If you find yourself short on cash, you might be tempted to cash in on some of your investments. But before you make that decision, it can be helpful to weigh the pros and cons before selling an investment.

  • Selling a bond. Bond holders might choose to sell for various reasons. There may be tax consequences due to the income or gains accrued with the bond. You may incur capital gains based on the sale. Consider speaking with a Financial Advisor or tax professional for guidance.
  • Selling a stock that has lost value. If you don’t feel positive about the stock’s prospects, you might be ready to sell. If you are selling at a loss, you would realize a capital loss, which may help reduce your tax bill by offsetting capital gains and up to $3,000 to offset ordinary income.
  • Selling a stock that has gained in value. If you’re ready to sell a stock that gained in value, be prepared to pay a capital gains tax. Be aware of different taxation rates for long-term vs. short-term capital gains and losses. If it’s a short-term (12 months or less) investment, the tax rate will be at the higher ordinary income tax rate rather than a long-term capital gain rate for a long-term (held longer than 12 months) investment. It helps to consult your tax advisor regarding tax-related investment decisions.
  • Selling shares in a mutual fund. Selling shares in a mutual fund involves considerations similar to selling stocks. However, a fund-holder might not be aware of the capital gains or losses incurred by a fund manager. If so, the full tax implications might not be clear when you decide to sell. Consider speaking with your Financial Advisor if you have questions.
  • Cashing out of a tax-deferred account. Generally, if you take a taxable distribution from an IRA or an employer sponsored retirement plan (QRP) such as a 401(k), 403(b), or governmental 457(b) before you reach age 59½, you could owe an IRS 10% additional tax on early withdrawals in addition to any potential ordinary income tax. However, the first amounts distributed from any of your Roth IRAs, if you have several accounts, are annual contributions. Because Roth contributions are not deductible, they are not subject to tax or included in gross income and can be taken at any time. Tax-favored college accounts such as a 529 plan, could result in recapture of a prior state tax deduction, if applicable, and ordinary income tax and a potential IRS 10% additional tax on the earnings if the distributions are not used for educational purposes.

    Note: The 2020 Coronavirus, Aid, Relief and Economic Security (CARES) Act includes provisions providing greater repayment flexibility for certain individuals affected by the coronavirus pandemic. If these apply to you, you should still consider the potential effects of borrowing from your QRP on your ability to reach your retirement goals.

It can be helpful to plan ahead for unexpected cash needs to avoid the fees and losses garnered from selling or withdrawing from investments early. Consider starting an emergency fund or applying for a low-interest line of credit to provide a buffer if you find yourself short on cash. If you plan early, you may be able to get more from all of your investments.

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