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• convert $X from t-IRA to Roth(1)
• convert $X from t-IRA to Roth(2)

as it sits, there's income tax on 2X

• in the two Roths, bet opposite directions (eg, buy calls in one, sell calls in the other; buy stock in one, sell short in the other; bet on Philly in one and Dallas in the other)

• one bet wins ,the other loses. so Roth(1) ,say, has $2X, Roth(2) has $2

•recharacterize loser's (Roth(2)) $2 back to t-IRA


••Op's theory is that he now has $2X in Roth(1), but only owes taxes on
$X ..loses the transaction costs, but gains the tax on $X


yes, that's the general strategy behind this tax arbitrage (i.e. monetizing the free option being written by treasury dept.) i have been pondering if/how to do this myself.

the relevant tax law (recharacterization rules) clearly lends itself to exploitation; there's no trouble there. the problem instead lies with setting up the trades. the lack of margin capabilities in IRAs makes it tough to do this in a riskless fashion. short investments of any kind are problematic because of collateral posting requirements.

leveraged & inverse ETFs are right out. pure wealth destroyers in any context other than daytrading.

any pair trades i can think off offhand sound rickety, expensive, with too many moving parts.

you really do want 50/50 zero-sum coin flips, but it's tough to find "investments" with that kind of risk/reward profile.

relaxing the constraint for exchange-traded securities.... if you could find an IRA custodian who'd place roulette wagers for you, you could convert a $37K IRA into 37 separate roths of $1K each, then "invest" each roth into a separate number on the wheel in monte carlo. take the winner as a $36K roth; recharacterize all the losers. you'll avoid the tax on $35K, and pay $1K to the casino as a frictional cost.

but while i've heard of some free-wheeling IRA custodians, i don't know any who swing THAT hard. i'm all ears if anybody knows anything.

trp
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