There are many advantages to investing in a Roth IRA. Of course the main one being that the return on your investments grow tax free. For this reason, in some cases, it can be beneficial to convert money from your traditional IRA to your Roth IRA. The thing to be aware of is that money that you convert from your traditional IRA is considered taxable in the year that you make the conversion. For this reason it’s important to carefully plan the tax consequences of any conversions you make.

But what if you could “convert” some of that money without being taxed on it. In this article I would like to share a strategy that I use occasionally to accomplish this. It’s not something that can be planned, but in certain situations with investing, opportunities come up that make it so this strategy can be implemented.

Keep in mind that I’m not a tax advisor, so this should not be considered as tax advice. This strategy may not be appropriate for your specific tax situation. So it’s important to seek professional tax advice to determine what is the best tax strategy for your specific situation.

The Basic Strategy

The basic concept of this strategy is to take advantage of a position that you own in your traditional IRA that is at a paper loss and average your cost down by buying the same position at a lower cost in your Roth IRA. You would then consider that you could sell both positions at the new average cost or higher even if the traditional IRA position would be sold for a loss.

What this results in is technically a loss for the position in the traditional IRA which is then offset by a gain in the Roth IRA. So even if the overall result is a breakeven situation, you would have reduced the amount in your traditional IRA and increased the amount in your Roth IRA by the same amount. Of course the goal is to do better than just breakeven. So if you sold at a higher price than your breakeven point there would be an overall gain.

An Example Using SOXL

I’ll share a basic example to show how this would work. I’m going to look at the ETF with the ticker SOXL as an example as this is one that I find that works well for swing trading. For our example, say we were to have purchased 1,000 shares of SOXL in February at a share price of $30 in our traditional IRA. These shares would have cost $30,000 to purchase. Soon after this the share price of SOXL dropped significantly. In fact the share price hit a low of $7.23 on April 7th.

Of course it’s difficult to know where the bottom is when a drop like this occurs. But say we were to have purchased another 1,500 shares in March at the price of $20 a share in our Roth IRA hoping that the share price would be going back up soon. Those shares would have also cost us $30,000 to purchase. At this point we would own 2,500 shares for a cost of $60,000. This comes out to be an average price per share of $24 for the 2,500 shares.

Now of course you still would have waited for the share price to drop even further before it would make it back to our breakeven point of $24. But it did make it to that point by June 24th. If you were to decide you wanted to sell the shares at your breakeven point, you would sell your 2,500 shares when the share price reached $24. You would essentially have realized a loss of $6,000 in your traditional IRA and a gain of $6,000 in your Roth IRA. This would essentially be a transfer of funds without an official conversion making it a tax free transfer from your traditional IRA to your Roth IRA.

Another thing you could look at is if you were to leave the shares to sell at a higher price. If you were to have sold the shares on July 15th for $28 a share you would have an overall gain. This would translate to a loss in your traditional IRA of $2,000 and a gain on the shares in your Roth IRA of $12,000 for an overall gain of $10,000.

An Example Using Options

In my next example I’ll share some actual trades that I placed and the outcomes from that where I used options trades as part of the strategy. These were trades that I placed on the ETF with the ticker symbol NAIL. NAIL is a leveraged ETF so it is a higher risk than non leveraged ETF’s. Because a part of my investment strategy implements options trading you’ll be able to see how I manage the options positions as well as use it to take advantage of this strategy of transferring some of my IRA assets to my Roth IRA account.

I started the process on March 10th by selling 2 put contracts on NAIL in my traditional IRA with an expiration date of 3/21 and a strike price of $75. For this I collected a premium $5.70 per share or a total premium of $1,138.80 after fees. The price dropped fairly quickly in the days after I sold these put contracts. So on 3/17 I rolled the contracts out another month. The strike price I left the same but the new expiration date was 4/17. For this roll I collected an additional premium of $2.15 per share or a total premium of $427.60. I also on that same date decided to sell 2 more put contracts, but this time in my Roth IRA with an expiration date of 4/17 and a strike price of $62. For this trade I collected a premium of $6.61 per share or a total premium of $1,320.80.

By April 14th the share price had dropped quite a bit more and was around the $50 range. My $75 strike puts were assigned on that date which was a few days before expiration. I decided to let my $62 strike puts also get assigned by leaving them open through the expiration date of 4/17. So at this point I owned 400 shares at an average cost of $68.50 per share. This average cost is just on what I paid for the shares. I had also collected option premium in the process.

After the puts in my IRA were assigned, I sold 2 call option contracts on the shares at a strike price of $69 and an expiration date of 5/16 as I knew my $62 strike puts would probably be assigned. This would be above my average cost per share for the 400 shares. For this trade I collected a premium of $0.86 per share or a total premium of $170.80. I then sold 2 call contracts in my Roth IRA also with a $69 strike and an expiration date of 5/16 for a premium of $0.41 per share or a total premium of $80.80.

The expiration date came and went on my call contracts as the share price fell even further. So on 5/15 I sold 3 more put contracts in my Roth IRA with an expiration date of 6/20 and a strike price of $53. For this trade I collected $5.10 per share or a total premium of $1,528.20.

On 5/19 after my May calls expired I sold 4 more calls with an expiration date of 6/20 and a strike price of $69. This was 2 contracts in my IRA and 2 contracts in my Roth IRA. For these calls I collected a premium of $1.30 per share or a total premium of $517.60 or $258.80 in each of my accounts.

When the expiration date of my open put and call contracts came around I decided to let my puts assign rather than roll them. I did this primarily to bring my average cost down. My call contracts also expired out of the money. This means I now owned 700 shares at an average cost of $61.85 per share. The 200 shares in my IRA were purchased at a price of $75 per share and the average cost of the 500 shares in my Roth IRA was $56.60 per share.

So on 6/23 I sold 7 call contracts with an expiration date of 7/18 and a strike price of $62 so it would be above my average cost per share on the 700 shares. For these calls I was able to collect $0.75 per share or a total of $520.80 in premiums.

On the expiration date for these calls the price had come up some from it’s lows, but still wasn’t above the strike price. On 7/18 I rolled the 7 call contracts out another month to an 8/15 expiration date. For the calls in my IRA account I collected a premium of $2.90 per share or total premiums of $577.60. And in my Roth IRA I collected $2.45 per share or a total of $1,219.

The share price had moved up to quite a bit above my strike price of $62 by the 8/15 expiration date so I let the calls get assigned which resulted in my shares being sold for $62 a share. So here is a summary of the results:

• Traditional IRA
  • Purchased 200 shares at a cost of $75 a share ($15,000)
  • Collected $2,722.40 in option premiums
  • Sold 200 shares at a price of $62 a share ($12,400)
  • Loss of $2,600 on shares
• Roth IRA
  • Purchased 500 shares at an average cost of $56.60 a share ($28,300)
  • Collected $4,698.80 in option premiums
  • Sold 500 shares at a price of $62 a share ($31,000)
  • Gain of $2,700 on shares

So as you can see we didn’t have an overall loss in the traditional IRA as we brought in more in option premiums than we lost on selling the shares at a lower price. But doing it this way did reduce the gain as the overall gain was only $122.40 in the traditional IRA. Where the overall gain in the Roth IRA was $7,398.80. By maximizing the gain in the Roth and minimizing the gain in the IRA, we were able to in a way use the strategy to indirectly transfer assets from the IRA to the Roth IRA.

Of course it’s important to be aware that you would only want to do this type of strategy on a ticker that you had a very high confidence level that the share price would recover sooner or later. You also would want to consider how much money you’re allocating so that you’re properly diversifying and not putting too much of your assets into one investment.

Read: How to Manage Cash Secured Put Options – Managing DJT Puts