Roth conversion ladder strategy using capital losses

[Daisy]

This is my first full FIREd year. I am planning to do a traditional to Roth IRA conversion to keep me in the 12% tax bracket and fully utilize the space in the 12% tax bracket.

I figure I can try to hit a taxable income of around $50,700 to use up the 12% tax bracket ($12,000 standard deduction + $38700 of 12% taxable bracket).

I have about $7000 of earned income from last year's employment bonus paid out in 2018. So that leaves me with $43,700 to convert from my traditional to Roth IRA.

Now, I realize that in my younger and not-so-wise days, I was not index investing and held some stock that now has a capital loss. Can I take that capital loss now and use that to convert even more into my Roth IRA?

For example, if I have $10,000 of capital loss from selling this stock, does that get directly deducted from my income, thereby giving me $53,700 available to convert to the Roth IRA?

I know I can only carry over $3,000 capital loss year to year, but I am not sure if I can take the $10,000 loss all in one year with no capital gains to offset the loss.

[gerardc]

I think you got your facts mixed up. You can only USE $3000 / year capital losses to offset income but you can carry over the full balance.

[Daisy]

I think you got your facts mixed up. You can only USE $3000 / year capital losses to offset income but you can carry over the full balance.

Yes I think I got my wording wrong.

But I think you did understand my question correctly. It looks like I should only sell enough stock to hit the $3000 capital loss, and then be able to add $3000 more to my traditional to Roth conversion.

[terran]

Yes, you can convert an additional $3000 if you realize a $3000 loss. If you realize greater losses they will carry over to future years, so you can realize the whole loss now. Losses will first count against any gains you have (including capital gains distributions from mutual funds) so that might be a reason to not realize the losses if you're comfortable with continuing to hold the investment with losses as you might not want to offset those gains (for example, if the gains will be taxed at 0% it would be a waste to use losses to offset them).

[bilmar]

Just be careful to complete everything this year since the IRS has changed the rules regarding Roth recharacterization ( undo)  which I used every year to fine tune my conversion down to the last $.
In previous years you were allowed to undo part or all of the conversion up until tax day the following year.

Starting this year it all has to be done by the end of the year so you need a good idea of your earnings by mid December to set/adjust your end of year conversion amount.

[Daisy]

Just be careful to complete everything this year since the IRS has changed the rules regarding Roth recharacterization ( undo)  which I used every year to fine tune my conversion down to the last $.
In previous years you were allowed to undo part or all of the conversion up until tax day the following year.

Starting this year it all has to be done by the end of the year so you need a good idea of your earnings by mid December to set/adjust your end of year conversion amount.

Thanks for the tip. I plan to leave some buffer room and not convert to the exact maximum of the 12% tax bracket for this reason.

[seattlecyclone]

I mean...if you go over by a few bucks you just pay 22% on those few extra dollars. Doesn't seem like a very big deal to me.

[Daisy]

I mean...if you go over by a few bucks you just pay 22% on those few extra dollars. Doesn't seem like a very big deal to me.

Blasphemy

[MustacheAndaHalf]

Having capital losses suggests you have taxable stocks/funds, and they probably issue dividends.  Capital losses cancel out the tax on dividends before the capital losses get applied to income.

[seattlecyclone]

Having capital losses suggests you have taxable stocks/funds, and they probably issue dividends.  Capital losses cancel out the tax on dividends before the capital losses get applied to income.

This is false. Capital losses cancel out capital gains, but if you still have a net loss it gets credited against regular income. Dividend income is then taxed separately at the lower rate.

[MustacheAndaHalf]

Having capital losses suggests you have taxable stocks/funds, and they probably issue dividends.  Capital losses cancel out the tax on dividends before the capital losses get applied to income.

This is false. Capital losses cancel out capital gains, but if you still have a net loss it gets credited against regular income. Dividend income is then taxed separately at the lower rate.

My mistake, I incorrectly thought schedule D tracked qualified dividends, when in actual fact those dividends appear on form 1040 line 8.  And they're kept separate in a worksheet used for qualified dividends and long-term capital gains.  I guess it's been too long since I filed taxes by hand.