I was thinking about new year 2021 IRA contributions, as well as those for last year 2020. And while Roth conversions can no longer be recharacterized (undone), Roth contributions can be recharacterized to Traditional up until you file that contribution year’s tax return, including extension.
Supposing you can contribute to a Roth IRA ($100k single /$200k married, roughly in terms of max AGI), you could do either a Roth or Traditional for your $6k ($7k if older). This gives you some optionality to make an investment and keep tax free (Roth) if it does well, or recharacterize it to a Traditional instead if, from the retrospective investment perspective in Oct’21 or Oct’22 (for 2020 or 2021 contributions, respectively), decide your losses would be better shared with the government.
If you recharacterize a Roth contribution to traditional, you’ll either get a tax deduction for the full original contribution (if you have no work retirement plan, or if you do, your income is fairly modest), or at worst get the basis for your full nondeductable contribution (*).
I think GBTC (bitcoin) or ETHE (etherium) crypto trusts would be excellent choices for their very high volatility and possibly very high returns over the next year or so. These are otc, but should be purchasable at any typical stock broker.
Say you’re in the 1/3 tax bracket and think it’s a coin flip that crypto goes up or down 50% in the next year. So you put your money into GBTC in your new Roth…
Heads - crypto goes up
$6k contribution makes 50%, win $3000 tax free in your Roth.
Tails - crypto goes down
Lose $3000, recharacterize to Traditional, get a $6000 tax deduction worth $2000 off your taxes at an assumed 33% marginal rate (possibly higher in 2021 TBD on the Biden plan). Net after tax loss of $1000.
Expected return $1000 (+2k or -$1k with equal assumed odds), or 17% over the time period, on an after tax basis. Pretax equivalent return 17%/(1-tax rate) = 25%.
It won’t beat TSLA calls in this market but it’s not too shabby on expectation and if you want a little crypto exposure, this is a good way to get some partial protection on the downside at the price of some extra paperwork only in the case it goes down.
- If you make too much at work with a retirement plan and can’t deduct the Traditional, you still get the full basis for your (partially lost) contribution. This means when you later take out pretax money from your 401k or this Traditional years later after it appreciates enough, you won’t have to pay the first $6k worth. So basically the value is not the up front tax deduction, but the value of a future tax free retirement withdrawal at your initial retirement marginal tax rate, discounted back in terms of present value. So lower, but maybe not that much lower, YMMV.