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INSIGHT

Harvesting Capital Gains vs. Roth Conversions

Alex LaRosa, CFP®

Alex LaRosa, CFP®

Investment Advisor Representative

September 9, 2021

Typically, financial advisors recommend deferring income to a later date as a strategy to mitigate taxes. However, this is only effective when current income levels are higher than expected future income levels.

The reality is that some people are in the other camp, where future income levels will be higher than current ones. Especially when more and more income is deferred to later dates.

In this circumstance, it can be beneficial instead to accelerate income rather than defer it taking advantage of a lower tax bracket now. Two popular strategies for accelerating income are Roth conversions and harvesting gains. Roth conversions accelerate ordinary income while the harvesting strategy accelerates capital gains.

Roth Conversions

We have written plenty about these in the past: you can read about them here. The short story of these is that you convert all or portions of your traditional IRA assets into an after-tax Roth IRA. Doing so forces you to pay the income tax on the converted amount now in exchange for tax free growth and withdrawals later.

Harvesting Gains

The standard strategy here that you are probably familiar with is tax LOSS harvesting where you take losses to try and offset gains and avoid taxes. Tax GAIN harvesting is when you take gains in lower tax bracket years to avoid taking them at higher rates in the future.  

Which is right for you?

There are a variety of factors that come into play including forecasting some future events. Thankfully, we have a nice flow chart that should be able to guide your decision included below:

Conclusion

Everyone’s situation is different, and it is important to discuss tax planning matters with you tax prepare before making any decisions. If you would like to discuss some income accelerate strategies for your portfolio fell fret to give us a call today.

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Harvesting Capital Gains vs. Roth Conversions

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