Personal Finance

I just retired - should I do a Roth IRA conversion or harvest capital gains?

Maurie Backman

Published: January 6, 2025 12:10 pm

Key Points from 24/7 Wall St.

• Given recent stock market gains, it could be a good time to cash out some of your portfolio.
• If your income is low enough, you might pay nothing on long-term capital gains.
• A Roth IRA conversion might cost you more from a tax perspective initially, but there could be long-term benefits to enjoy.
• Also: Take this quiz to see if you’re on track to retire (Sponsored)

Buying quality stocks and holding them for many years is a good wealth-building strategy. But if you’re newly retired, you may want to focus on retaining wealth while minimizing your tax bill.

Meanwhile, the S&P 500 is up roughly 24% from a year ago as of this writing. So it may be a good time to cash out a portion of your portfolio and bank your gains.

Such is a move a recent retiree is contemplating in this Reddit post. They’re able to cash out some of their stocks at a pretty darn favorable tax rate — 0%, which is the rate low to moderate earners pay on long-term capital gains this year.

On the other hand, the poster is also considering a Roth IRA conversion. The benefit there is getting to grow their money tax-free, avoid required minimum distributions, and take tax-free withdrawals when they’re ready.

But the Roth IRA conversion will likely constitute more of an immediate tax hit. So it’s important to weigh both options carefully.

Why a Roth IRA may be a better bet

When you do a Roth IRA conversion, the sum you move over is taxable. But the amount of tax you pay hinges on your income and tax bracket.

You may be able to pay 0% on long-term capital gains. But if you’re a moderate earner, you could be looking at a 12% tax rate or more this year to convert funds to a Roth IRA.

But one thing to keep in mind is that a Roth IRA protects you from future tax hikes. And since we can’t see into the future, it’s hard to know what those might look like.

Also, if you expect to be in a higher tax bracket in future years but are in a lower one this year, it’s an optimal time to do a Roth conversion. And while you might rack up a larger tax bill initially with a Roth conversion than by harvesting capital gains, you get the benefit of added tax-free growth for what could be many years.

Additionally, it’s worth noting that the tax code could undergo a big change once a number of key provisions sunset in 2025. Of course, we don’t know what will happen there and whether tax changes that come down the pike will be positive or negative ones. That’s part of what makes the decision tricky. But to a large degree, a Roth IRA protects you against negative tax code changes.

An advisor can help you decide

The decision to harvest capital gains versus convert to a Roth IRA goes beyond immediate tax implications. And it’s a tough decision to make.

That’s why a good bet is to consult a qualified financial advisor who can crunch the numbers with you and help you decide what’s best. An advisor can also walk you through the pros and cons of each choice so you see the big picture.

Remember, too, that it’s not a given that you’ll pay 0% on long-term capital gains. Even a low six-figure income bumps you into the 15% long-term capital gains rate, whether you’re single or married, and that changes things quite a bit. So it’s really best to consult a professional if thinking about your choices is making your head spin.