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I think you're wrong about one thing. If you loose everything on the IRAs and make it up in the taxable account, you won't get a tax-free distribution. You'll effectively get a penalty-free distribution; but the IRS will take taxes on the entire gain in your taxable account. And the gain will be short-term, so you'll pay the same in taxes.

all true. i was getting ahead of myself with the "tax free" part, which assumes that either (a) you have lots of capital loss carryforwards to burn (which i do), or (b) you have extra tax deferrals you can use (which i also do). but generally speaking, yeah, the downside on this strategy is penalty-free but not tax-free.

i'm not convinced this angle is at all attractive. for one thing, it involves a whole lot of nonsense, and executing moves i wouldn't otherwise be interested in making - the tax tail wagging the investment dog. i mean, i'm not a ordinarily a customer for multileg options trades on the russell 2K, or whatever....

but to continue the thought experiment... if you really wanted to get down, and were converting large enough sums of money that the tax savings were big enough to put up with significant overhead...

0) [optional] perform in-service rollover out of 401(k) plan, if necessary & feasible. now you have a big honkin' IRA.
1) convert big honkin' IRA into two half-honkin' roths.
2) sign up with a really swingin' IRA custodian (i can make recommendations), and have each of the roths invest in a freshly capitalized LLC.
3) have each of those LLCs open a margin account, funded with all the LLC assets.
4) now go long & short the same option/future/whatever in one roth against the other. game's over when one of the roths gets a margin call it can't meet; sell out both sides at the same time.

that ought to work. i don't think it would run into a UBIT issue either, as long as you didn't use debt funding to acquire the position, just used the borrowing power to satisfy margin posting requirements.

i estimate it would cost in the ballpark of $800 frictional costs.

fun, huh?

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