Flowchart – What Will Have the Least Tax Impact: Harvesting Capital Gains or Roth Conversions?

Many people often have outsized positions due to appreciation and large pre-tax retirement accounts. You may be looking to reduce portfolio risk and protect gains now, while also aiming to reduce your 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.

You may be struggling to choose the optimal balance between Roth conversions and harvesting capital gains. To help you weigh the options, we have created this flowchart. 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 remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.

The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.  

Published for the blog on March 4, 2024 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.