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High Volatility, Negative Correlation, Roth IRA Conversions, and the Codified Economic Substance Doctrine

9 Pages Posted: 30 Nov 2010  

Gregg D. Polsky

University of Georgia School of Law

Abstract

This paper describes and analyzes an investment strategy that, when combined with simple Roth IRA conversion planning, can substantially reduce the tax costs of Roth conversions. The strategy leverages, through the combination of volatily and negative correlation, the put option feature inherent in Roth IRA recharacterizations. The only significant risk to taxpayers who execute the strategy is that the IRS might assert that the recently codified economic substance doctrine (and its strict liability penalty) applies to disallow the tax benefit. However, the doctrine appears not to be relevant in this context, where Congress has given taxpayers an explicit election to recharacterize Roth IRA conversions. Even if the doctrine were to apply, it would not likely increase current year tax liability.

Suggested Citation

Polsky, Gregg D., High Volatility, Negative Correlation, Roth IRA Conversions, and the Codified Economic Substance Doctrine. UNC Legal Studies Research Paper No. 1717019. Available at SSRN: https://ssrn.com/abstract=1717019 or http://dx.doi.org/10.2139/ssrn.1717019

Gregg D. Polsky (Contact Author)

University of Georgia School of Law ( email )

225 Herty Drive
Athens, GA 30602
United States

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