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Roth Conversion or Cap Gains within 15% Tax Bracket
Old 09-24-2012, 02:04 PM   #1
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Roth Conversion or Cap Gains within 15% Tax Bracket

For about the last eight years, I've used any remaining portion of my federal 15% tax bracket to convert T-IRAs to Roth IRAs, usually at about $20K per year. I have a basis in the T-IRA that I'm also whittling down.
But with the uncertainties in the tax code for 2013, I've been considering using the 15% bracket for taking some capital gains on a few stocks that I've held for a long time.
One stock is now at 34, my basis is around 3+. The other is at 72, my basis is about 12. I still like both stocks though the second may have more near term potential than the first (I'd sell and almost immediately buy back the second stock). If I go ahead and realize the cap gains now, it'd be subject to the 0% cap gains tax (up to my $20K wiggle room)

But I hate to let a year go by without doing Roth conversions. I just looked it up and I may be able to complete the conversions in next four to five years and I have 8 years to RMDs.

I'm inclined to max out realizing the cap gains for 2012 with a temporary hold on Roth conversions but wondering if any other factors or considerations I may have missed. Also have pension and wife and I each have 401k
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Old 09-24-2012, 02:09 PM   #2
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I've been doing the same thing with the Roth conversions. As far as the gains are concerned I would just sell a bunch of losers to make up the difference. If you don't have any losers you are a much better investor than me.
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Old 09-24-2012, 02:45 PM   #3
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If cap gains taxes increase in 2013, losers are better sold then to offset gains subject to the new, higher tax rate.
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Old 09-24-2012, 04:51 PM   #4
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If cap gains taxes increase in 2013, losers are better sold then to offset gains subject to the new, higher tax rate.
if there is carryover to future yrs, won't they offset gains at whatever rate is in effect then?
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Old 09-24-2012, 05:26 PM   #5
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I think I would fill the 15% bracket with LTCG since their effective tax rate would be 0% vs 15% on Roth conversion income. Right?

Another constraint to consider this year, particularly if you pay for you own health insurance is the effect of your 2012 income on ObamaCare health insurance subsidies paid in 2014. That is a constraint for me. If my income is $60,500 or less, I would be eligible for ~$12,480 in health insurance subsidies in 2014. If my income is $60,600 then the subsidies are zero, so that extra $100 of income would cost me over $12,480! Note that there are a lot of uncertainties about what will happen between now and when the 2014 subsidies are paid so to some degree we are operating in the dark.
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Old 09-24-2012, 07:20 PM   #6
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I'd go for the 0% on capital gains, but I suppose you should do the math.
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Old 09-24-2012, 09:22 PM   #7
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Just for giggles, I took my projected 2012 tax return and filled up to 60k of income with LTCG and had 0 tax. If I replace the LTCG with Roth conversion, I get a whopping 2.4% tax on the Roth conversion, so for me it isn't a huge difference.

Alternatively, if I were to go to the top of the 15% bracket ($70k of taxable income), I would pay 8.7% tax on the Roth conversion, but 0% tax on LTCG.
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Old 09-24-2012, 09:58 PM   #8
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if there is carryover to future yrs, won't they offset gains at whatever rate is in effect then?
AFAIK, yes, a carryover will work that way. The 2013 cap gains rate is key: if it goes higher then loss harvesting is potentially more valuable done in 2013. Place your bets on whether Congress extends the BTCs.
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Old 09-24-2012, 11:57 PM   #9
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Given the uncertanities in future taxation as well as government benefits (SS, Medicare could eventually be income/asset based?), Roth withdrawals could be subject to some new surcharge, counted towards benefits, etc, who really knows, I am keeping a mix of tax-free, taxable and tax-deferred investments in my portfolio. This gives me some flexibility to withdraw from a combination of the above while minimizing my taxes and hopefully maximizing my benefits. I am no longer as keen on converting everything to Roth as I was at one point.
If you plan on leaving an estate to the heirs, remember the step up in basis they get on the investments.


You might want to post on Bogleheads forum as well, you might get some interesting additional perspectives.
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Old 09-25-2012, 12:47 PM   #10
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Thanks for the comments. I wish it was just a math exercise but it really comes down to what the 2013 tax laws will look like regards tax brackets and status of cap gains tax. Realize the gain now at 0% and put off Roth conversions or take the risk and hold on to the stocks.

In reading another article, could consider a charitable donation in kind, but small tax benefit since I'm normally only half way in using my standard deduction anyway (no mortgage).

I think I'll wait until after the election and see what transpires....I've essentially got until mid-December to make a deliberate choice, unless of course, I determine it's time to sell for other reasons than tax considerations

Or I may just split the difference and do half cap gain, half Roth conversion. Given my past history, this may be the most likely action.

Thanks again.
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