How to Prioritize Roth Conversions Vs Tax Gain Harvesting

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Questions answered: When do you know which strategy to implement? How does your taxable income impact your strategy?

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Key Takeaways:

Tax Gain Harvesting is NOT the same as Tax Loss Harvesting.
- Most people are familiar with Tax Loss Harvesting.
  - Selling security at a loss.
    - You cannot immediately rebuy for at least 30 days.
  - Booking the loss (writing it off)
  - Buying a similar (not exact same) investment.
- Tax Gain Harvesting is the opposite.
  - Intentionally selling a security at a gain.
  - it can potentially be tax free.
    - It must be a long-term capital gain.
    - If your taxable income is under certain thresholds.
      - For 2022, long-term capital gains rate is 0 if your taxable income is below $83,350. If you’re single, it’s half that.
  - You’re focused on your taxable income.
    - Add up all the income you have, then subtract deductions. That is your taxable income.
    - You can only realise the long-term capital gains between your taxable income and the $83,350 limit at 0 federal tax.
Capital gains and ordinary income from Roth conversions are taxed on separate schedules.
- The taxable capital gains threshold is based upon on your taxable income.
Which is better for you?
- Some things to consider:
  - How impactful are RMDs going to be for you?
    - Largely driven by how much money is in your pre-tax balances.
    - RMD is a percentage of your pre-tax balance based on your age.
  - Capital gains rates are more attractive than ordinary income rates.
  - Flexibility.
    - Unless tax laws change, you can tax gain harvest at any time.
    - You want to ideally maximise Roth conversions before you turn 72.
      - You want to do them before RMDs kick in.
    - Unrealised capital gains pass down to heirs tax free.
Don’t let your asset allocation get out of control by avoiding capital gains.