0% LTCG vs Roth conversion under 22% bracket?

[spammagnet]

I'm retired and DW retires in a couple of months. Our retirement savings are 2% taxable brokerage, 16% Roth and 82% TIRA. We'll live off IRA withdrawals until we both start SS at 70.

At our current level of income I can convert about $15K this year and stay under the 22% marginal tax bracket. I anticipate staying below that rate (assuming current tax law) for the remainder of our retirement, including with RMDs, so it wouldn't make sense for me to convert into the 22% bracket, I don't think.

My question regards about $10K of LTCG in our taxable account. This is the only year in which I can capture that at the 0% tax rate, but that sacrifices some of the space I'd use for Roth conversion. Is it better for me to capture the LTCG with 0 tax, or to leave that for future LTCG taxes > 0 and convert an additional 10K into Roth at a 12% rate?

Does my question make sense? If other information is needed, let me know.

[livesoft]

There are 3 other ways to avoid capital gain taxes: a) donate shares to charity, b) tax-loss harvesting (offset with losses). and c) die. For us, we do Roth conversions.

[Mlm]

I am currently in this situation. I’ve always prioritized Roth conversions

[crefwatch]

Our retirement income is often in the 22% bracket, we both have substantial tIRA accumulations, and we have IRMAA to consider. But I find (in my 25-year spreadsheet of income projections and taxes) that it takes fifteen years or more to recoup Roth conversion taxes from lower RMDs. The calculations are complex, and it’s risky to predict tax rates and structures. I recently added a “Cumulative FIT and IRMAA” row to the spreadsheet, which is reset to zero for the just-past year.

[MrJedi]

I offload my appreciated shares efficiently by gifting them to charity (I gift cash regularly, when it's time to gift shares I just replace the cash I normally gift with the shares). Because of this, I prefer Roth conversions.

Another important piece of information needed for tax planning is it you plan on passing any wealth after you die.

[boglehat]

My question regards about $10K of LTCG in our taxable account. This is the only year in which I can capture that at the 0% tax rate

Based on this alone, I'd personally capture the gains at 0% this year. You can't go wrong though, on the Roth side, whatever you convert will grow tax free which may come slightly ahead in certain asset appreciation scenarios, so I think it's splitting hairs either way.

[retiredjg]

My question regards about $10K of LTCG in our taxable account. This is the only year in which I can capture that at the 0% tax rate, but that sacrifices some of the space I'd use for Roth conversion. Is it better for me to capture the LTCG with 0 tax, or to leave that for future LTCG taxes > 0 and convert an additional 10K into Roth at a 12% rate?

In your situation, I'd capture the LTCG at 0%. It is a sure savings in tax vs a conversion that are doing for convenience rather than need. However, I think either choice is a good one.

When you do conversions, remember that the 22% marginal line is no longer the limit you need to watch if you have any LTCG or qualified dividends. The limit is now just a little bit lower ($80,800 as compared to $81,050).

[Exchme]

You owe the government taxes on the tIRA, regardless of whether it's paid now or later (unless you do QCDs). The advisability of Roth conversions depends on the relative marginal tax rates now vs. later. One reason it's often advisable to do conversions now is that once one of you passes, the other will face single rate tax brackets.

There is no free lunch if you leave your tIRA to your heirs, they owe taxes as the money is withdrawn and it may be in their highest earning years, possibly putting them in a higher tax bracket than you face. Because of the progressivity of the tax code, a good rule of thumb is to try to equalize your (and your heirs) marginal tax rate each year. Obviously that can be hard to calculate due to the complexity of credits, subsidies, IRMAA tiers, NIIT, etc. plus of course guessing at the future of returns, taxes, number of years between you and your spouse passing, your heirs future tax rates.

[spammagnet]

To all, I appreciate the shared wisdom.

Tax efficiency for inheritance purposes is not a consideration. While there probably will be some leftovers because we can't plan exactly when we die, we have no plans to leave anything to heirs. We'll give gifts during our life, commensurate with our means, but we hope to spend the rest on ourselves.

[spammagnet]

… When you do conversions, remember that the 22% marginal line is no longer the limit you need to watch if you have any LTCG or qualified dividends. The limit is now just a little bit lower ($80,800 as compared to $81,050).

It took me awhile to clearly understand how that worked. That's when I realized that Roth conversions up to the 22% ordinary margin could kick all the LTCG into the 15% bracket. Hence, my questions.

[UsualLine]

Take the LTCG @ 0%.

Even if forgoing $10k of Roth conversions this year pushes that much future conversion or RMD from 12% to 22% bracket, that is still only a cost of 10% tax and you're saving 15% on the LTCG. From what you said, your future conversions would likely stay below the 22% bracket anyway in which case there is no cost to deferring the conversion.

[gobel]

I'm retired and DW retires in a couple of months. Our retirement savings are 2% taxable brokerage, 16% Roth and 82% TIRA. We'll live off IRA withdrawals until we both start SS at 70.

At our current level of income I can convert about $15K this year and stay under the 22% marginal tax bracket. I anticipate staying below that rate (assuming current tax law) for the remainder of our retirement, including with RMDs, so it wouldn't make sense for me to convert into the 22% bracket, I don't think.

My question regards about $10K of LTCG in our taxable account. This is the only year in which I can capture that at the 0% tax rate, but that sacrifices some of the space I'd use for Roth conversion. Is it better for me to capture the LTCG with 0 tax, or to leave that for future LTCG taxes > 0 and convert an additional 10K into Roth at a 12% rate?

Does my question make sense? If other information is needed, let me know.

I guess it doesn't completely make sense since aren't these 2 lines contradictory? If you will never be in the 22% bracket, then you will always be in the 0% LTCG bracket, and also any Roth conversions you do now will be at par to your future tax rate (except for upcoming tax rate changes).

Therefore, I would choose Roth conversions for the following reasons:
- your LTCG will be 0% later anyway
- future earnings on a Roth conversion are tax-free, while LTCG will grow back again
- conversion at 12% now may be less than distribution later (already going up to 15% in 2026)
- smaller forced RMDs: more Roth and less Traditional makes it easier to control MAGI for various thresholds like IRMAA or SS taxation

[spammagnet]

… I anticipate staying below that rate (assuming current tax law) for the remainder of our retirement, including with RMDs …
… This is the only year in which I can capture that at the 0% tax rate, but that sacrifices some of the space I'd use for Roth conversion.

I guess it doesn't completely make sense since aren't these 2 lines contradictory? If you will never be in the 22% bracket, then you will always be in the 0% LTCG bracket, and also any Roth conversions you do now will be at par to your future tax rate (except for upcoming tax rate changes). …

I thought so, too, until I better understood how LTCG rates are determined.

I can do Roth conversions and stay under the 22% ordinary bracket but still have to pay 15% on all of the LTCG. Marginal rates for ordinary income are determined independently of LTCG, but LTCG are stacked on top of ordinary income to determine LTCG rates. The lower margin for the 15% LTCG bracket is 80,800 of combined ordinary taxable income plus LTCG.

Let's say I have 10K in LTCG. If I withdraw from my TIRA up to the 81,050 limit of the 12% ordinary bracket, all of the LTCG will be above the 80,800 lower limit, with the result of all LTCG being taxed at 15%. I have to keep ordinary income under 70,800 to keep the entire 10K of LTCG in the 0% LTCG bracket. If my ordinary income is 75,800, 5K of the LTCG would be taxed at 0% and 5K would be taxed at 15%.

So, no, the statements are not contradictory.

[spammagnet]

Take the LTCG @ 0%.

Even if forgoing $10k of Roth conversions this year pushes that much future conversion or RMD from 12% to 22% bracket, that is still only a cost of 10% tax and you're saving 15% on the LTCG. From what you said, your future conversions would likely stay below the 22% bracket anyway in which case there is no cost to deferring the conversion.

I didn't think in terms of the marginal cost of the 12% vs 22% bracket. The 15% savings is better than the 10% marginal savings.

Based on expected spending and the withdrawals that requires, I don't think I'll have room for conversions in the future. Whatever the case, capturing the LTCG at 0% seems like the better deal.

[Fat Tails]

Take the LTCG @ 0%.

Even if forgoing $10k of Roth conversions this year pushes that much future conversion or RMD from 12% to 22% bracket, that is still only a cost of 10% tax and you're saving 15% on the LTCG. From what you said, your future conversions would likely stay below the 22% bracket anyway in which case there is no cost to deferring the conversion.

+1, your LTCGs are guaranteed now, so take them. Roth conversions, based on what you said, may not provide a benefit in the future if your tax bracket doesn't go up in the future.

Cheers.

[UpsetRaptor]

+1 for LTCG. In addition to what everyone else has said, in the event of a market downturn, you'll have more room for TLH.

[Howie]

I thought so, too, until I better understood how LTCG rates are determined.

I can do Roth conversions and stay under the 22% ordinary bracket but still have to pay 15% on all of the LTCG. Marginal rates for ordinary income are determined independently of LTCG, but LTCG are stacked on top of ordinary income to determine LTCG rates. The lower margin for the 15% LTCG bracket is 80,800 of combined ordinary taxable income plus LTCG.

Let's say I have 10K in LTCG. If I withdraw from my TIRA up to the 81,050 limit of the 12% ordinary bracket, all of the LTCG will be above the 80,800 lower limit, with the result of all LTCG being taxed at 15%. I have to keep ordinary income under 70,800 to keep the entire 10K of LTCG in the 0% LTCG bracket. If my ordinary income is 75,800, 5K of the LTCG would be taxed at 0% and 5K would be taxed at 15%.

So, no, the statements are not contradictory.

Thanks for this helpful summary. I’ve also been contemplating future moves involving these moving pieces.

When considering the ordinary earned income bracket thresholds, I believe one’s standard deduction could be applied in order to enable a potentially larger chunk of TIRA to be withdrawn (or converted) and/or LTCG to be realized?

[neurosphere]

Not sure if it's been mentioned, but yet another unknown to think about. Your standard deduction will go down and brackets will jump for a given amount of income if one of you dies earlier than expected, and Roth conversions now are a hedge against the tax consequences, likely (?) more valuable than gain harvesting.

[spammagnet]

… When considering the ordinary earned income bracket thresholds, I believe one’s standard deduction could be applied in order to enable a potentially larger chunk of TIRA to be withdrawn (or converted) and/or LTCG to be realized?

Yes, deductions, whether standard or itemized, are applied to ordinary income before either rate is determined. That is assumed in my discussions above.

[CloseEnough]

I agree with the point made that utilizing the 0% LTCG rate is a sure thing, v. uncertain benefits of the Roth conversion (there are strong different views regarding value of conversion). I think there is merit in both, potentially, but would lean toward the certainty of using the 0% rate, especially since it may not be available again. One thing, I may have missed it, is OP age, as that could factor into the time period for doing Roth conversions in the future.

[retiredjg]

… I anticipate staying below that rate (assuming current tax law) for the remainder of our retirement, including with RMDs …
… This is the only year in which I can capture that at the 0% tax rate, but that sacrifices some of the space I'd use for Roth conversion.

I guess it doesn't completely make sense since aren't these 2 lines contradictory? If you will never be in the 22% bracket, then you will always be in the 0% LTCG bracket, and also any Roth conversions you do now will be at par to your future tax rate (except for upcoming tax rate changes). …

I thought so, too, until I better understood how LTCG rates are determined.

I can do Roth conversions and stay under the 22% ordinary bracket but still have to pay 15% on all of the LTCG. Marginal rates for ordinary income are determined independently of LTCG, but LTCG are stacked on top of ordinary income to determine LTCG rates. The lower margin for the 15% LTCG bracket is 80,800 of combined ordinary taxable income plus LTCG.

Let's say I have 10K in LTCG. If I withdraw from my TIRA up to the 81,050 limit of the 12% ordinary bracket, all of the LTCG will be above the 80,800 lower limit, with the result of all LTCG being taxed at 15%. I have to keep ordinary income under 70,800 to keep the entire 10K of LTCG in the 0% LTCG bracket. If my ordinary income is 75,800, 5K of the LTCG would be taxed at 0% and 5K would be taxed at 15%.

So, no, the statements are not contradictory.

This is where your thinking goes off the rails.

Your capital gains straddle the $80,800 line of demarcation. Every dollar more that you convert raises your taxes by 27%. One more dollar is taxed at 12% and that pushes $1 of LTCG from 0% to 15%. The extra 12% plus the extra 15% = 27% marginal tax rate.

This is very different from what you thought you were doing (converting at only 12%). In fact, you may not even want to convert at 27% marginal rate.

In order to do Roth conversion that are taxed at 12%, all the income (ordinary income and Roth conversion and LTCG) must fit under the $80,800 taxable amount.

The question is whether that leaves you with enough space at 12% for the conversion to be meaningful.

If not, what you might want to do is no conversions in one year followed by larger conversion (so that you get past the 27% marginal rate) the next year.

[spammagnet]

I thought so, too, until I better understood how LTCG rates are determined.

I can do Roth conversions and stay under the 22% ordinary bracket but still have to pay 15% on all of the LTCG. Marginal rates for ordinary income are determined independently of LTCG, but LTCG are stacked on top of ordinary income to determine LTCG rates. The lower margin for the 15% LTCG bracket is 80,800 of combined ordinary taxable income plus LTCG.

Let's say I have 10K in LTCG. If I withdraw from my TIRA up to the 81,050 limit of the 12% ordinary bracket, all of the LTCG will be above the 80,800 lower limit, with the result of all LTCG being taxed at 15%. I have to keep ordinary income under 70,800 to keep the entire 10K of LTCG in the 0% LTCG bracket. If my ordinary income is 75,800, 5K of the LTCG would be taxed at 0% and 5K would be taxed at 15%.

So, no, the statements are not contradictory.

This is where your thinking goes off the rails.

Your capital gains straddle the $80,800 line of demarcation. Every dollar more that you convert raises your taxes by 27%. One more dollar is taxed at 12% and that pushes $1 of LTCG from 0% to 15%. The extra 12% plus the extra 15% = 27% marginal tax rate.

This is very different from what you thought you were doing (converting at only 12%). In fact, you may not even want to convert at 27% marginal rate.

In order to do Roth conversion that are taxed at 12%, all the income (ordinary income and Roth conversion and LTCG) must fit under the $80,800 taxable amount.

The question is whether that leaves you with enough space at 12% for the conversion to be meaningful.

If not, what you might want to do is no conversions in one year followed by larger conversion (so that you get past the 27% marginal rate) the next year.

Thanks for the details. The addition of the two rates makes sense but should the additional 12% paid for the conversion be considered, since I'll have to pay at some point in the future, anyway? So, with respect to that portion, it's not a decision to pay it or not, it's a decision of when to pay it.

The choice I'm contemplating is to either pay 12% for additional Roth conversion or harvest LTCG @ 0%, not both. Both are elective because harvesting LTCG is not a requirement to support my spending plans and the IRA withdrawals required to do that are well below the 22% threshold for ordinary income.

From this and other comments I conclude that I will harvest the LTCG and withdraw from tIRAs only enough to stay under the 0% LTCG rate. Any tIRA withdrawals that we don't need to live on will be converted.

I won't do any of this until the end of the year when I can determine how much of the potential capital gains are long term and how much additional space I have below the 15% LTCG threshold. In the meantime I'll do only whatever tIRA withdrawals are needed to maintain life as we know it.

[colejr]

One point about capital-gains harvesting that is seldom mentioned: in real terms, cost basis is a depreciating asset. This isn't a consideration if the the proceeds will be spent, but matters if reinvested for the long term.

[Nestegg_User]

I'd also agree that doing the 0% harvesting (obviously in the taxable account) might be best, partially because you mentioned that you only have 2% of your portfolio in taxable. (There's no tax loss harvesting for 401k's and you already mentioned that you doubt that you would exceed 22% in retirement).
Often, the best option is to have flexibility in your portfolio: taxable, Roth, and tax-deferred... this allows one to titrate how much taxable to use after taking enough tax-deferred to stay under various limits, whether it is a tax bracket, preferred long term gains, or IRMAA (and similar) limits.
That you have so little in your taxable account indicates that you might find that your future withdrawals are more heavily taxed than if you had more flexibility. (we have significant taxable funds in our portfolio; but we were also sometimes limited in how much we could put into 401k due to HCE situation.)

[spammagnet]

One point about capital-gains harvesting that is seldom mentioned: in real terms, cost basis is a depreciating asset. This isn't a consideration if the the proceeds will be spent, but matters if reinvested for the long term.

I'm unclear what you mean and how I would use the information if I understood it.

[neurosphere]

One point about capital-gains harvesting that is seldom mentioned: in real terms, cost basis is a depreciating asset. This isn't a consideration if the the proceeds will be spent, but matters if reinvested for the long term.

I'm unclear what you mean and how I would use the information if I understood it.

Brackets/income go up with inflation, but capital losses carried forward are not adjusted for inflation.

Suppose I have $80,000 in losses today and (just assume for argument) I have $80,000 in taxable income that I can completely offset. I may go from some high bracket to owing no taxes. But if I "save" that $80,000 loss for 80 years, well due to inflation that loss may only represent the tiniest fraction of one bracket. It may be in the future that the standard deduction is greater than $80,000 and the loss is worthless unless you have $160,000 in income or whatever.

I didn't put that very eloquently, but I hope it make sense.

[colejr]

One point about capital-gains harvesting that is seldom mentioned: in real terms, cost basis is a depreciating asset. This isn't a consideration if the the proceeds will be spent, but matters if reinvested for the long term.

I'm unclear what you mean and how I would use the information if I understood it.

Since 1990, inflation has cut the purchasing power of the dollar in half. An asset purchased in 1990 and sold today at twice the (nominal) price would be taxed on half the sales price, even though no real profit was made - in effect, the cost basis lost half its value in real terms. A 1990 investor with perfect foresight would calculate that a dollar of tax-loss harvesting would, in real terms, save only 7.5 cents, not 15 cents of tax in 2021.