Would appreciate comments from the finance gurus on which is more beneficial to assure at least $7500 in tax liability - generating capital gains by selling appreciated stock or converting some IRA money into a Roth?
If it's a wash, I'd prefer to sell some stock rather than creating another account for a Roth.
Thanks.
In either case you're effectively "prepaying" taxes (taxes you would have paid in later years) using the credit, so it's a bit of a wash -- if you have both choices available to you.
Because of the Bush/Obama tax cuts for the unearned income of rich people, selling stocks which you've held over a year is taxed at very low rates.
This can mean that you would need to sell a LOT of stock in order to generate $7500 in federal taxes, unless you have big short-term (under a year) gains -- if it's all taxed at 15%, you need to sell for a $50000 gain, and if some of it is in the 0% bracket you need to sell even more. Many people simply aren't sitting on that much unrealized capital gains in a taxable account.
On the other hand, a standard IRA to Roth conversion is taxed at full rates, which usually means you need to convert rather less than $50000 to generate $7500 in taxes.
So for a lot of people doing a Roth conversion to generate $7500 in taxes is possible, and realizing capital gains on taxable stocks isn't. Some people (like me) are in the opposite position, with no standard IRA to convert. Some people can't do either.
If you really can choose between both options, the choice is determined by which income you expect to be taxed at higher rates in the "future". Do you expect that when you sell stocks 20 years from now, they will be taxed at confiscatory 50% rates to punish rentiers, or do you expect that they will be taxed at 0% to reward the rich? Do you expect that when you withdraw from your IRA 20 years from now, you will be paying very high tax rates because you will be very rich, or that you will be paying very low rates because you have no income outside the IRA? You have to guess your *future tax rates* in order to make an informed choice, and honestly, looking at past tax rates, it's a crapshoot. Anyway, whichever income you expect to be taxed at higher rates in the future is the income you want to realize now.
As an aside, if you're a retiree and already taking money out of a traditional IRA every year, it's almost certainly correct to just withdraw more money out of the traditional IRA to generate the $7500 in taxes. At that point you pretty much know the rate you'll be paying when you take money out of the IRA.
This is not investment or tax advice, I am not your investment or tax advisor, and this could be totally wrong. Do your own analysis.