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How Roth Conversions Affect Capital Gains
A Roth conversion is ordinary income. It does not become a capital gain, but it can stack underneath long-term capital gains and qualified dividends, which may push those gains into a higher capital gains bracket.
The Rule
Capital gains stack on top of ordinary income
Long-term capital gains and qualified dividends receive preferential federal rates, but ordinary income fills the lower taxable-income space first. A Roth conversion increases ordinary income, which can reduce the space available for capital gains to be taxed at 0% or 15%.
| 2026 concept threshold | Single | Married filing jointly |
|---|---|---|
| 0% long-term gains band | Up to $49,450 | Up to $98,900 |
| 15% long-term gains band | $49,451 to $545,500 | $98,901 to $613,700 |
| 20% long-term gains band | Over $545,500 | Over $613,700 |
Why Roth Conversions Matter
The conversion can crowd out the 0% gains bracket
If a retiree has taxable brokerage assets, a Roth conversion may make more of their long-term gains taxable at 15% instead of 0%, or at 20% instead of 15%. This does not mean Roth conversions are bad; it means the conversion amount should be tested against the client’s taxable-account income.
The planning opportunity: coordinate Roth conversion size with gain harvesting, charitable giving, tax-loss harvesting, and the timing of taxable-account withdrawals.
Example
$90,000 conversion with gains in the 0% band
Assume a married couple has $70,000 of ordinary taxable income and $85,000 of long-term capital gains. Before the conversion, some gains may fit inside the 0% capital gains band. Add a $90,000 Roth conversion, and ordinary income rises enough that more gains may be pushed into the 15% band. The federal cost is not just ordinary tax on the conversion; it may also include additional capital gains tax.
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