Roth conversion vs harvesting gains at 0%

The household

A couple, both 62, retired early and file jointly. Their only income is a $30,000 pension; Social Security and Medicare are years away, and they pay for health coverage without a marketplace credit. They hold a traditional IRA and a taxable brokerage account with large unrealized long-term gains. With so little income, the bottom of the tax schedule is nearly empty. They can fill it with a Roth conversion, which is ordinary income^[1], or by selling and rebuying shares to realize gains that fit in the 0% capital-gains band^[2].

Side by side

The conversion is sized to fill the 12% bracket, which on a joint return ends at $100,800 of taxable income^[4]. The harvest is the largest gain that stays entirely at 0%, found with the simulator’s 0% gains calculator logic: $101,100.

Why they interact

• The harvest costs nothing because the deduction and the 0% band absorb all of it.
• The conversion costs $11,600: it is ordinary income taxed at 10% and 12%.
• Doing both does not cost $11,600. Gains stack on top of ordinary income, so once the conversion fills the bottom brackets the gains start above the 0% band: $101,100 of them is taxed at 15%, and the total is $26,765.

When each tends to come out ahead

The two choices buy different things. A conversion pays tax now to move money out of the IRA for good: later growth and withdrawals from the Roth are tax-free once the holding rules are met, and the IRA’s future required distributions shrink. It tends to come out ahead when the IRA is large enough that required distributions, Social Security and a survivor’s single brackets would later push the same dollars into higher brackets. A harvest pays nothing now and raises the shares’ basis, so a later sale owes less; but gains that are never sold in life generally lose their tax at death anyway^[3], and gains can often be realized at 0% in other low-income years. It tends to come out ahead when the IRA is small, when the gains will be sold during the couple’s lifetime, or when extra ordinary income now would cost a marketplace credit or a means-tested benefit. Many households split the room between the two, which this table shows is not additive.

What this comparison leaves out

• Future tax rates, investment growth and the size of later required distributions.
• The ACA premium tax credit, which both choices would reduce for marketplace enrollees.
• State income tax, which often taxes gains as ordinary income.
• The five-year rules for withdrawing converted amounts before 59½.

See it over a full plan

Related

• Guide: Roth ladder: how a Roth conversion ladder works
• Guide: The 0% capital-gains bracket is real: LTCG stacking explained
• Calculator: Roth conversion room calculator
• Calculator: 0% capital gains calculator
• Topic: Roth conversions
• All comparisons
• Worked examples, line by line