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 that come with liquidating each type of investment.
- Selling a certificate of deposit (CD) before it matures. CDs are locked-in for a set term. You may pay a penalty or forfeit your interest by selling a CD before its maturity date. If the interest rate is low and the loss of return isn’t great, this may be a viable option; however, it’s best to wait until the CD matures so you can reap the full reward.
- Selling a bond before it matures. If you purchased a bond when it is issued and hold it through to maturity you will typically receive the amount you paid for that bond plus the regular interest payments—or coupon payments—you receive over the life of the bond. If you sell the bond before it matures, you will lose the remainder of the coupon payments you would receive over the life of the bond, and you may either recoup or lose your money on your original investment depending on whether the bond has appreciated or lost value over the period since you purchased it.
- Selling a stock that has lost value. If you don’t feel positive about the stock’s prospects, you might be ready to access its current value. By selling it at a loss, you would realize a capital loss. It’s important to remember, however, that it could take up to three days for your funds from the sale of a stock to become available.
- Selling a stock that has gained in value. If you’re ready to take your gain, 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 higher than 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. So, talk with your fund manager or financial advisor before you take action.
- Cashing out of a tax-deferred account . Generally, if you withdraw from an IRA or a 401(k) before you reach age 59½, you could face penalties and taxes. However, if certain conditions have been met, you can withdraw the principal amount you invest in a Roth IRA without penalty at any time. Tax-favored college accounts, such as a 529 plan, could lose their tax benefit if they are not used for educational purposes and you may face penalties.
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 will be more likely to get the most from all of your investments.
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This information is provided for educational and illustrative purposes only.
Wells Fargo Wealth Management provides products and services through Wells Fargo Bank, N.A., and its various affiliates and subsidiaries.
Wells Fargo & Company and its affiliates do not provide legal or tax advice. Please consult your legal and/or tax advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared.
Investing in mutual funds involves risk. The investment return and principal value of mutual funds will fluctuate, and shares, when sold, may be worth more or less than their original cost.
Investing involves risk, including the possible loss of principal. Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially of investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original costs upon redemption or maturity.
Traditional IRA and 401(k) distributions are taxed as ordinary income. Qualified Roth IRA distributions are not subject to state and local taxation in most states. Qualified Roth IRA distributions are also federally tax-free provided a Roth account has been open for at least five years and the owner has reached age 59 ½ or meet other requirements. Distributions may be subject to a 10% Federal tax penalty if distributions are taken prior to age 59½.
Non-qualified withdrawals from a 529 plan are subject to federal and state income tax and a 10% penalty.
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