Gamble To Boost Tax-Deferred/Tax-Free Funds

[RocketManJames]

I was thinking about this and I currently don't plan on doing this, especially when I have not yet investigated legality and whether or not it is worth the risk.

This 'gamble' is meant for Roth IRA or 401k accounts that allow purchase of stocks.

Let's assume I want to put more money into my Roth IRA... well, I can only add a few grand a year. This is not very much. I would do much better in the long-run if I could put in 25K or more.

So, let's say my Roth IRA/401k account has $50K.

I look for companies with big earnings announcements coming up... I will try to find the one that I believe has the best chance for a largish pop. I will not be right about this all of the time obviously.

So, in my tax-advantaged account, I buy $50K worth of stock in that company a few days before the major earnings announcement. At the same time, in my normal taxed account I short against the box, the same $50K of that stock.

Earnings comes... if it is really good, the stock pops. I will lose money in my taxed account, but gain equal amount in my tax-advantaged account. This effectively allows me an extra deposit into my tax-advantaged account, plus I can take a tax loss in the normal account. This will cost me only transaction fees... which, in this case, are near negligible.

If I am wrong, and earnings go bad... I've effectively withdrawn same amount from the tax-advantaged account without penalty. The only penalty so to speak would be the taxes I would have to pay on the gains. But, I would not be hit with the additional penalty had I done a 'normal' withdrawal.

So, that's the gamble... Risk = Reduction of funds in tax-advantaged account. Reward = Increase of funds in tax-advantaged account.

Anyone have any thoughts? If this is beyond stupid, please enlighten me.

-RMJ

[thing85]

You might want to check how wash sale rules apply to what you're suggesting (http://www.smartmoney.com/tax/capita...tory=washrules)

When you incur losses in your regular taxed account, you won't be able to take advantage of capital losses, but when you have capital gains in that account, you will have to pay taxes on them. Might wind up paying more taxes than you'll save. Again, you will want to look into this further, but this was the first thing that came to mind when I read your post.

[RocketManJames]

Thanks for your thought...

Ya, I don't know how wash sale rules work for non-taxed accounts. I understand the 30-day wash rules for normal taxed accounts. I assumed that accounts like Roth were treated separately from your normal accounts, but I'd need to look into it.

-RMJ

[thing85]

These articles seems to suggest that wash sale rules still apply even if an IRA account is involved:

http://www.thestreet.com/funds/inves...m/1157275.html

http://www.fairmark.com/capgain/wash/wsira.htm

[RocketManJames]

OK, so even with the wash rules in effect for retirement/non-retirement accounts...

My idea is simply a way to transfer money from one account to another. Which direction that transfer takes is up to the market... the chosen vehicle is the stock I pick.

So, we don't get the added advantage of taking a loss in the taxed account in case we choose correctly and the stock jumps. But, we still managed to transfer money from the taxed account to the non-taxed one. And, all it cost us was transaction fees.

The risk is still what it is... we risk taking money out of the tax-advantaged account, but is the reward of having a good amount more money in that account worth the risk?

Edit: I suppose another way we could try to do it to avoid wash rules would be to go long in both accounts the leveraged index ETFs, like UltraLong/UltraShort funds. We'd have to do it before some significant event... enough to move the entire market indexes (e.g. fed decision, beige book release, bellwether earnings announcements), but this will probably not work well, since even with a market move, you aren't likely to see more than 1-2%, which translates to 2-4% in the leveraged ETFs.

-RMJ