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I generally prefer to have my retirement savings in a Roth IRA rather than a traditional IRA, so that my returns earn money tax-free. I have a lot of savings in a traditional IRA that I'd like to convert into a Roth IRA.

This calendar year when stocks fell heavily, I used tax loss harvesting to sell stocks at a loss for many negative capital gains.

Does that mean it would be a good year to convert some of my traditional IRA funds into Roth IRA funds?

I had a high income this year (I expect about a 24% marginal tax rate), so perhaps there are still high penalties on the conversion that make it not the right time to do that. I'd appreciate you letting me know about pros and cons in the situation.

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  • Did you have other income (such as earned income) in the current year?
    – void_ptr
    Commented Dec 1, 2022 at 21:20
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    I believe you can only take at most $3000 net capital losses in any year; the rest will have to be carried forward to the next year.
    – user102008
    Commented Dec 2, 2022 at 1:31

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Short answer: no.

Explanation why not:

That you have realized capital losses is irrelevant for the purpose of determining whether to convert traditional IRA to Roth, with one condition explained in the next paragraph.

Roth conversion is considered ordinary income. Capital losses offset at most $3,000 of ordinary income in a given year. If you already have at least $3,000 of other income in the current year (the question mentions "I had a high income this year"), additional income from Roth conversion does not change how much income you can offset. Therefore there is no benefit in doing Roth conversion now.

Extra reading:

Whether it makes sense to do Roth conversion is determined by your marginal tax bracket in the current year vs. your expected marginal tax bracket in the future, including your retirement and decumulation phase.

If you expect your tax bracket in retirement to be higher than 24%, then it makes sense to do the conversion in the current year. Otherwise, continue contributing to pre-tax accounts if you have access to them.

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