Asking for a friend… Really. My friend has a VERY SIGNIFICANT capital loss carryforward and wondered whether this impacts the typical calculations that go into deciding if Roth conversions make sense. He expects his future tax rate will be lower and his heirs will have higher tax rates.
My friend uses his taxable account for investments in equities, hoping to earn capital gains that can be offset by his capital loss carryforward. He intends to invest the Roth money in interest and dividend bearing investments to balance out his portfolio. Contrary to standard advice, he is planning to pay the taxes on the Roth conversion with funds from the withdrawal/conversion. He prefers not to tap other investments.
Given these circumstances, does it make sense to do Roth conversions??
Who,in your experience, is best to talk with about specific case personal rollovers and required pension withdrawals? Estate plan lawyer, accountant, financial company(e.g. Edward Jones etc. or other) I am 69 and need some direction. Thanks.
Hi John,
If you have not checked out the topics in the HumbleDollar guide related to your questions I encourage you to go there first.
I further recommend you include in your search watching a presentation from the recent Bogleheads® Conference 2024 titled Roth Conversion Deep Dive with Mike Piper. Mike is a CPA but is primarily a writer and runs a blog that focuses on taxes and related planning at his website Oblivious Investor.
https://www.youtube.com/watch?v=Wjbf9KVSG7s&ab_channel=Bogleheads
I also enjoy of videos by Rob Berger on YouTube (he is a retired PCBOA attorney) who has a blog (500+ videos) that may help you address your planning questions. Mr. Berger and other financial professionals can be found on the below Bogleheads® Conference 2022 video link discussing topics that may address some of your questions.
https://www.youtube.com/watch?v=5E-JG540J8g&ab_channel=Bogleheads
I hope these links help.
Best, Bill
Many thanks.
I agree with the below Roth conversion comments of wtfwjtd.
According to current life expectancy statistics, a 76-year-old male has roughly a 20-30% chance of living to age 90, with individual factors like health habits and genetics significantly impacting this probability.
If your friend actually lives to age 90 that would give him approximately $42K ($3K per year for 14 years) of his capital loss carryforward that he should be able to offset against ordinary income during his remaining lifetime. Of course if he has other realized capital gains in the future then those gains could also be offset by his available capital loss carryforward. As you describe your friend’s capital loss carryforward as very significant in amount I guess utilization of the $3K a year maximum of net capital loss carryforward against ordinary taxable income to be a drop in the bucket in his tax planning.
I speculate his taxable portfolio has only nominal unrealized gains that he could sell to realize gains without owing tax due to his carryforward. He may be able to reorganize part of his taxable portfolio to investments that when sold are more likely to have gains he could offset.
If your friend has a home with a huge capital gain he may be able sell the home and offset any gain against the loss carryforward but he might end up wasting the IRC 121 home gain exclusion. If he is planning to move during his lifetime his capital loss carryforward may make a planned move more tax friendly.
An individual’s capital loss carryover expires at their death. However, it can be put to use in the final tax return filed for that person. All of the investments in his taxable accounts should get a basis adjustment upon his death. Of course relevant tax laws and regulations are subject to change and federal and state tax laws may differ.