Roth IRA Conversion and Capital Gains Harvesting Calculation Amounts

[R32]

How do you calculate the maximum amounts in a year you can Roth IRA convert and capital gain harvest without paying any income tax on either of these events?

When we FIRE in five years, we will primarily live off cash reserves and withdrawing from our existing Roth IRA accounts and/or after-tax brokerage accounts. We will have about $225k in our Traditional IRA accounts.

My wife and I file married filing jointly status and no kids. Please let me know if you need any more relevant information in order to answer my questions effectively. Thank you!

[Sandra L.]

Jeremy's infamous post "Never Pay Taxes Again" should contain the information you need - https://www.gocurrycracker.com/never-pay-taxes-again/

Basically every year you can earn the following amount TAX-FREE - 
standard deduction + max amount of 0% long term capital gain tax bracket (https://www.gocurrycracker.com/capital-gains-tax-rates/)

For a married couple, the amount would look like below:
2019: 24,400 + 78,750 = 103,150
2020: 24,800 + 80,000 = 104,800

you can use the quota of standard deduction to do the rollover from Traditional IRA to Roth IRA (assuming that you don't have any other taxable income).
then use the 0% long term capital gain quota to harvest your capital gain.

assuming on average you move $25K every year from Tradional IRA to Roth IRA, $225K will take you about 9 years to complete the roll over without tax.

You can try out this calculator to have some better idea - https://www.gocurrycracker.com/federal-income-tax-calculator/
hopefully this helps!

[gocurrycracker]

You can try out this calculator to have some better idea - https://www.gocurrycracker.com/federal-income-tax-calculator/
hopefully this helps!

Thanks Sandra, great answer

I made that tax calculator specifically to address this question - enter your data and it will calculate the maximum tax-free Roth conversions and capital gain harvests.

[R32]

I've attached rough 2020 numbers for our situation. We won't owe a federal tax obligation because we meet the physical presence test for FEIE and our ordinary W2 income is $73k. So after $6k in 401k contributions, what the output is telling me is that I would be able to either Roth convert $30,800 or capital gain harvest up to $37,800 without paying any taxes? I'm having a hard time understanding why it's those amounts based on my inputs (i.e. I can't reconcile or back into those numbers to validate the calculation).

Thank you for the clarification - this is my first year living abroad as an expat and trying to optimize our financial situation. Thank you GCC and forum community for the wisdom, education, and encouragement.

[gocurrycracker]

we meet the physical presence test for FEIE and our ordinary W2 income is $73k.

The calc is confused - for the FEIE calculations I need to add valid data checks and improve the summary text

Make 2 small changes to your inputs and the output will make (more) sense:
* Box 1 on your W2 should show $67k ($73k income - $6k 401k contribution.) Put this in the ordinary income box
* On your 1040 you won't have any Adjustments - change adjustments to $0


Based on the above (attached) you can Roth convert up to the full amount of the standard deduction ($24,800). If you do so, you could also harvest up to $13k in long-term capital gains. Or do no Roth conversions and harvest up to $37,800. Or some other combination <= $37.8k.

One thing worth noting:
Making traditional 401k contributions in this scenario is not tax efficient - you are trading a 0% tax rate now (via exclusion) for an unknown (but most likely higher) future tax rate on withdrawals. You get no tax benefit now, but have all the tax consequences later.

If you can, changing your 401k contributions to Roth would help you win on both ends.

Caveat: if you have no Roth option and get a healthy employer match, then it is probably still worth contributing (e.g. you get a 50% match, which is better than the max 37% marginal tax rate.)