This is Optimal Finance Daily, Episode 1738, 2021, Your End Tax Planning, Part 2,

by Sean Mulaney of 5taxguy.com. And I'm your host and personal finance enthusiast,

Diana Mariam. Now, today's post is actually a continuation from yesterday. So if you're new

here, it'd be best to listen to yesterday's episode first. But if you're all caught up,

let's hear Part 2 and continue optimizing your life.

2021 Your End Tax Planning, Part 2, by Sean Mulaney of 5taxguy.com.

The two main levers in this regard are Roth conversions and tax gain harvesting.

Roth conversions move amounts in traditional retirement accounts to Roth accounts via a taxable

conversion. The idea is to pay tax at a very low tax rate while taxable income is artificially

low, rather than leaving the money and deferred accounts to be taxed later in retirement at a higher

rate under the required minimum distribution rules. Tax gain harvesting is selling appreciated

assets when one is in the 10% or 12% marginal tax bracket, so as to incur a 0% long-term

capital gains federal tax rate on the capital gain. Early retirees can do some of both.

In terms of a tiebreaker, if everything else is equal, I prefer Roth conversions to tax gain

harvesting for two primary reasons. First, traditional retirement accounts are subject to

ordinary income tax rates in the future, which are likely to be higher than preferred capital gains

tax rates. Further, large taxable capital gains in taxable accounts can be washed away through

the step-up in basis at death. This opportunity doesn't exist for traditional retirement accounts.

One time to favor tax gain harvesting over Roth conversions is when the traditional retirement

accounts have the early retirees desired investment assets, but the taxable brokerage account

has positions that the early retiree doesn't like anymore. For example, a concentrated position

in a single stock. Why not take advantage of tax gain harvesting to reallocate into preferred

...