Pairing Roth Conversions with Tax-Loss Harvesting: A Smart Year-End Strategy

As we approach the end of the year, it’s a great time to take a closer look at your portfolio and ask: Are there smart moves I can make now to reduce taxes and set myself up for long-term success? Two strategies that work especially well together are Roth IRA conversions and tax-loss harvesting.

Why Consider a Roth Conversion Before Year-End?

Let’s start with Roth conversions. If you have a traditional IRA or other pre-tax retirement account, converting some or all of it to a Roth IRA means you’ll pay taxes on the amount you convert now, but once it’s in the Roth, it grows tax-free. And when you take money out in retirement, it’s tax-free too, as long as the distribution is qualified. A qualified Roth distribution requires that the account has been open for at least five years and the account holder is age 59½ or older. Meeting both conditions ensures that all earnings and principal can be withdrawn tax-free.

From a planning perspective, Roth conversions can be a strategic way to take control of your future tax exposure. Traditional pre-tax retirement accounts defer taxes until withdrawal, which can be helpful during your working years, but in retirement, those withdrawals are taxed as ordinary income. This can lead to higher taxes on Social Security benefits, increased Medicare premiums, and less flexibility in managing your cash flow. 

Roth accounts, by contrast, allow you to withdraw funds without triggering additional taxable income, giving you more control over your retirement budget and tax bracket. They also provide a hedge against future tax rate increases, which many investors are concerned about given current fiscal trends.

Roth IRAs: A Strategic Tool for Tax and Estate Planning

Another key benefit of Roth IRAs is that they are not subject to required minimum distributions (RMDs) during the account owner’s lifetime. This is a major advantage over traditional IRAs and even designated Roth accounts within employer plans, which do require RMDs unless rolled into a Roth IRA. 

From an estate planning perspective, Roth IRAs can also be a valuable tool. Under the SECURE Act, most non-spouse beneficiaries must fully withdraw inherited retirement accounts within 10 years. While this rule still applies to inherited Roth IRAs, the distributions are tax-free, which can significantly reduce the tax burden on heirs compared to inheriting a traditional IRA.

How Tax-Loss Harvesting Can Reduce Your Tax Bill

Tax-loss harvesting, on the other hand, is a strategy used in taxable investment accounts. If you have positions that are down from where you bought them, you can sell those investments to realize a capital loss. That loss can offset capital gains from other investments, and if your losses exceed your gains, you can deduct up to $3,000 against ordinary income each year. Any unused losses can be carried forward to future years. In a year like 2025, where some sectors have struggled while others have surged, there may be opportunities to harvest losses without significantly changing your overall investment strategy.

Pairing Tax-Loss Harvesting with Roth Conversions

Here’s where things get interesting: pairing tax-loss harvesting with a Roth conversion can help reduce your overall tax liability, though it requires careful coordination. While capital losses don’t directly offset the income generated by a Roth conversion — since conversions are taxed as ordinary income — up to $3,000 of net capital losses can be deducted against ordinary income each year. Additionally, if you’ve realized capital gains earlier in the year, harvesting losses can offset those gains, lowering your adjusted gross income and potentially keeping you in a lower tax bracket. This bracket management can make a Roth conversion more efficient by minimizing the tax cost of the converted amount

For example, say you plan to convert $50,000 from your traditional IRA to a Roth IRA this year. That amount will be taxed as ordinary income and could push you into a higher tax bracket. Earlier in the year, you also realized $12,000 in capital gains from your taxable investments. Now, as part of year-end planning, you harvest $15,000 in capital losses from underperforming positions in your portfolio. The losses fully offset your $12,000 in gains and also allow you to deduct an additional $3,000 against your ordinary income. While these losses don’t directly reduce the tax owed on your Roth conversion, they lower your overall taxable income, helping keep the conversion more tax-efficient.

Avoiding the Wash-Sale Rule and Coordinating Across Accounts

This strategy can also help with portfolio rebalancing. After harvesting losses, you can reinvest in similar (but not identical) securities to maintain your market exposure while staying compliant with IRS rules. It’s important to note that the wash-sale rule prohibits buying the same or substantially identical security within 30 days before or after the sale. And here’s a nuance many investors miss: if you repurchase the same security in an IRA or Roth IRA during that window, the loss may be permanently disallowed, not just deferred. That’s why it’s critical to coordinate across all accounts when executing a tax-loss harvesting strategy.

When Roth Conversions Might Not Make Sense

Of course, this isn’t a one-size-fits-all solution. Roth conversions increase your taxable income in the year of the conversion, which can affect things like Medicare premiums, Social Security taxation, and eligibility for certain deductions or credits. That doesn’t mean you should avoid the strategy; it just means it’s important to plan carefully. Working with a financial advisor and a tax professional can help you model different scenarios, understand the ripple effects, and decide how much to convert and when. The goal isn’t just to minimize taxes today, but to optimize your overall financial picture for the long term.

Take Action Before December 31

If you’re thinking about a Roth conversion, exploring tax-loss harvesting opportunities, or wondering how to combine both before year-end, now is the time to take action. These strategies are most effective when coordinated thoughtfully and implemented before December 31. Contact us to start a conversation about how they might fit into your broader financial plan.

Emerald Asset Management is an independent, boutique Registered Investment Advisory firm based in Rocky Mount, NC, serving successful executives, business owners, and high-net-worth individuals across Raleigh, Durham, and Chapel Hill. As a fiduciary-led firm with over 30 years of experience, Emerald provides research-driven investment management and strategic financial planning. The firm specializes in individually managed stock and bond portfolios, alternative investments, and risk management strategies. With a disciplined approach and a commitment to clarity, Emerald helps clients navigate complex financial decisions with confidence. They can be reached at (252) 443-7616 or on the web at www.emeraldam.com. 

The information presented is based on sources believed to be reliable and accurate at the time of publication. This material is for educational purposes only and does not necessarily reflect the views of the author, presenter, or affiliated organizations. It should not be construed as investment, tax, legal, or other professional advice. Always consult a qualified professional regarding your specific situation before making any decisions.

Emerald Asset Management is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Emerald Asset Management's investment advisory services can be found in its Form ADV Part 2 and/or Form CRS, which is available upon request.