Pay no LTCG tax or do Roth conversion for 2025?

[HealthyFuture]

I suspect if I did my own taxes, I could make sense of this in a heartbeat. But I do not, and despite reading a lot, my brain remains muddled.

MFJ - current anticipated ordinary income (interest, dividends) of $36,000 for 2025. LTCG already incurred of $68,000. Ordinarily we are in the 22-24% tax bracket.

At the moment, we’d be paying $0 LTCG tax, and can do a Roth conversion of ~$25,000 or so and still not pay any LTCG taxes.

And:
- We do not expect to have any LTCGs for the next several years.
- I am 54 this year; wife 63 (and I know about IRMAA thresholds).
- The market is where it was a year ago, making it ‘cheaper’ today than presumably in future years to convert more shares to Roth for the same money.
- The calculator I use for Roth modeling (Boldin, formerly New Retirement) suggests we should be doing the largest Roth conversion we reasonably can this year, and then none for several decades. We could land ourselves in the 32-35% tax bracket from RMDs down the line IF we do not do any QCDs (we will do some) and IF by then we haven’t taken money tax free from our retirement accounts for long-term care.

It is REALLY appealing of course to pay 0% LTCG tax versus 15%. But I simply cannot figure out what the math is to compare the ‘cost’ of converting additional monies to Roth now versus later — the LTCG tax hit this year vs waiting and converting fewer shares for the same money in future years and losing that time of tax-free growth within the Roth.

I recognize that tax brackets could revert back to 2017 levels next year, but I do think that’s unlikely. Also, I would not ever do Roth conversions that take us above 22% (and despite what the Boldin program says, I would do Roth conversions of some kind for the next 4-5 years). Given the economic uncertainty, I will be weighing my comfort with less versus more cash on hand, but that’s an entirely different consideration.

I welcome your wise insights.

 

[TheWizard]

Do Roth conversions, yes.
Why would you about your LTCG tax rate? Are you selling shares from your taxable account to live on?
Otherwise, just let unrealized CGs pile up and get stepped up basis eventually. That's what I'm doing...

 

[HealthyFuture]

Yes, sold the stocks in January to have more cash to live on four years from now. So that is a done deal.

 

[Exchme]

I suspect if I did my own taxes, I could make sense of this in a heartbeat. But I do not, and despite reading a lot, my brain remains muddled.

MFJ - current anticipated ordinary income (interest, dividends) of $36,000 for 2025. LTCG already incurred of $68,000. Ordinarily we are in the 22-24% tax bracket.

At the moment, we’d be paying $0 LTCG tax, and can do a Roth conversion of ~$25,000 or so and still not pay any LTCG taxes.

And:
- We do not expect to have any LTCGs for the next several years.
- I am 54 this year; wife 63 (and I know about IRMAA thresholds).
- The market is where it was a year ago, making it ‘cheaper’ today than presumably in future years to convert more shares to Roth for the same money.
- The calculator I use for Roth modeling (Boldin, formerly New Retirement) suggests we should be doing the largest Roth conversion we reasonably can this year, and then none for several decades. We could land ourselves in the 32-35% tax bracket from RMDs down the line IF we do not do any QCDs (we will do some) and IF by then we haven’t taken money tax free from our retirement accounts for long-term care.

It is REALLY appealing of course to pay 0% LTCG tax versus 15%. But I simply cannot figure out what the math is to compare the ‘cost’ of converting additional monies to Roth now versus later — the LTCG tax hit this year vs waiting and converting fewer shares for the same money in future years and losing that time of tax-free growth within the Roth.

I recognize that tax brackets could revert back to 2017 levels next year, but I do think that’s unlikely. Also, I would not ever do Roth conversions that take us above 22% (and despite what the Boldin program says, I would do Roth conversions of some kind for the next 4-5 years). Given the economic uncertainty, I will be weighing my comfort with less versus more cash on hand, but that’s an entirely different consideration.

I welcome your wise insights.

A single "Big Bang" conversion is usually not the best plan and neither is ending up in the 32-35% bracket, so something seems off. I would not do a large conversion without checking with a tool like Pralana that handles more of the tax code.

There is a problem with most of these tools if you hold your bonds in tax deferred and stocks in Roth/taxable. They see the low returns in tax deferred and the high returns in Roth and want to switch from low to high returns as fast as possible (increasing your allocation to stocks). That has nothing to do with the benefits of Roth Conversions, it's a limitation of the program.

I like Pralana because you can select "Advanced Portfolio Modeling","Mode 2" and tell the program the priority for where to hold bonds vs. stocks. The program keeps your overall portfolio at a constant asset allocation by increasing bonds in tax deferred until it's full, then moving on to put them in other parts of your portfolio.

The tax gain harvesting is harder, I don't think Boldin does gain harvesting; I know Pralana does not, other than if you wanted to do harvesting in the early years, you could manually figure out how much it would reduce your unrealized gains and simply lower the initial unrealized gains accordingly. We don't anticipate ever using all our taxable account, so I made a rough guess of what percentage of the account we would need and then only look at the unrealized gains in that portion of the account.

 

[GrayHare]

But I simply cannot figure out what the math is to compare the ‘cost’ of converting additional monies to Roth now versus later

It's simply the tax rate. You'll have more after tax assets if you convert or withdraw whenever (now or later) your marginal rate on ordinary income is lower.

 

[engineernerd]

I suspect if I did my own taxes, I could make sense of this in a heartbeat. But I do not, and despite reading a lot, my brain remains muddled.

MFJ - current anticipated ordinary income (interest, dividends) of $36,000 for 2025. LTCG already incurred of $68,000. Ordinarily we are in the 22-24% tax bracket.

At the moment, we’d be paying $0 LTCG tax, and can do a Roth conversion of ~$25,000 or so and still not pay any LTCG taxes.

And:
- We do not expect to have any LTCGs for the next several years.
- I am 54 this year; wife 63 (and I know about IRMAA thresholds).
- The market is where it was a year ago, making it ‘cheaper’ today than presumably in future years to convert more shares to Roth for the same money.
- The calculator I use for Roth modeling (Boldin, formerly New Retirement) suggests we should be doing the largest Roth conversion we reasonably can this year, and then none for several decades. We could land ourselves in the 32-35% tax bracket from RMDs down the line IF we do not do any QCDs (we will do some) and IF by then we haven’t taken money tax free from our retirement accounts for long-term care.

It is REALLY appealing of course to pay 0% LTCG tax versus 15%. But I simply cannot figure out what the math is to compare the ‘cost’ of converting additional monies to Roth now versus later — the LTCG tax hit this year vs waiting and converting fewer shares for the same money in future years and losing that time of tax-free growth within the Roth.

I recognize that tax brackets could revert back to 2017 levels next year, but I do think that’s unlikely. Also, I would not ever do Roth conversions that take us above 22% (and despite what the Boldin program says, I would do Roth conversions of some kind for the next 4-5 years). Given the economic uncertainty, I will be weighing my comfort with less versus more cash on hand, but that’s an entirely different consideration.

I welcome your wise insights.

I like the bird-in-the-hand of taking advantage of the 0% capital gains, and I think the math says you can do more than a $25k Roth conversion if you only have $36k of ordinary income (other than the conversion). I'm pretty sure your ordinary income can be $96k this year and you'd still be eligible for the 0% capital gains bracket. Also you didn't mention whether you have qualified dividends, those are treated the same as LTCGs.

Most of us here do not try to guess where the market will go in the next few years or even decade, nor does that really seem relevant to the Roth conversion decision anyway. If you have a big tIRA balance, you do what you can to "even out" when you pay the taxes on withdrawals.

I'm assuming your Roth conversions are really your over-59.5-age wife's conversions? You are still young enough to have to pay the 10% penalty for early withdrawals so you almost certainly shouldn't be taking distributions from your own tIRA(s) yet.

There are probably easier places to go for 0% capital gains calculators, but if you want it from the horse's mouth you'd download the Form 1040 (search "f1040") and the Instructions for Form 1040 (search "i1040" or "i1040gi"), print the Qualified Dividends and Capital Gain Tax Worksheet which is on page 36 of the 2024 Instructions, and fill in your numbers. The $94,050 in the worksheet for 2024 will be $96,something in 2025.

You didn't say whether leaving more money to your heirs is a concern; I'm assuming your goal is to avoid running out of money before you die. I know very little about estate planning.

 

[NomDeER]

I'm in a similar situation. The last couple of years, I've been selling at the 0% tax bracket, using some of it for living expenses and investing the rest in a CD/bond ladder. It's been hard to make myself convert to Roth and pay the taxes. But, concerns about future RMDs and IRMAA have led me to convert this year. I already converted some and now that that market is down, I'll convert through the top of the 12% bracket.

I'm assuming your Roth conversions are really your over-59.5-age wife's conversions? You are still young enough to have to pay the 10% penalty for early withdrawals so you almost certainly shouldn't be taking distributions from your own tIRA(s) yet.

There is no penalty for Roth conversions under the age of 59.5. You just have to pay the taxes.

 

[Al18]

Fidelity says if you do a Roth conversion under age 59.5 and you have taxes withheld from the conversion, there is a 10% penalty.

 

[NomDeER]

Fidelity says if you do a Roth conversion under age 59.5 and you have taxes withheld from the conversion, there is a 10% penalty.

Having them withhold taxes is the same as getting a distribution, so there is a penalty (but only on the withheld tax amount). But, the conversion itself is not taxed. The default is that they do not withhold taxes. You have to affirmatively ask for them to withhold the taxes and they will warn you about the consequences. But, the mere fact that the OP is under 59.5 and is considering converting does not mean he will pay a penalty.

 

[HealthyFuture]

I like the bird-in-the-hand of taking advantage of the 0% capital gains, and I think the math says you can do more than a $25k Roth conversion if you only have $36k of ordinary income (other than the conversion). I'm pretty sure your ordinary income can be $96k this year and you'd still be eligible for the 0% capital gains bracket. Also you didn't mention whether you have qualified dividends, those are treated the same as LTCGs.

Most of us here do not try to guess where the market will go in the next few years or even decade, nor does that really seem relevant to the Roth conversion decision anyway. If you have a big tIRA balance, you do what you can to "even out" when you pay the taxes on withdrawals.

I'm assuming your Roth conversions are really your over-59.5-age wife's conversions? You are still young enough to have to pay the 10% penalty for early withdrawals so you almost certainly shouldn't be taking distributions from your own tIRA(s) yet.

There are probably easier places to go for 0% capital gains calculators, but if you want it from the horse's mouth you'd download the Form 1040 (search "f1040") and the Instructions for Form 1040 (search "i1040" or "i1040gi"), print the Qualified Dividends and Capital Gain Tax Worksheet which is on page 36 of the 2024 Instructions, and fill in your numbers. The $94,050 in the worksheet for 2024 will be $96,something in 2025.

You didn't say whether leaving more money to your heirs is a concern; I'm assuming your goal is to avoid running out of money before you die. I know very little about estate planning.

Don’t the LTCG get included in the total income which dictates the tax bracket? In other words, aren’t we roughly at the top of the 12% bracket with $36K interest/ dividends and $68K LTCG if we do a $~22-~25K conversion (given the 30K standard deduction)?

 

[HealthyFuture]

And yes, no heirs. The goal is to be able to fund long-term care if needed and not run out of money.

 

[Dash man]

Don’t the LTCG get included in the total income which dictates the tax bracket? In other words, aren’t we roughly at the top of the 12% bracket with $36K interest/ dividends and $68K LTCG if we do a $~22-~25K conversion (given the 30K standard deduction)?

Capital gains are stacked on top of ordinary income. The more ordinary income the more of your capital gains will be pushed into being taxed at 15% or 20%.

 

[engineernerd]

I'm in a similar situation. The last couple of years, I've been selling at the 0% tax bracket, using some of it for living expenses and investing the rest in a CD/bond ladder. It's been hard to make myself convert to Roth and pay the taxes. But, concerns about future RMDs and IRMAA have led me to convert this year. I already converted some and now that that market is down, I'll convert through the top of the 12% bracket.


There is no penalty for Roth conversions under the age of 59.5. You just have to pay the taxes.

Yes, my bad. Only money that doesn't complete the journey from tIRA to Roth IRA is subject to the early withdrawal penalty. Though apparently you also have to be careful not to withdraw the rolled-over money from your Roth for at least 5 years - ?

 

[engineernerd]

Don’t the LTCG get included in the total income which dictates the tax bracket? In other words, aren’t we roughly at the top of the 12% bracket with $36K interest/ dividends and $68K LTCG if we do a $~22-~25K conversion (given the 30K standard deduction)?

Yes, I think you do have the math right, sorry. To get the entire $68k taxed at 0% I think you do need to keep your other income below ($96k + your deductions - $68k). So that works out to a Roth conversion of $22k.

 

[Montecfo]

For me, the tactics are dictated more by where equities are OR if I have something in my taxable account that I WANT to sell. Always happy to pay 0% on LTCG. You can't beat zero and estate and other tax law can change. Plus my ability to tap the 0% will go away in the future.
.
In years like this I will probably do some Roth converting with the market down. But with 60-65% or so in tax deferred, it will not really change future RMDs or brackets. So Roth conversions are not a big overriding goal.

 

[Time2]

I have successfully used this tax calculator to preplan my income. I usually take out what I need to live on and figure out how much of a Roth Conversion I can make in December, but you can start anytime. It has worked very well for me. It allows you to say add $100 to whatever category of income you want until you see where it bumps you to the next tax bracket, it has a nice little display box at the bottom to show where you're at. 1040 Tax Calculator

 

[HealthyFuture]

For me, the tactics are dictated more by where equities are OR if I have something in my taxable account that I WANT to sell. Always happy to pay 0% on LTCG. You can't beat zero and estate and other tax law can change. Plus my ability to tap the 0% will go away in the future.
.
In years like this I will probably do some Roth converting with the market down. But with 60-65% or so in tax deferred, it will not really change future RMDs or brackets. So Roth conversions are not a big overriding goal.

Thanks, Montefco. I probably should have phrased the question in the opposite way: Do a Roth conversion? Or preserve LTCG rate of 0%? I had already sold what I wanted to sell back in Jan/Feb to extend a treasury/ CD ladder. So just trying to decide if the ability to convert up to 22% is worth the tax hit of ~$10K (federal and state). I’m inclined to say ‘no,’ but need to keep playing with the Roth explorer calculator to see the impact on taxes if we have strong long-term growth in our tax-deferred accounts (or not). It is extremely difficult to pay that kind of money when the alternative is to pay nothing. Just want to make sure Future Me would likely agree with that.

 

[TheWizard]

Thanks, Montefco. I probably should have phrased the question in the opposite way: Do a Roth conversion? Or preserve LTCG rate of 0%? I had already sold what I wanted to sell back in Jan/Feb to extend a treasury/ CD ladder. So just trying to decide if the ability to convert up to 22% is worth the tax hit of ~$10K (federal and state). I’m inclined to say ‘no,’ but need to keep playing with the Roth explorer calculator to see the impact on taxes if we have strong long-term growth in our tax-deferred accounts (or not). It is extremely difficult to pay that kind of money when the alternative is to pay nothing. Just want to make sure Future Me would likely agree with that.

The answer depends on where you'll be financially around age 75 when RMDs start. You'll need to do some financial modelling with a spreadsheet to get an approximate answer...

 

[pb4uski]

+1 It depends on whether the effective tax rate that you will pay now (tax from conversion divided by conversion amount) exceeds what you expect to pay when you are subject to RMDs. If you can pay less now than you expect to have to pay later then you are best off converting.

 

[Palmtree]

I don't know what is right for you but I was facing the exact same question for tax year 2024. After much head scratching I decided to take the 0% in LTCGs over the paying the the 12% tax on a Roth conversion.

 

[imbatman]

I would convert what you can....but only up to the limit of keeping your 0% LTCG rate.

 

[HealthyFuture]

+1 It depends on whether the effective tax rate that you will pay now (tax from conversion divided by conversion amount) exceeds what you expect to pay when you are subject to RMDs. If you can pay less now than you expect to have to pay later then you are best off converting.

I think “tax from conversion divided by conversion amount” is what I was seeking. I’d be paying $35K more in taxes (to convert an additional $110K) than if I didn’t convert that money this year (given I’ve already incurred the capital gains). Steep!

 

[Al18]

IMHO, there are too many variables to know if it's wise to do an extra large conversion this year. Heck, we don't even know what the federal tax rate will be next year.

I think it is wise to Roth convert to the top of the 12% bracket this year. Considering the SP500 is down 10% this year, it's not a bad idea to convert soon.

 

[pb4uski]

I think “tax from conversion divided by conversion amount” is what I was seeking. I’d be paying $35K more in taxes (to convert an additional $110K) than if I didn’t convert that money this year (given I’ve already incurred the capital gains). Steep!

Yes, steep. But what about converting $10k? $20k? Etc. If 32% from the start then I would pass, but there may be a sweet spot somewhere in there to be had.

 

[TheWizard]

IMHO, there are too many variables to know if it's wise to do an extra large conversion this year. Heck, we don't even know what the federal tax rate will be next year.

I think it is wise to Roth convert to the top of the 12% bracket this year. Considering the SP500 is down 10% this year, it's not a bad idea to convert soon.

The OP claims ordinarily to be in the 22-24% bracket, so this strategy is not applicable to him...