Take capital gains or partial IRA conversion?

[BrianB]

I've been stuck on a question & I am soliciting opinions:

Due to circumstances this year, we will have about $20k "headroom " in the 15% fed tax bracket. We have some non-qualified stock in DW's company that has almost that in capital gains. I'm also interested in partial conversion on my IRA to ROTH as we are a little top-heavy in qualified accounts.

We're really choosing between CG now with regular income later, or regular income now with CG later. (IRA distributions are regular income).

Which is the better choice, especially since 2012 could to be the last year for such generous treatment of CG?

Thanks for comment, and I will take suggestions as opinions only & not legal / accounting advice.

Brian

[pb4uski]

I think I would lean towards the CG as I don't think we'll see 15% CG tax rate again in the near future (depending on the outcome of the Nov elections and how DC handles the fiscal cliff).

However I see from your profile that you plan to retire in 2014, so you need to think through the health insurance subsidy implications of your situation as well depending on what you have available to you for health insurance once you retire.

While I'm still evaluating it, I suspect that these implications will be a more important limit on my CG/Roth conversion activities later this year as at my age there is a steep cliff in the subsidies so the combination of the incremental tax and the incremental loss of subsidies is the total "economic" cost of CG/Roth conversions and the economic cost can be as much as 400% in some situations. IOW, an additional $1,000 of CG or Roth would not only result in ~$150 or so of tax but also the loss of more than $4,000 in health insurance subsidy in 2014 (since 2014 subsidies will presumably be based on 2012 tax return information).

YMMV and there is a lot about the subsidy situation that is unknown/unclear at this writing.

[kaneohe]

Maybe need to do some fuzzy math:
1) Taking CG this yr, is a "real" savings of 20K x 15%? (what will CG rate be in the future vs 0% this yr) = 3K? What will you do with the 3K.....spend/invest?
2)Doing Roth conversion costs you now at 15% bracket and saves you later at bracket? Generally there is only a minimal advantage if you withdraw later at the same tax bracket.

conclusion: .........it depends.......the only thing known for sure is that LTCG rate will be 0% this yr. Seems like a slight bias toward the stock unless you think you will in a higher bracket when you withdraw from TIRA.?

[kaneohe]

pb4uski brought up an important point about the health insurance subsidy so I linked that thread. It was an eye-opener for me: Need advice on taking advantage 15% Fed tax bracket "headroom"

[MichaelB]

Quote:

Originally Posted by BrianB I've been stuck on a question & I am soliciting opinions: Due to circumstances this year, we will have about $20k "headroom " in the 15% fed tax bracket. We have some non-qualified stock in DW's company that has almost that in capital gains. I'm also interested in partial conversion on my IRA to ROTH as we are a little top-heavy in qualified accounts. We're really choosing between CG now with regular income later, or regular income now with CG later. (IRA distributions are regular income). Which is the better choice, especially since 2012 could to be the last year for such generous treatment of CG? Thanks for comment, and I will take suggestions as opinions only & not legal / accounting advice. Brian

Usually, non-qualified refers to stock options, not stock. Tax treatment of options is different than taxation of regular stock. Is this stock or options?

[Animorph]

NQ stock options are treated as income no matter what, unless you already excercised them and now just hold the stock.

Don't forget the regular income tax bracket for next year may not be 15% either. So it may be close to the same benefit taking income or CG. Your guess...