Funneling money from a Traditional IRA to a Roth IRA using Options: Is my method possible and tax legal?
"I am not a lawyer, but I can't think of a reason this is illegal (something that would be illegal would be to ""trade with yourself"" across the accounts to try to manipulate stock or option prices). I don't think you're ""funneling,"" you're doing ""asset location"" which is a standard tax planning strategy. http://news.morningstar.com/articlenet/article.aspx?id=154126&t1=1303874170 discusses asset location. I'd be more concerned about whether it makes sense." I am not a lawyer but I do not see a legal problem here. However, if the puts in the Roth IRA are not purchased at fair market value that could be a problem. For example, if your traditional IRA sold puts to the Roth IRA below fair market value that would not be allowed. However, from your post, it appears that you will be buying the puts from a third party so that will not be an issue. There is something else that just cross my mind. Imagine that you own 100 shares of the XYZ stock in your traditional IRA and 100 shares of the XYZ stock outside of an IRA. Now, you buy a put on the XYZ stock inside your Roth IRA. Are the dividends on the XYZ stock still qualified? I do not know but my guess is the answer is no.
"Close... Warning, I may be off a bit here; I'm sure someone will correct me if so. Traditional 401k or IRA: money goes in pre-tax (so, yes, you avoid paying tax on it now), grows untaxed, taxes are due when you retire and start taking money back out of the account -- but your income, including these withdrawals, is likely to be lower than your peak earning years so your tax rate will be lower. You don't avoid all the tax, but you delay it and hopefully reduce it, and by doing so there's more money in your account earning returns. Roth 401k or IRA: money goes in after taxes (you do pay income tax now). However, all returns on the money are untaxed (I believe), and you pay no tax when you're eligible to withdraw the funds.  Either or both kinds of 401k may be eligible for some percentage of matching funds from your employer (there are some incentives for them to offer this benefit). I believe that even if you're doing a Roth 401k, the matching funds legally have to go in as traditional plan. And yes, as that implies, it is possible to split your contribution between the two styles. Note: the matching funds are ""free money."" If your plan offers a match, it is highly recommended that you contribute enough to your 401k to capture the maximum match." In the same way that you are taxed on the actual amount of money you convert from the Traditional IRA to the Roth IRA -- rather than on the amount of money that you initially contributed to your 401(k) or on the amount of money that you rolled over to your Traditional IRA -- that converted amount becomes the contributions to your Roth. So (3) is the correct answer. It doesn't matter how you accumulated the money in the first place; as long as the IRS has had the opportunity to dig their claws into it, it counts as a contribution to your Roth. Broadly speaking, a traditional account is better if you will be in a lower tax bracket in retirement (see for instance here).  When you put the money in now, you pay no taxes on it at your current (high) rate; when you take it out, you will pay taxes at your future (low) rate.  You push the taxes onto your future, lower-rate self. This is, crucially, assuming you can deduct the contribution on the traditional IRA.  If you can't (e.g., because you have an employer-sponsored plan and make too much money), the traditional IRA doesn't really gain you anything (see here). That is the basic story, but there are some other differences to consider as well.  For instance, if your income is too high, you cannot contribute to a Roth at all.  Also, with a traditional IRA you're required to start taking money out at a certain age, whereas with a Roth you never have to; this can make a difference if you have other retirement income and want to leave the money in the Roth (e.g., to pass on to your heirs without having to pay an intermediate tax at withdrawal). On a more speculative level, there is the possibility that tax rates may change between now and your retirement; some people try to hedge against this possibility by strategically allocating their retirement assets based on whether they think tax rates will rise or fall. Other people have pointed this out, but there are a few considerations in whether you should do a Roth or Traditional IRA, such as: One of the major arguments for using a Traditional IRA is that you can (at least in theory) afford to contribute more money initially than you'd be able to afford if you were using a Roth IRA. While this is, in theory, true, I'm not at all convinced that using a Traditional IRA will actually cause people to contribute more to it. Realistically, how many people will actually contribute, say, $500 more to their IRA because they knew that their contribution for this year will save them $500? To know if this is the case, consider the last time that you actually invested some of your tax refund in your retirement account; I haven't seen any actual statistics on this, but I'm guessing that very few people do this. Please see other people's answers for details on the mathematics behind that. The second argument for contributing to a Traditional IRA is if you expect your future income tax rate to be lower than your current tax rate for some reason - e.g. due to a change in government policy (e.g. replacing income taxes with Value Added Tax or something like that), the fact that you're doing the contribution relatively close to when you're planning on withdrawing it, etc. Please see this question for more discussion about this. Keep in mind that, while a Traditional IRA saves you tax money this year, a Roth IRA saves you money when you withdraw it, so it's not really a question of paying taxes on $5000 now or $5000 later, it's a question of paying taxes on $5000 now vs., for example, $50,000 later (or however much the money's grown by the time you withdraw it). Maybe the Traditional IRA is still worth it, though, if there are changes to tax policy or you end up with a lot more money in your Traditional IRA due to being able to contribute more. If you have the cash on hand to pay the tax on the amount you are transferring I recommend moving to a Roth IRA An IRA is tax-deferred. You put in pretax contributions in to an IRA, and you are taxed on that money (your contributions and interest earned) when you withdraw it at retirement, age 59 1/2.  The idea being that you will be taking less out per year in your retirement years, putting you into a lower tax bracket. The major problem is most people draw out as much or more a year in their retirement years than when they were working. A Roth IRA grows tax free You put after tax contributions into a Roth IRA, you have paid taxes on the contributions, and you are never taxed on the growth. When you draw the money out at retirement you don't pay any income taxes on that money. Let me give you an example: For this example we will use the following information for both scenario: We will invest $400 per month for a total of $4800. The current maximum is $5000 if you are under 50 years old $400 dollars after taxes is $300 Invest $300 a month, at age 65 you have 3,529,432 You owe no taxes on this money, it doesn't matter how much you take out a year. $400 dollars a month is taken pretax out of your paycheck. Invest $400 per month, at age 65 you have $4,705,909 You owe taxes of 25% as you draw that out for at total tax of 1,176,477 4,705,909 - 1,176,477 = 3,529,432 cash in your pocket The problem is if you draw out more than $82,400 (current 2010 filing single) per year you will be pushed to a higher tax bracket and take more of your money away. If you decide to buy a vacation home and you take out $250,000 to pay for it, that's counted as income for that year any you will be in the 33% tax bracket. Even if you can keep yourself to a low income the government forces your hand and makes you draw out more money at age 70, based on their tables, forcing you into a higher tax bracket Your assumptions are flawed or miss crucial details. An employer sponsored 401k typically limits the choices of investments, whereas an IRA typically gives you self directed investment choices at a brokerage house or through a bank account. You are correct in noticing that you are limited in making your own pre-tax contributions to a traditional IRA in many circumstances when you also have an employer sponsored 401k, but you miss the massive benefit you have: You can rollover unlimited amounts from a traditional 401k to a traditional IRA. This is a benefit that far exceeds the capabilities of someone without a traditional 401k who is subject to the IRA contribution limits. Your rollover capabilities completely gets around any statutory contribution limit. You can contribution, at time of writing, $18,000 annually to a 401k from salary deferrals and an additional $35,000 from employer contributions for a maximum of $53,000 annually and roll that same $53,000 into an IRA if you so desired. That is a factor. This should be counterweighed with the borrowing capabilities of a 401k, which vastly exceeds an IRA again. The main rebuttal to your assumptions is that you are not necessarily paying taxes to fund an IRA. Not exactly. There are a few ways to manage your taxes with investments. 1) For most investments you get taxed on any gain in value in the investment or dividends paid by that investment. Most investments (with some exceptions for mutual funds) you don't take the tax hit until you sell the investment and realize the gain. For bonds, cds, and other cash type investments you have to pay taxes in the year they pay out the interest or dividend. 2) You can put money (up to a certain limit) in a traditional IRA and can subtract that amount from your income for tax calculation for the year you invest it. However, you are going to pay taxes on it when you take the money out at retirement. It really just delays the taxes. 3) If you put the money in a Roth IRA, you don't get a tax break now, but you don't have to pay any taxes on the money or the gains when you take it out at retirement. 4) The gains from some mutual funds can be tax exempt, but that just saves you from paying tax on the increase in value.  5) Don't fall for scams that try to use insurance policies as investments to avoid taxes. The fees are ginormous, which usually makes them a ripoff. "You can definitely open an IRA and roll the money over. I suggest instead of trying opening online calling the institution and asking what would be the procedure in your specific case. If not, I will have to cash out my 401K. Who do I contact to find out   if my country has some sort of deal with the US in regards to taxes? I   would of course prefer to not pay the penalty (20 % federal + 10 %   state tax), and instead reinvest the money in a retirement fund in my   country. US embassies some times have listings of tax advisers who work with US expats in the countries they cover. You can check for such a list on the website of your local US embassy. These people will be able to answer this question. However it is highly unlikely that you'll be able to avoid the tax and penalty in the US in this scenario. It is not likely that you could ""roll-over"" into a foreign retirement fund (from your country's laws perspective), but maybe your country has some solution for this."