Tax Opportunities in Early Retirement: Roth Conversions vs Capital Gain Harvesting
Roth Conversions vs. Harvesting Capital Gains (and why most people should do both)
Early retirement often creates a rare situation: your income drops, but your wealth doesn’t.
That gap—low taxable income with meaningful assets—can open a short window where you can make tax moves that are difficult (or impossible) during peak earning years.
Two of the biggest opportunities are:
Roth conversions (moving money from a Traditional IRA/401(k) to Roth)
Harvesting long-term capital gains (selling appreciated taxable investments strategically—sometimes at a 0% federal rate)
They’re both powerful. They’re also different tools. The key question isn’t “which one is best?”—it’s:
What problem are you trying to solve?
The core difference: “Income later” vs. “Basis now”
Roth conversions: pay tax now to reduce future tax risk
A Roth conversion intentionally creates taxable income today so you can potentially:
Reduce future tax surprises from large IRA balances
Build a pool of tax-free income later
Increase flexibility around Social Security timing, Medicare premiums, and legacy goals
Think of conversions as pre-paying taxes in years you control to reduce taxes in years you don’t.
Capital gain harvesting: use low-income years to reset basis (and/or fund spending)
Capital gain harvesting means selling appreciated investments in a taxable account to:
Fund living expenses tax-efficiently, and/or
“Reset” your cost basis higher (reducing taxes on future sales)
Unwind concentrated or unwanted positions in a tax-aware way
Think of gain harvesting as turning “paper gains” into realized gains at favorable rates while improving your taxable portfolio’s tax profile going forward.
How much can you harvest at 0% in 2026?
Long-term capital gains (and qualified dividends) have their own brackets: 0%, 15%, and 20%.
The 0% rate applies as long as your taxable income stays under the 0% threshold.
2026 “0% LTCG room” (assuming standard deduction and no other income)
If your only income is long-term capital gains / qualified dividends, you can have total income roughly up to:
Single: $49,450 (0% taxable cap) + $16,100 (standard deduction) = $65,550
Head of Household: $66,200 + $24,150 = $90,350
Married Filing Jointly: $98,900 + $32,200 = $131,100
This is the headline opportunity: in the right situation, an early retiree can sell appreciated assets, realize gains, and still owe 0% federal on those gains (state tax may still apply).
Important: once you add other income (interest, wages, IRA withdrawals, Roth conversions, etc.), that income “uses up” some of the 0% space.
Why Roth conversions can “crowd out” 0% capital gains (and why you might do them anyway)
Here’s the key interaction:
Roth conversions are ordinary income.
Ordinary income uses up your low brackets first, which can push some gains out of the 0% band.
In 2026, gains above the 0% thresholds are generally taxed at 15% until very high income levels, then 20%.
This is why the best answer is often a hybrid:
Harvest gains at 0% when feasible (especially if taxable is your “bridge money”), and
Convert some Traditional IRA dollars at low ordinary rates to reduce future IRA tax risk—even if some gains spill into 15%.
The “return of basis” advantage when living off taxable
One reason taxable accounts can be such a powerful early-retirement bridge: you’re only taxed on the gain portion, not the full withdrawal.
Example: You sell $100,000 of investments with a $50,000 cost basis.
Cash to spend: $100,000
Taxable long-term gain: $50,000
So you funded a $100k lifestyle expense, but only added $50k to taxable income (before deductions). This is exactly why retirees with modest spending can sometimes combine:
spending from taxable (low taxable income), and
partial Roth conversions (controlled ordinary income),
in the same year.
Pros and cons: Roth conversion strategy
Pros
Reduces future taxable income and bracket risk
Builds tax-free Roth assets for later
Can improve estate outcomes (more on that below)
Tradeoffs
Conversions increase income, which can impact:
ACA subsidies (often the biggest real-world constraint in early retirement)
State taxes
Social Security taxation later (depending on timing)
College aid formulas (FAFSA/financial aid years can matter)
You need a plan for paying the tax (often from taxable assets)
Pros and cons: capital gain harvesting
Pros
Potential to realize gains at 0% federal (when structured carefully)
Resets basis to reduce future taxes
Great for rebalancing or unwinding concentrated positions tax-efficiently
Tradeoffs
Realized gains still increase your income picture (ACA and state tax effects can be material)
If you sell to fund spending, you may shrink taxable faster than expected (reducing future flexibility)
Charitable intent and estate planning can flip the “best” answer
This is where optimization gets personal:
Who are you optimizing for?
If you’re charitably inclined, Traditional IRA dollars can be “perfect charity dollars”
Here’s the underappreciated point: a charity can receive Traditional IRA assets tax-free (because the charity generally doesn’t pay income tax on withdrawals).
That changes the conversion math:
If you already know a meaningful portion of your IRA is destined for charity, converting those dollars to Roth can be unnecessary—why voluntarily pay tax on money that could go to charity tax-free later?
In that case, it may be smarter to focus early-retirement tax planning on harvesting capital gains (especially at 0%) while leaving more pre-tax IRA value to charity.
QCDs: a “pressure valve” for future RMDs and tax-bomb risk
Once you’re age 70½ or older, you can direct IRA distributions straight to charity via a Qualified Charitable Distribution (QCD). A QCD generally:
is excluded from income (lowers AGI),
can count toward RMDs (once RMDs apply), and
can be powerful even if you don’t itemize.
One important catch: QCDs generally can’t go to donor-advised funds (DAFs).
So if DAF funding is a key goal, appreciated taxable shares may be the better “DAF asset,” while QCDs remain a tool for direct giving later.
Estate planning summary (the three-bucket view)
Taxable: may receive a step-up in basis for heirs (often very favorable)
Traditional IRA/401k: will be taxed by most individual heirs, but can be extremely efficient if left to charity
Roth: generally most efficient for heirs from an income-tax standpoint
When charitable giving is a large part of the plan, you often end up with a “who gets what” strategy:
Individuals inherit Roth + stepped-up taxable (when possible)
Charities inherit Traditional IRA dollars
The hybrid approach: how many early retirees actually optimize
For many early retirees, the sweet spot looks like:
Fund spending primarily from taxable (dividends + strategic sales)
Harvest gains at 0% where possible (or at least keep gains in the 15% bracket)
Use remaining room to do Roth conversions up to a target bracket—unless charitable plans suggest keeping more Traditional IRA value for charity
This creates three wins at once:
You preserve flexibility in taxable
You reduce future tax surprises where it matters
You align account types with your goals (spending + heirs + giving)
A simple takeaway
Early retirement isn’t just about withdrawals and market returns. It’s also a window to reshape your tax balance sheet:
Harvest gains at 0% when feasible
Convert Traditional dollars when it reduces future tax surprises
Use charitable and estate goals to decide which assets to spend, donate, or hold
That’s how you reduce surprises and increase after-tax spending power over your lifetime.
Meet Your Guide
Hi, I’m Josh Short, a CERTIFIED FINANCIAL PLANNER® professional and founder of OptimalPath Advisors. With over 20 years in financial services, I help DIY investors and FI-minded professionals build clear, flexible plans—using flat-fee, commission-free advice.
Want help coordinating conversions, gains, and your early-retirement “bridge years”?
Most DIY investors don’t need a “perfect” strategy—they need a clear, rules-based plan that coordinates:
Withdrawals (taxable vs Traditional vs Roth)
Roth conversions (how much, when, and how to pay the tax)
Capital gain harvesting (basis resets, rebalancing, and concentration risk)
Healthcare + other income interactions (ACA, state taxes, Social Security timing)
Charitable and legacy planning (QCDs, DAF funding, inheritance efficiency)
I work with clients locally in East Tennessee and virtually across the U.S. If you’d like a second set of eyes on your strategy, you can schedule a free 30-minute intro call here:
https://calendly.com/josh-optimalpathadvisors/30min
Disclosure: This is general education, not tax or legal advice. Tax rules are complex and change over time—coordinate strategy with your CPA/EA or planning professional for your specific situation.
