TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, June 23, 2012

How to Use a Roth IRA Conversion to Profit from the Presidential Election

Romney ObamaCBS Money Watch, How to Profit From the Presidential Election:

Sometimes two unremarkable and unrelated ideas can be merged into a single brilliant strategy. Gregg Polsky, a tax professor at the University of North Carolina School of Law, recently emailed me two such ideas. His proposal -- combining a Roth conversion with the November presidential election. This is how it would work....

Let's say you have $20,000 in an IRA and are in the 30 percent marginal tax bracket. If you converted it to a Roth IRA, you'd pay $6,000 in taxes. Rather than do one Roth conversion, Polsky suggests doing two $10,000 conversions. With Roth IRA conversion one, you buy Obama options; with the second conversion, you buy Romney options. The goal is that one of the Roth conversions would double in value and become worth $20,000, while the other would expire and become worthless. Then you recharacterize the worthless IRA account and owe nothing in taxes. You'd have to pay $3,000 in taxes for the Roth conversion you keep. This means you converted $20,000 to a Roth, while paying only $3,000 in taxes. That's a 15 percent rate and a savings of $3,000.

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How does one buy an Obama or Romney option ? And doesn't this strategy depend on them being equally priced, which competeing options (bets) rarely are. A simultaneous buy/write of either option is more likely to be a 50/50 proposition.

Posted by: Reynolds Williams | Jun 25, 2012 4:28:53 AM

Put your options on the table and let's talk.

Posted by: willis | Jun 25, 2012 6:12:55 AM

Binary Options on Political Events Are Not Allowed (at least according to the CFTC in April 2012).

Posted by: Tax Professional Extraordinaire | Jun 25, 2012 2:42:25 PM