Is it Roth Conversion right for me?
As I posted last time, I was doing a Roth conversion from my traditional IRA. The reason I am posting this blog is that since I cannot trade for yesterday and today, I wanted to write something to add some value to the blog.
The fundamental fact about the traditional IRA is that it is a tax deduction on your income and tax-deferred growth. However, it has tax consequences when you take out the money. Especially if you are under 59 1/2, it has added a 10% penalty to it.
Hypothetically if you make an income from a regular job, and withdraw the money from the Traditional IRA, you would be paying federal tax of a minimum of 10% to 50% depending on your income. But if it was a Roth account, then you only need to pay the penalty of 10% if you were to withdraw before 59 1/2. If you are above 59 1/2, there are no taxes to pay. 100% of the money is yours.
For that matter, if your purpose is to deduct taxes, the traditional IRA is a good way to go. However, if you believe you can make 10% or more on your return, you should consider Roth IRA. at the end of the day, you will pay substantially lower taxes if you can grow your portfolio. If you cannot grow your portfolio, then Traditional is the better way to go.
Another point is that I had a business in two years. However, due to pandemics, I had to close out the business. It means I did not make much money this year in regular income. It gives me good timing for me to convert since I have a lower tax basis for the year. The assumption here is this; if I believe I can make the money next year to pay for the tax, it will be a great idea to convert to the Roth IRA as well.
As I combine with the idea, I decided to go with Roth, because I have confidence that my portfolio will grow much faster than a 10% rate. I think I can do at least 50% a year just using a cover call option strategy alone. If I can combine it with the naked put and vertical spread option, I think I can do much better than that.
So far past 10 weeks, I have been in a positive return range of 2% - 12% a week. This return is not calculated based on the performance of the stock, it is merely performance on selling options. Because 100% of my stock is at Tesla at the moment which is the crazy stock to go up.
My goal for the account next year is doubling. For that goal, I decided to pay all the tax upfront this year. When next year comes, when the account size is double, I do not want to regret and saying what if I converted last year. I don't want to regret it.
There are many ways to pay for the taxes in my case.
I have withheld 10% of federal and state tax on it. It will pay some portion of the tax.
I need to come up with 20% of the tax. There are a few options I can pay 20% of the tax
Save the money from the day job to pay it. It will need about 3 months of the entire saving to do so.
Do cover call and other strategies with my regular brokerage account to substitute the taxes.
Start a business and make a cash flow to pay it (I am planning to open another S-Corp for rental business and with that cash flow to pay for it. In that case, I need to defer taxes until October 15, 2021)
Using the tax loss on real estate remodeling to reduce the taxes (I will use some of this as well)
Pay with the Roth IRA (worst-case scenario, that you cannot come up with the cash)
The bottom line is if you can pay the tax and believe the bullish market you should do Roth conversion if you have a Traditional IRA before the year-end. If you are bearish on the market, also do not want to pay tax right now, you should stay as-is.
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I am not a financial advisor. Any trades listed are my own personal trades and meant for educational purposes only. Option trading bears high risk and high return strategy for trader.