Teleport into Roth IRA using offsetting leveraged positions?

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targetconfusion
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Teleport into Roth IRA using offsetting leveraged positions?

Post by targetconfusion » Wed Jul 10, 2019 8:07 pm

Overall question: Is it possible to legally “teleport” funds into a Roth IRA by taking a long, leveraged position inside the rIRA and an offsetting short position outside of it? Here teleport means effectively increase rIRA balance without contributions, conversions, or rollovers and with a corresponding decrease in source account balance. So, no net directional exposure.

Example: In the rIRA, buy an equity future (or options, or even leveraged ETF) and in a taxable brokerage account, sell the equivalent equity future (or option/leveraged ETF). As long as the market rises, the rIRA balance grows at the same rate the taxable brokerage account shrinks. No net position is taken.

Obvious risk: market goes down or sideways. While that is very possible short-term, most here invest with expectation of long-term market rise.

With some medium-duty poking around, I can’t find anything preventing this maneuver. But it’s also often true that when something seems too easy, there’s a reason it’s not practiced.

One note: I’m not asking here about wash sales, which have restrictions on offsetting positions (though I’m murky on how they apply to futures). But the question here is not whether the loss in the taxable brokerage can be deducted, but whether it’s possible and legal to employ any sort of rIRA teleportation at all.

alex_686
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Re: Teleport into Roth IRA using offsetting leveraged positions?

Post by alex_686 » Wed Jul 10, 2019 8:18 pm

In theory no. However, there are a fair number of rules that limit leverage inside a IRA (Trad or Roth). Some brokers interpreted this as forbiding leveraged ETFs. Often use of futures and options are curtailed. So this is going to be a modest effort at best.

rascott
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Re: Teleport into Roth IRA using offsetting leveraged positions?

Post by rascott » Wed Jul 10, 2019 9:46 pm

alex_686 wrote:
Wed Jul 10, 2019 8:18 pm
In theory no. However, there are a fair number of rules that limit leverage inside a IRA (Trad or Roth). Some brokers interpreted this as forbiding leveraged ETFs. Often use of futures and options are curtailed. So this is going to be a modest effort at best.
TDA lets you do futures/options in IRAs.... the margin requirement is a bit higher, but that's about it. Are these rules part of law?

rascott
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Re: Teleport into Roth IRA using offsetting leveraged positions?

Post by rascott » Wed Jul 10, 2019 9:49 pm

targetconfusion wrote:
Wed Jul 10, 2019 8:07 pm
Overall question: Is it possible to legally “teleport” funds into a Roth IRA by taking a long, leveraged position inside the rIRA and an offsetting short position outside of it? Here teleport means effectively increase rIRA balance without contributions, conversions, or rollovers and with a corresponding decrease in source account balance. So, no net directional exposure.

Example: In the rIRA, buy an equity future (or options, or even leveraged ETF) and in a taxable brokerage account, sell the equivalent equity future (or option/leveraged ETF). As long as the market rises, the rIRA balance grows at the same rate the taxable brokerage account shrinks. No net position is taken.

Obvious risk: market goes down or sideways. While that is very possible short-term, most here invest with expectation of long-term market rise.

With some medium-duty poking around, I can’t find anything preventing this maneuver. But it’s also often true that when something seems too easy, there’s a reason it’s not practiced.

One note: I’m not asking here about wash sales, which have restrictions on offsetting positions (though I’m murky on how they apply to futures). But the question here is not whether the loss in the taxable brokerage can be deducted, but whether it’s possible and legal to employ any sort of rIRA teleportation at all.


So you'd have funds basically un-invested until you were done teleporting? Interesting idea, though.

Clarice
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Re: Teleport into Roth IRA using offsetting leveraged positions?

Post by Clarice » Wed Jul 10, 2019 10:15 pm

targetconfusion wrote:
Wed Jul 10, 2019 8:07 pm
Overall question: Is it possible to legally “teleport” funds into a Roth IRA by taking a long, leveraged position inside the rIRA and an offsetting short position outside of it? Here teleport means effectively increase rIRA balance without contributions, conversions, or rollovers and with a corresponding decrease in source account balance. So, no net directional exposure.
^^That last sentence. Then what’s the point?

alex_686
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Re: Teleport into Roth IRA using offsetting leveraged positions?

Post by alex_686 » Wed Jul 10, 2019 10:20 pm

rascott wrote:
Wed Jul 10, 2019 9:46 pm
alex_686 wrote:
Wed Jul 10, 2019 8:18 pm
In theory no. However, there are a fair number of rules that limit leverage inside a IRA (Trad or Roth). Some brokers interpreted this as forbiding leveraged ETFs. Often use of futures and options are curtailed. So this is going to be a modest effort at best.
TDA lets you do futures/options in IRAs.... the margin requirement is a bit higher, but that's about it. Are these rules part of law?
I don’t know about TDA and it has been a few years since I sat at either a IRA or margin desk. However that “bit higher” margin requirement tends to really kill the strategy in real terms. Not totally, but it puts a real gimp in it. So be forwarded.

gch
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Re: Teleport into Roth IRA using offsetting leveraged positions?

Post by gch » Wed Jul 10, 2019 10:30 pm

If you have no net position then you would have no gains. So I guess this would work if you already had a large portfolio and we’re willing to take the inflation+no growth cost in exchange for tax savings, but for most people they want a long position in the market.

Topic Author
targetconfusion
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Re: Teleport into Roth IRA using offsetting leveraged positions?

Post by targetconfusion » Wed Jul 10, 2019 11:05 pm

rascott wrote:
Wed Jul 10, 2019 9:49 pm
So you'd have funds basically un-invested until you were done teleporting? Interesting idea, though.
Yes - at least to whatever margin the broker required. In theory you could maintain desired leverage, though, if you had been invested in something common, by replacing [investment X] with whatever combination of [cash] + [levered investment X] was equivalent.
Clarice wrote:
Wed Jul 10, 2019 10:15 pm
targetconfusion wrote:
Wed Jul 10, 2019 8:07 pm
Overall question: Is it possible to legally “teleport” funds into a Roth IRA by taking a long, leveraged position inside the rIRA and an offsetting short position outside of it? Here teleport means effectively increase rIRA balance without contributions, conversions, or rollovers and with a corresponding decrease in source account balance. So, no net directional exposure.
^^That last sentence. Then what’s the point?
To pick up additional IRA space. For someone that doesn't want that, there's no benefit.
gch wrote:
Wed Jul 10, 2019 10:30 pm
If you have no net position then you would have no gains. So I guess this would work if you already had a large portfolio and we’re willing to take the inflation+no growth cost in exchange for tax savings, but for most people they want a long position in the market.
Well, I don't see that this excludes retaining the IRA's existing long position, as long as the account isn't already maximally levered. Example: somebody is 100/0 stock/bond in rIRA and X/Y in taxable brokerage. They could go to 150/0 in the rIRA and -50+X/Y in the taxable and start teleporting without changing allocation. But I agree it's a potential snag for somebody that's close, pending margin requirements.

Topic Author
targetconfusion
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Re: Teleport into Roth IRA using offsetting leveraged positions?

Post by targetconfusion » Wed Jul 10, 2019 11:13 pm

alex_686 wrote:
Wed Jul 10, 2019 10:20 pm
I don’t know about TDA and it has been a few years since I sat at either a IRA or margin desk. However that “bit higher” margin requirement tends to really kill the strategy in real terms. Not totally, but it puts a real gimp in it. So be forwarded.
It's good advice - expecting leverage of all flavors could be more trouble inside IRAs than out. But observationally (if the number of posts devoted to the ins and outs of backdoor IRAing is any indication) people seem willing to endure considerable hassle in pursuit of additional Roth space.

MrJones
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Re: Teleport into Roth IRA using offsetting leveraged positions?

Post by MrJones » Wed Jul 10, 2019 11:27 pm

Interesting idea. Have you done an analysis on the benefits? IOW, how much are the potential tax savings across N years for a given base amount? How does this compare to the risk of losing tax-free space?

Topic Author
targetconfusion
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Re: Teleport into Roth IRA using offsetting leveraged positions?

Post by targetconfusion » Wed Jul 10, 2019 11:50 pm

MrJones wrote:
Wed Jul 10, 2019 11:27 pm
Interesting idea. Have you done an analysis on the benefits? IOW, how much are the potential tax savings across N years for a given base amount? How does this compare to the risk of losing tax-free space?
Not yet - just started wondering about it and hoped the wisdom of the forum would surface any legal or strategic obstacles before plowing a bunch of time into calculating expected benefits. As I think about your question, though (i.e., does potential tax benefit outweigh potential tax penalty) I'm realizing it may be a better job for options rather than futures. We'd want one-way teleportation - money can go into the IRA but not out - and options are unidirectional by default. Buying calls in the IRA might be expensive if volatility is high, but in theory that should come back if selling calls in the taxable. If naked calls are scary (which they are), one can hedge with far out-of-money (and cheap) puts. But your point stands - if this seems qualitatively feasible then I need to run real numbers.

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Nate79
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Re: Teleport into Roth IRA using offsetting leveraged positions?

Post by Nate79 » Thu Jul 11, 2019 6:00 am

You can use leveraged ETFs in an IRA (at Schwab at least) like 3x fund UPRO.

Topic Author
targetconfusion
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Re: Teleport into Roth IRA using offsetting leveraged positions?

Post by targetconfusion » Thu Jul 11, 2019 11:29 am

Nate79 wrote:
Thu Jul 11, 2019 6:00 am
You can use leveraged ETFs in an IRA (at Schwab at least) like 3x fund UPRO.
That one has the advantage that we know it works. It has the same downside of futures, though, in that it teleports out of the IRA in a down market. I think I've convinced myself that a one-way valve between the taxable and IRA can be built by buying a straddle in the IRA and selling one in the taxable. What I need to spent more time figuring out is cost - how to choose the right combination of expiration dates and strike price. Also, since the IRA is paying the option premium (and the taxable receiving it), it's not truly a one-way valve. There would need to be a certain amount of movement to overcome the fixed option premium.

Soon2BXProgrammer
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Re: Teleport into Roth IRA using offsetting leveraged positions?

Post by Soon2BXProgrammer » Thu Jul 11, 2019 12:26 pm

targetconfusion wrote:
Thu Jul 11, 2019 11:29 am
Nate79 wrote:
Thu Jul 11, 2019 6:00 am
You can use leveraged ETFs in an IRA (at Schwab at least) like 3x fund UPRO.
That one has the advantage that we know it works. It has the same downside of futures, though, in that it teleports out of the IRA in a down market. I think I've convinced myself that a one-way valve between the taxable and IRA can be built by buying a straddle in the IRA and selling one in the taxable. What I need to spent more time figuring out is cost - how to choose the right combination of expiration dates and strike price. Also, since the IRA is paying the option premium (and the taxable receiving it), it's not truly a one-way valve. There would need to be a certain amount of movement to overcome the fixed option premium.
I would be interested in reading your analysis once you do some more thinking/exploration.

overthought
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Re: Teleport into Roth IRA using offsetting leveraged positions?

Post by overthought » Thu Jul 11, 2019 4:25 pm

I actually dug into a variant of this idea a few weeks ago, writing cash-secured PUT options from IRA (strike well above current trading price) and buying protective PUT in taxable (strike well below current trading price). The numbers didn't really work in the end, though.

tl;dr: Capped upside means missing out on big upward movements, and that costs a *lot* over time. The market generally prices the options so that the downside protection isn't enough to compensate.

There are three regions in the resulting payoff graph:
  1. Below the lower strike price, net losses are capped. This is nice. Losses from the IRA side are unbounded, but still better than holding the underlying (= not a bad thing if you would have held the underlying anyway).
  2. Above the higher strike price, net gains are capped, so you miss out on any big upward movement. IRA is similarly capped and misses out in the same way, though the premiums help a bit there.
  3. Between the two strike prices, net gains track the underlying, but lag it a bit due to the difference in premiums.
For example, consider SPY on 18 Jan 2019, trading at $264.97. I'm interested in 15 Feb 2019 expiry. I can write a PUT @268 for $5.41, and buy one @260 for $2.46.

If SPY climbs above $268 (gain at least 1.4%), IRA gains 2% while taxable loses 0.9%... a net 1.1% gain.

If SPY drops below $260 (lose at least 1.7%), IRA loses a proportional amount (offset a bit by the premium), while profits from taxable cap the net loss to 1.9%.

If SPY doesn't move at all (stays at $265), IRA gains 0.7% while taxable loses 1%, a net loss of 0.3%.

In actual fact, SPY traded at $276.92 on 15 Feb, putting us in "capped gain" territory.

If I buy at a low enough strike price to make the "middle ground" outcome net positive, then the absolute difference between IRA and market gains shrinks substantially, to the point that it's probably not worth the trouble after accounting for transaction costs, time spent, etc. For example, I could buy @254 for $1.59... in which case the IRA has a 0.6% premium over market in the "middle ground" area, and net premium is 0.1%. However, we're still capped at 2% total gain in the IRA, and as noted the market gained 4.7% during the month we're looking at. Over time the asymmetry adds up (upside capped at 1.4%, downside capped at -3.5%... assuming equal numbers of ups and downs you lose).
Last edited by overthought on Thu Jul 11, 2019 5:08 pm, edited 1 time in total.

overthought
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Re: Teleport into Roth IRA using offsetting leveraged positions?

Post by overthought » Thu Jul 11, 2019 4:32 pm

Also: I'm pretty sure the IRS forbids trading on margin in tax-advantaged accounts, so you're stuck with options that can be 100% covered with cash. That's why my example above used cash-secured PUT... there just aren't many choices available.

rascott
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Re: Teleport into Roth IRA using offsetting leveraged positions?

Post by rascott » Thu Jul 11, 2019 6:00 pm

It could work in theory if you got a nice uptrend, and used a lot of leverage. A 3x ETF wouldn't be enough leverage, I wouldn't think, anyway.

rascott
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Re: Teleport into Roth IRA using offsetting leveraged positions?

Post by rascott » Thu Jul 11, 2019 6:01 pm

overthought wrote:
Thu Jul 11, 2019 4:32 pm
Also: I'm pretty sure the IRS forbids trading on margin in tax-advantaged accounts, so you're stuck with options that can be 100% covered with cash. That's why my example above used cash-secured PUT... there just aren't many choices available.
Futures are possible.

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