planning idea- would it work?

[kathyc2]

Say someone deals with American Funds or similar. They pay a up front load charge when they first invest new money, but then once the money is in no further transaction charges. Say they pay a 3% load charge and want to put 6,500 into a Roth.

Instead of putting the money directly into Roth, they deposit the money to a non-qualified account. The 6,500 investment reduced by 3% or $195 for a net of 6,305. They then transfer the 6,305 to a different fund in their Roth.

Net effect is they have increased Roth 6,305 same as if they made the contribution directly to Roth and paid the load there, but they would then also have a $195 ST loss to offset gains or ordinary income if no other capital gains.

It seems like this would work, but maybe I'm missing something??

[Burke]

Interesting scenario. However, why wouldn't the custodian also charge another 3% upon "transferring" the money? It is not actually a transfer at all, but a sale or redemption and separate purchase in another type of vehicle as far as they are concerned. Especially if he is buying the same fund. Because if he is not, I can't see the reasoning behind this course of action.

[kathyc2]

Interesting scenario. However, why wouldn't the custodian also charge another 3% upon "transferring" the money? It is not actually a transfer at all, but a sale or redemption and separate purchase in another type of vehicle as far as they are concerned.

American Funds does not do this, although some other companies may. Once the money is with them you can move it without fees between funds or between non-qualified/Roth/IRA. I know this to be true because I've done it, but the non qualified to Roth idea just popped into by brain this morning.

[TaxGuyBill]

I'm a bit fuzzy on what you are saying.

Where does the Short Term Loss come into play? Unless something is being sold, isn't it just reducing basis?

[kathyc2]

I'm a bit fuzzy on what you are saying.

Where does the Short Term Loss come into play? Unless something is being sold, isn't it just reducing basis?

If you put it in a non-qualified plan, your basis would be the full 6,500. After they take the load charge the value in the account is only 6,305. This amount is immediately transferred to a Roth. The 1099B would show a sale of 6,305 and a basis of 6,500 so you would have a ST loss of 195. You would be technically selling the non-qualified to purchase the Roth.

[TaxGuyBill]

Hmmm. An IRA is a "trust". Would the Related Party rules apply?

https://www.irs.gov/publications/p17/ch14.html#en_US_2014_publink1000172300

[kathyc2]

Hmmm. An IRA is a "trust". Would the Related Party rules apply?

https://www.irs.gov/publications/p17...link1000172300

I was thinking using 2 different funds would eliminate any potential problems with related party and wash rules. Say put the in and out non-qualified in Amcap and then the Roth in Balanced.

I think it should work, but I don't remember ever reading about something similar as a planning tool. Since the "experts" aren't talking about it, maybe I'm missing something as to why it wouldn't work.

[Rapid Robert]

Once the money is with them you can move it without fees between funds or between non-qualified/Roth/IRA. I know this to be true because I've done it, but the non qualified to Roth idea just popped into by brain this morning.

I vaguely recall that IRA contributions (not rollovers) must be in the form of cash, not other types of property such as securities (too lazy to look up the code section). You're saying that once you make the initial purchase of a fund in regular account, you can sell that and use the cash to purchase some securities in a Roth IRA account, without any transaction fees? Sounds unusual to me.

[kathyc2]

I vaguely recall that IRA contributions (not rollovers) must be in the form of cash, not other types of property such as securities (too lazy to look up the code section). You're saying that once you make the initial purchase of a fund in regular account, you can sell that and use the cash to purchase some securities in a Roth IRA account, without any transaction fees? Sounds unusual to me.

Yes, that is exactly what I'm saying. I've pretty much had all my investments w/ AF for the last 20 years or so. Since that's the way they handle loads I assumed it was the norm, but it seems like other companies handle it differently. From their site:

"If I roll my account into an American Funds IRA, what sales charges or account fees will I have to pay?

It depends. Generally, an amount already invested in American Funds can be rolled over into an American Funds IRA without paying any up-front sales charges. Any amount held in investments other than American Funds is subject to applicable sales charges."

Maybe it's a regional thing but the majority of my clients with investments have some it not all their investments/IRA's with American Funds.

Are you saying it's the norm for a change of classification to be charged? Like if someone rolls money from Traditional to a Roth some investment companies will charge them a fee?

[FEDUKE404]

Strange way to do things

I've never heard of anything like this. . .seems like a lot of trouble for marginal return (except for a professional tax preparer).

Are you sure you can establish a credible "capital loss" of $195 from the first account, or did perhaps the scenario go along the lines of you REALLY only put $6,305 into assets and the other $195 was a true "fee" ??

Will a Form 1099-R and/or Form 5498 be rattling around also? ?

FE

[buzzardbreath]

I see problems

Kathy, the first deposit is into a "non-qualified" account. Is this any kind of conventional IRA, SEP plan, etc. "Non-qualified" simply means it has not been blessed by IRS - you haven't really told us what kind of a "plan" it is. Is it possible that this is just an ordinary brokerage account with American Funds?

If this is ANY kind of IRA or SEP, no kind of gain or loss is allowed within the plan (or even reportable), although basis may be altered by the disallowed gain/loss.

If this is an ordinary brokerage account, the loss would be allowed, but then what is to stop the Roth from charging a new load on money coming in from a personal account? Loss would be allowed once, but paid twice.

If this works as you think it may, it would only be by the graces of American Funds not wishing to double-charge. Not sure they will (or won't) go along with this.

[Lion]

And, now you have to make up the missing $195 to make your full contribution of $6,500. But you have only your tax rate time $195 as a benefit of your moving funds around.

[kathyc2]

Duke- There would not be a 1099R since there is not a distribution from Roth. There would however be a 1099B from selling the shares from the non-qualified.

Buzzard- non-qualified, non-retirement, ordinary brokerage, taxable account, regular investment account- call it what you want. Yes, I am sure they don't recharge the load.

Lion- if you put the max of 6,500 directly into Roth the account balance would only increase by 6,305 due to load. Conversely, you could put 6,700 into the non-qualified and pay the load from that account so you could get the full net of 6,500 into a Roth.

Yes, we are not talking high finance but a $50 tax saving is $50, all from client just doing a little paperwork taking less than 5 minutes. If I can offer a suggestion to a client that will save them roughly the equivalent of a third of my prep fee, why wouldn't I? There are some client that I know would not want to bother with it, and others that are capable of understanding and will appreciate the suggestion. However, with the difficulty I'm having explaining it to professionals, I may want to rethink which clients would be capable of understanding the concept.

With a non-qualified or a traditional IRA you will recoup the load charge at some point either from basis or less money to withdraw. Paying the load charge directly from the Roth account and you never will receive any tax benefit from the load.

[Rapid Robert]

Maybe it's a regional thing but the majority of my clients with investments have some it not all their investments/IRA's with American Funds.

Are you saying it's the norm for a change of classification to be charged? Like if someone rolls money from Traditional to a Roth some investment companies will charge them a fee?

First, I'd like to confirm that you are NOT talking about any kind of rollover. You are talking about moving money from a regular after-tax investment account into a Roth IRA. As stated previously (and now I've verified it at IRS web site), you can only contribute cash to a Roth IRA, not any other type of property. I'm not sure what you mean by "change of classification", you are not changing anything, you are selling some securities to generate cash, which you then contribute to the IRA.

I have never heard of a brokerage that does not charge you a transaction fee to sell securities in an after-tax account, or to buy securities inside an IRA account. Since there is no rollover involved, why would they provide this service for free when everyone else charges for it? In fact, even when doing a rollover, there could be a charge, For example I recently consolidated some IRAs, let's say from Fidelity to E*Trade. Even with an in-kind transfer of securities (since it was a rollover, not a contribution), I recall that Fidelity charged me an "account closing fee".

[Burke]

I understand what you are proposing to do, and based on the info in your post re AF load charges, it should work. You are calculating a tax savings of 26%. It will definitely only benefit those in higher income tax brackets (your state is 3.4%?). A NY taxpayer for instance, would have a higher savings on the transaction. And I guess you would have to factor in the loss in future investment earnings as a cost on the $195 not transferred over.