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Author: ColumbusFool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121316  
Subject: Roth IRA Daytrading loophole? Date: 2/5/2000 10:22 PM
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As I understand it, the Roth IRA takes post-tax money and then there's no tax on withdrawal. So if a trader goes and opens a Roth, then trades a lot, then takes the money out, he has to pay just 10% (early withdrawal penalty) tax at most. Is my interpretation correct? I think the max one can put in each year is $2K, so the strategy has it's limits.
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Author: HatchetJack One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27416 of 121316
Subject: Re: Roth IRA Daytrading loophole? Date: 2/5/2000 11:25 PM
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As I understand it, the Roth IRA takes post-tax money and then there's no tax on withdrawal. So if a trader goes and opens a Roth, then trades a lot, then takes the money out, he has to pay just 10% (early withdrawal penalty) tax at most. Is my interpretation correct? I think the max one can put in each year is $2K, so the strategy has it's limits.
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Nice try. Nonqualifying Roth IRA distributions (before age 59 1/2 in general or within the 5 year period beginning with the first year a Roth contribution was made) are taxed under the annuity rules of Section 72. In applying Section 72 to such a distribution, Congress enacted ordering rules to determine which amounts are withdrawn in the event a Roth IRA contains both conversion amounts (possibly from different years) and other contributions. Under these rules, regular Roth IRA contributions are deemed to be withdrawn first, then converted amounts (from a regular IRA to a Roth IRA starting with amounts first converted), and then earnings. Withdrawals of converted amounts will be treated as coming first from converted amounts that are required to be included in income (i.e., deductible IRA contributions) as a result of the conversion. For purposes of this rule, all Roth IRAs, whether or not maintained in separate accounts, will be considered a single Roth IRA.

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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27421 of 121316
Subject: Re: Roth IRA Daytrading loophole? Date: 2/6/2000 1:47 AM
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<< As I understand it, the Roth IRA takes post-tax money and then there's no tax on withdrawal. So if a trader goes and opens a Roth, then trades a lot, then takes the money out, he has to pay just 10% (early withdrawal penalty) tax at most. Is my interpretation correct? I think the max one can put in each year is $2K, so the strategy has it's limits. >>

It has more limits than you realize. If you don't leave the money in for the required 5 years and until the required age, you pay tax on the earnings, PLUS the penalty. You could do this trading in a taxable account and pay only the income tax, skipping the penalty.

Phil Marti
Tax Preparer

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