Roth Conversion vs Gap Gain...

[SoReady]

Hi,

For this year I can either max out on a Roth conversion to hit the AGI number I use for ACA, or I can also utilize captial gains to accomplish this. What I am wondering if there is any advantage to one way or the other.

Here is some information.

I have 12% of my retirement holdings as a Roth. The rest is IRA/401k. I currently estimate a sizable RMD for when I turn 70.5 (hence trying to move more to Roth). Currently I am 61.

The capital gain strategy is to reset the cost basis. Essentially I would sell the stock, wait 31 days and repurchase it (price fluctuation may impact exact timing). So later in life, when I sell, the cap gains tax would be minimal, while now it would be 0%

I could do a Roth conversion to get me to the ACA income I reported when I signed up, OR I could lower the Roth conversion amount and do a Capital gain cost basis reset to get top the ACA income amount.

I've gone back and forth on this and can't seem to come up with which may be best. Maybe I need to consider other variables... I don't know. Any insight would be fantastic!

Thanks,

Bob D

 

[Er3184]

You can sell at a gain and immediately buy it back, there are no wash sale rules on gain harvesting.

 

[SoReady]

Oh, cool. I wasn't aware of that. That will make that easier as price change will be negligible.

 

[pb4uski]

Similar situation here. My choice is Roth conversions as I only have 4-8 more years to do low tax cost Roth conversions whereas I presume that the capital gains preference will be available for a long time to come.

 

[Sunset]

OP - you could do a bit of both if you can't decide which is really better. That way no matter what you get at least 50% of the best choice.

We are doing Roth conversions mainly with some LTCG as need to shift investments.

 

[jarts98]

I had a somewhat similar situation last year. I opted for the capital gain harvesting. In the 15% bracket, LT capital gains are taxed at 0%. In the 15% bracket, Roth conversions are taxed at, well, 15%. In my case it wasn't a huge amount of money, so gain harvesting worked well - quick and easy - and 0% is nice.

John

 

[Huston55]

OP-

Do you not have any taxable accounts to consider in your choice?

 

[Er3184]

I think you take the capital gain harvesting while you're able. Do that, more likely to take losses in future which allow you to go $3000 in the hole on capital losses. Those losses in the future will wash out $3k of additional Roth conversions as an offset to ordinary income.

 

[Er3184]

Your marginal tax rate if proposed legislation goes through is going to drop to 12% next yr (90k married, 45k single) so your marginal rate for conversions will be lower next yr further supporting gain harvesting over conversions at 15%

 

[pb4uski]

I had a somewhat similar situation last year. I opted for the capital gain harvesting. In the 15% bracket, LT capital gains are taxed at 0%. In the 15% bracket, Roth conversions are taxed at, well, 15%. In my case it wasn't a huge amount of money, so gain harvesting worked well - quick and easy - and 0% is nice.

John

emphasis added

Depending on your situation Roth conversions are taxed at a lot less than 15%. In our case our ordinary income before Roth conversions is only about $19k of pensions and interest which is about the same as our itemized deductions.... so the first $8,100 of Roth conversions is 0% because it is offset by personal exemptions, the next $18,650 is tax at 10% and anything beyond that is taxed at 15%.... I expect to pay ~10.6% on our Roth conversions in 2017.

Over the last 5 years we have paid about 8% in federal tax on ~$275k in conversions.

 

[Sunset]

OP - since you live in IL, remember that roth conversions are only Federally taxed. As IL does not tax $$$ from retirement income.
IL will tax your LTCG. at the blended rate this year ~4.25% and next year at the full rate of 4.95%

 

[SoReady]

Thanks all for the info.

Seems like either direction may work depending on the point of view.

My tax rate would be fairly low. My taxable income would end up around 30K so the Roth conversion would be lightly taxed.

Sunset, I forgot about IL taxing CG. Thanks for the heads up on that. Certainly need to factor that in.

The possible 15% bracket going to 12% bracket is another consideration.

I'm glad I still have time! I will need to ponder this some more.

Thanks again,

Bob D

 

[43210]

Don't forget basis step-up for heirs if that's a factor.

 

[bingybear]

Hi,

For this year I can either max out on a Roth conversion to hit the AGI number I use for ACA, or I can also utilize captial gains to accomplish this. What I am wondering if there is any advantage to one way or the other.

Here is some information.

I have 12% of my retirement holdings as a Roth. The rest is IRA/401k. I currently estimate a sizable RMD for when I turn 70.5 (hence trying to move more to Roth). Currently I am 61.

at least one piece is missing... how much do you have after tax verse retirement savings. If you are really heavy in TIRA/T401k overall, then I would look at the roth conversion. The capital gains will likely have lower tax rates later than your RMD marginal rate.

If you are really heavy on after tax, then I'd look at LTCG harvesting.

From your post I would assume you are real heavy in TIRA/T401k.

 

[SoReady]

You are correct.

Essentially I am at the point where the after tax monies need to be replenished. And the goal is to keep taking from IRA/401k until 65, when I want to take my pension.

Thanks!

 

[Skoach]

Depending on your situation Roth conversions are taxed at a lot less than 15%. In our case our ordinary income before Roth conversions is only about $19k of pensions and interest which is about the same as our itemized deductions.... so the first $8,100 of Roth conversions is 0% because it is offset by personal exemptions, the next $18,650 is tax at 10% and anything beyond that is taxed at 15%.... I expect to pay ~10.6% on our Roth conversions in 2017.

Over the last 5 years we have paid about 8% in federal tax on ~$275k in conversions.

+1 this.

The optimal spot may vary depending on your individual circumstances, but you can pay zero tax on all if you do Roth conversions up to personal exemptions and above the line deductions. The take Cap Gains up to whatever level you like as long as you stay in the 15 % bracket. This is what I do every year.