Author Topic: Not worth the returns after taxes.  (Read 24190 times)

lascott

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Re: Not worth the returns after taxes.
« Reply #30 on: February 16, 2015, 02:15:13 AM »
An after tax IRA contribution is an option too. Contribution is not tax deferred but tax deferred income is still good.  My previous employer let us put $52k of after tax money into the 401k each year.  After I left, I rolled that money into LC.<snip>
That sort of thing can be done to move it to a ROTH IRA (even annually). Fidelity will do this, as one example.
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mchu168

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Re: Not worth the returns after taxes.
« Reply #31 on: February 16, 2015, 09:25:44 AM »
An after tax IRA contribution is an option too. Contribution is not tax deferred but tax deferred income is still good.  My previous employer let us put $52k of after tax money into the 401k each year.  After I left, I rolled that money into LC.<snip>
That sort of thing can be done to move it to a ROTH IRA (even annually). Fidelity will do this, as one example.

Yep I believe this is allowed for after tax 401k money now. IRS made the change this year.

I'm still waiting for the IRS to fix the whole pro-rata conversion mess.  Maybe if we get Jeb into the WH...

BruiserB

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Re: Not worth the returns after taxes.
« Reply #32 on: February 16, 2015, 02:29:39 PM »
The backdoor Roth is the way to go, at least until Obama kills it.

If you have substantial traditional IRA(s) already, backdoor Roth isn't really an option.

My only traditional IRA holdings are in LendingClub and were made with non-deductible contributions.  So I would only pay tax on my gains for the last two years if I converted to Roth.

My question is, do I need to liquidate my notes and then transfer the money to a new Roth IRA account at LC?  Or is there a way I can have Self Directed IRA Services (the company that administers the IRA for LC) just convert the IRA to a Roth IRA with the current notes in it?  If I can, that would be simple, but then I'd have to open a new traditional IRA account next year to make the initial contribution and then convert it to a Roth?  Or do I make next year's cash contribution to the traditional account, but instead of buying any notes, immediately move the cash portion of the account to a Roth account?  Basically, what's the simplest way to do the initial conversion and to be set up for making it easiest in the future?

Fee

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Re: Not worth the returns after taxes.
« Reply #33 on: February 16, 2015, 02:43:34 PM »
The backdoor Roth is the way to go, at least until Obama kills it.

If you have substantial traditional IRA(s) already, backdoor Roth isn't really an option.

My only traditional IRA holdings are in LendingClub and were made with non-deductible contributions.  So I would only pay tax on my gains for the last two years if I converted to Roth.

My question is, do I need to liquidate my notes and then transfer the money to a new Roth IRA account at LC?  Or is there a way I can have Self Directed IRA Services (the company that administers the IRA for LC) just convert the IRA to a Roth IRA with the current notes in it?  If I can, that would be simple, but then I'd have to open a new traditional IRA account next year to make the initial contribution and then convert it to a Roth?  Or do I make next year's cash contribution to the traditional account, but instead of buying any notes, immediately move the cash portion of the account to a Roth account?  Basically, what's the simplest way to do the initial conversion and to be set up for making it easiest in the future?

Do NOT liquidate your notes. SDIRA will take care of everything. LC will not be involved. I would make both your 2014 and 2015 contribution now if feasible to make it more simple. I just did a conversion but am unsure if I will need to open a completely new Trad account next year or if they will let me keep the first one open for the future. Please let us know what they tell you.

BruiserB

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Not worth the returns after taxes.
« Reply #34 on: February 16, 2015, 04:57:30 PM »

The backdoor Roth is the way to go, at least until Obama kills it.

If you have substantial traditional IRA(s) already, backdoor Roth isn't really an option.

My only traditional IRA holdings are in LendingClub and were made with non-deductible contributions.  So I would only pay tax on my gains for the last two years if I converted to Roth.

My question is, do I need to liquidate my notes and then transfer the money to a new Roth IRA account at LC?  Or is there a way I can have Self Directed IRA Services (the company that administers the IRA for LC) just convert the IRA to a Roth IRA with the current notes in it?  If I can, that would be simple, but then I'd have to open a new traditional IRA account next year to make the initial contribution and then convert it to a Roth?  Or do I make next year's cash contribution to the traditional account, but instead of buying any notes, immediately move the cash portion of the account to a Roth account?  Basically, what's the simplest way to do the initial conversion and to be set up for making it easiest in the future?

Do NOT liquidate your notes. SDIRA will take care of everything. LC will not be involved. I would make both your 2014 and 2015 contribution now if feasible to make it more simple. I just did a conversion but am unsure if I will need to open a completely new Trad account next year or if they will let me keep the first one open for the future. Please let us know what they tell you.

This would be ideal....I've already made contributions for 2013, 2014, and 2015.  So I have invested $16,500.  My current account value is around $18,500. 

So you're saying that SDIRA can merely change the account to a Roth IRA and I would pay tax on $2,000 in gains that I have so far on my 2015 taxes?  As you say if I don't involve LC, then I will keep the same LC account number....SDIRA will just "move" that account from being held in a Traditional IRA to being held in a Roth IRA.  Did SDIRA assign you a new account number with them?  Maybe I'll give them a call and check out options.  Were they easy to deal with?




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Fee

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Re: Not worth the returns after taxes.
« Reply #35 on: February 16, 2015, 05:46:35 PM »

The backdoor Roth is the way to go, at least until Obama kills it.

If you have substantial traditional IRA(s) already, backdoor Roth isn't really an option.

My only traditional IRA holdings are in LendingClub and were made with non-deductible contributions.  So I would only pay tax on my gains for the last two years if I converted to Roth.

My question is, do I need to liquidate my notes and then transfer the money to a new Roth IRA account at LC?  Or is there a way I can have Self Directed IRA Services (the company that administers the IRA for LC) just convert the IRA to a Roth IRA with the current notes in it?  If I can, that would be simple, but then I'd have to open a new traditional IRA account next year to make the initial contribution and then convert it to a Roth?  Or do I make next year's cash contribution to the traditional account, but instead of buying any notes, immediately move the cash portion of the account to a Roth account?  Basically, what's the simplest way to do the initial conversion and to be set up for making it easiest in the future?

Do NOT liquidate your notes. SDIRA will take care of everything. LC will not be involved. I would make both your 2014 and 2015 contribution now if feasible to make it more simple. I just did a conversion but am unsure if I will need to open a completely new Trad account next year or if they will let me keep the first one open for the future. Please let us know what they tell you.

This would be ideal....I've already made contributions for 2013, 2014, and 2015.  So I have invested $16,500.  My current account value is around $18,500. 

So you're saying that SDIRA can merely change the account to a Roth IRA and I would pay tax on $2,000 in gains that I have so far on my 2015 taxes?  As you say if I don't involve LC, then I will keep the same LC account number....SDIRA will just "move" that account from being held in a Traditional IRA to being held in a Roth IRA.  Did SDIRA assign you a new account number with them?  Maybe I'll give them a call and check out options.  Were they easy to deal with?




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They were great to deal with. I had opened my account with them with a Roth IRA contribution. I later realized that my wife and I were over the Roth contribution income limit so I had it recharachterized to a Trad IRA. Once that was settled, I converted the Trad back to a Roth and was able to use the same, original Roth IRA account number.

Your best bet is to call them directly since our situations are a little different. I don't want to try and give you tax guidance since I am not a professional and could inadvertently lead you astray.

BruiserB

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Re: Not worth the returns after taxes.
« Reply #36 on: February 16, 2015, 06:32:15 PM »
Appreciate the feedback, Fee!  Just good to know they are easy to deal with.  I've never spoken to anyone there as I handled the account opening through the LC website and have just mailed in my contribution each year.  It would be awesome if they can make it super simple!

rockinray

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Re: Not worth the returns after taxes.
« Reply #37 on: February 22, 2015, 10:53:48 AM »
So let me make sure I understand this... I'm kind of dumb from time to time.   :o

My wife and I already max our 401k, HSA, and Roth IRA's, and we do not qualify for a traditional "pre-tax" IRA. But, if I read correctly here, I can open an IRA and fund it without the tax credit, and everything grows tax free until I start to pull it out?

Am I understanding this correctly?

rawraw

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Re: Not worth the returns after taxes.
« Reply #38 on: February 22, 2015, 12:05:32 PM »
So let me make sure I understand this... I'm kind of dumb from time to time.   :o

My wife and I already max our 401k, HSA, and Roth IRA's, and we do not qualify for a traditional "pre-tax" IRA. But, if I read correctly here, I can open an IRA and fund it without the tax credit, and everything grows tax free until I start to pull it out?

Am I understanding this correctly?
http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

rockinray

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Re: Not worth the returns after taxes.
« Reply #39 on: February 22, 2015, 12:21:43 PM »
So let me make sure I understand this... I'm kind of dumb from time to time.   :o

My wife and I already max our 401k, HSA, and Roth IRA's, and we do not qualify for a traditional "pre-tax" IRA. But, if I read correctly here, I can open an IRA and fund it without the tax credit, and everything grows tax free until I start to pull it out?

Am I understanding this correctly?
http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

Thanks rawraw!

I'm gong to visit our accountant this week about this to see what he has to say too.


Fred

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chasingbread

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Re: Not worth the returns after taxes.
« Reply #41 on: April 13, 2017, 04:37:01 AM »
I highly recommend that you research the IRS rules for Contingent Payment Debt Instruments... if you look at the definition of CPDIs and the structure of LC investments, one can make a strong argument that LC notes are, indeed, CPDIs.  If you come to that conclusion, capital gains and losses are treated as normal income and will either add or subtract from your OID income.

This is not tax advice and you should always discuss matters like this with a tax professional.

There was a post in the forums a couple of years ago regarding this by AmCap.  I'm not sure if he's still active here.

http://www.lendacademy.com/forum/index.php?topic=805.0

There he said:

Quote
Per Code Section 166, non business bad debts are treated as short term capital losses, regardless of how long you've held the debt instrument.  See generally, http://www.fool.com/school/taxes/2000/taxes000107.htm
for why that matters.  If you have net short-term capital loss, you can deduct against ordinary income up to $3k per year.
 
Note that the mandatory short-term rule only applies to losses, not to gains.  If you buy a note, hold it for a year, and sell for a gain over your adjusted basis, you get long-term capital gain (yippee!).

So he seemed to argue that any losses should be taken as short term losses (therefore at your normal marginal rate) but still subject to a maximum $3000 yearly loss after offsetting any gains.  I've also seen this CPDI argument, which sounds completely reasonable.  And then starting with last year I get the Lending Club Tax Guide with my 1099 which tells me to take notes held less than a year as short term losses and notes held more than a year as long term losses. 

Bottom line, there seems to be no consistent recommendation of what to do.  It would certainly be to LendingClub's advantage to be proponents of the CPDI approach as it would simply allow investors to deduct losses from our OID income and give the best possible tax treatment to the losses.  Why don't they do this?  There must be some reason they feel that their notes don't qualify as CPDIs.....even though your argument that they should seems equally reasonable to me.

I wouldn't mind being more aggressive in declaring my losses.  As I understand it, if you make a mistake in good faith and are audited you will simply pay the corrected tax amount and maybe some interest, but won't be penalized.  But if I were to consider my losses as losses on CPDIs, how would I show that on my taxes?  I can't simply reduce my OID income by the loss amount, or things won't match up when the IRS compares my declared interest vs what's been reported to them on 1099s.  Is there a specific line one would enter this loss on?  And more specifically, what Turbo-Tax question would I answer so that it asks me for my CPDI losses?

Last year, I used the adjustment screen right after you enter the OID information... I think there was a box you could check that said 'I need to adjust the interest reported'.

I don't think the tax code contemplates how to deal with P2P loans.  LC chose to view Folio transaction and charge-offs as capital gains.  I disagree with their assessment and think that the gains and losses from my investment in LC should all be taxed at regular income rates and not get capital gain treatment.  Taxpayers try all sorts of schemes to convert income to capital gains so they get lower taxes.  I'm proposing just the opposite and think it's justified legally based on the ambiguity of the situation and, more importantly to me, it's ethically justified... I put money into LC and I'm getting taxed at a high marginal rate on my total return from the investment, the opposite of an abusive tax shelter.

Again, I'm not a tax professional and nobody should feel comforted by my personal feeling.


Ok, so, If I chose to report my gains/losses as ordinary income......

1. I would NOT report a 1099-B?
2. I would subtract my losses from my OID
3. Adjust my OID in Turbotax
4. Which is the correct reason? reduce by accrued interest, adjust the amount payer reported or "other reasons"

In my case, OID is $54K, losses (cost basis) is $21K. My adjusted OID amount would be $33K

This would be the difference between me paying $9K and not paying anything...I am willing to explain my justification based off everything I read here and about CPDI.

@jpildis is this how you did it? Have you gotten audited? Did you get audited after amending your returns? I have consistently paid 7K or more every yr.


rubicon

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Re: Not worth the returns after taxes.
« Reply #42 on: April 13, 2017, 06:54:32 AM »
Please check out this
http://www.aba.com/Tools/Offers/Documents/Chapman_Regulation_Marketplace_Lending_0317.pdf

Specifically page 90. Lending Club chooses to treat the Notes as Debt.

The Debt Approach also requires that the Operator and the investors treat the Platform Notes as debt instruments issued with original issue discount, or “OID.”


Platform Notes treated as debt instruments, and treated as issued by the Operators, would be subject to the OID rules to the extent that interest on those notes is not regarded as “unconditionally payable”—a reasonable assumption given that interest is payable only to the extent received on an underlying Borrower Loan.


chasingbread

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Re: Not worth the returns after taxes.
« Reply #43 on: April 13, 2017, 06:54:30 PM »
Please check out this
http://www.aba.com/Tools/Offers/Documents/Chapman_Regulation_Marketplace_Lending_0317.pdf

Specifically page 90. Lending Club chooses to treat the Notes as Debt.

The Debt Approach also requires that the Operator and the investors treat the Platform Notes as debt instruments issued with original issue discount, or “OID.”


Platform Notes treated as debt instruments, and treated as issued by the Operators, would be subject to the OID rules to the extent that interest on those notes is not regarded as “unconditionally payable”—a reasonable assumption given that interest is payable only to the extent received on an underlying Borrower Loan.


Thanks for the reference! I am getting schooled on all this in the forum. What I understand by what jpildis is saying, is that LC has interpreted the law as treating it as the "debt approach."

I am looking for anyone's input on how to actual input it into Turbotax.

As of right now, I adjusted the OID under "other reasons" and eliminated my capital gains losses. When i went to an accountant, they just wrote it off as capital gains which did not help much.

Fred93

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Re: Not worth the returns after taxes.
« Reply #44 on: April 13, 2017, 09:59:24 PM »
As of right now, I adjusted the OID under "other reasons" and eliminated my capital gains losses.

You have zero justification for doing that. 

I'm not tellin' you how to do your taxes, but I would want a justification based on something in the tax code or tax regulations that says you can do that before I'd do it.  If you haven't found justification in the code or regs, then you're just makin' stuff up.  Most accountants and tax preparers would feel the same way.