What Will Have The Least Tax Impact: Harvesting Capital Gains Or Roth Conversions?
![[Checklists and Flow Charts] - What Will Have The Least Tax Impact: Harvesting Capital Gains or Roth Conversions? | The Retirement Planning Group](https://www.planningretirements.com/wp-content/uploads/2022/10/Harvesting-Capital-Gains-or-Roth-Conversions-600x400-1.png "[Checklists and Flow Charts] - What Will Have The Least Tax Impact: Harvesting Capital Gains or Roth Conversions? | The Retirement Planning Group")
For high-income and high-net-worth individuals, there are many strategies that an experienced financial advisor will recommend to maximize your returns, minimize your taxes and risk, and ensure you have a well-balanced portfolio geared toward achieving your financial goals. One of these strategies can involve timing when you harvest your income based on your expected tax bracket. How do you know if it is better to harvest capital gains now or convert assets into a Roth for future use? We share some things to consider and a handy flow chart to help in your decision-making.
Harvesting Capital Gains
What does it mean to harvest capital gains or convert to a Roth? This is really a decision about when to take the income from your investments. To “harvest” your income means to realize it from your investment, and often is timed when your income or tax bracket is low to minimize any tax bill due.
When speaking about capital gains, there is a difference between long-term capital gains (LTCG) and short-term capital gains (STCG). The type of capital gain is based on how long you’ve held the asset: if you’ve held it for more than a year, this is a long-term capital gain, and if you’ve held it for less than a year, it is a short-term capital gain (source IRS.gov).
While you may have heard of tax-loss harvesting, you may not have heard of its countermeasure called tax-gain harvesting. Tax-loss harvesting involves selling investments at a loss to offset taxes when a winning investment is sold. Tax-gain harvesting means timing the sale based on your tax bracket to hopefully reduce the taxes. For example, if you recently retired, you may opt to sell an investment with a large amount of capital gains next year because your tax bracket will be lower.
Which Should I Do? Harvest Capital Gains Now Or Convert To A Roth?
In general, you want to harvest your income and assets while you are in lower tax brackets and delay or defer your income when you are in a higher tax bracket. To do this, you need to understand what your income is now and what you expect it to be in the future.
Here are a few things to consider:
Will you need the income or assets in your retirement accounts or do you plan to pass those on to your heirs?
Planning on leaving most of your assets to your heirs? A Roth conversion may be most optimal, see below for charitable contribution considerations.
What tax bracket are you in?
Simply put, if you are in the top 10% of income you may want to harvest some long-term capital gains until certain income limits are reached
If you are in a lower tax bracket, it may be more advantageous to pay the taxes to convert to a Roth and defer the income rather than harvest capital gains
What about charitable contributions?
If you convert your assets to a Roth, the LTCGs in your taxable investment accounts will be eliminated if they are donated to charity or if held until your passing.
Need more help? Check out our handy flow chart to answer a few questions and see what options may be suitable for you when harvesting capital gains or converting your money to a Roth account.
Navigating the world of when and how to harvest your hard-earned income, and paying only the minimum required amount of taxes owed, is a challenge. Having a wealth manager on your side will help you navigate this complex financial planning strategy. At the Retirement Planning Group, we’re here to help. Schedule your free 10-minute consultation to see how we can help with harvesting capital gains, converting to a Roth, or a range of other financial questions.