Clients 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 a 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.
Clients may struggle to choose the optimal balance between Roth conversions and harvesting capital gains. To help guide our conversations and the weighing of 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.