What Will Have The Least Tax Impact: Harvesting Capital Gains Or Roth Conversions?
People often have outsized positions due to appreciation and large pre-tax retirement accounts. They may be looking to reduce portfolio risk and protect gains now, while also aiming to reduce their future income tax burden. Roth conversions and harvesting capital gains are two effective financial strategies that can achieve these goals; however, they accelerate income tax costs. There are current tax consequences associated with each strategy, and the issue becomes whether to accelerate ordinary income, capital gains, or a combination thereof.
If you are struggling to choose the optimal balance between Roth conversions and harvesting capital gains, we have created this flowchart to help guide you and the weighing of options. It covers key considerations, including:
Expected need and future goals for the assets
Current tax brackets and the effect of increasing income (ordinary or capital gains)
Projected future income and tax rates
Collateral impact on Social Security, Medicare, wealth transfer goals, etc.
Please follow this link to read the article, written by Michael Kitces, that inspired this flowchart.
Robert J. Pyle, CFP®, CFA, AEP® founded Diversified Asset Management, Inc., in 1996 to provide personalized, comprehensive wealth management services to successful individuals, families, single women, and business owners. His specialty is addressing the complex financial needs of self-employed professionals, corporate executives, and small-business owners. Our disclosure can be found here. The views, opinion, information, and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting, or tax advice.