What to consider before selling investments

Updated: Apr 27

Tax and other considerations before you sell

If you are short on cash, you may be tempted to liquidate some of your investments. However, before making that decision, it can be beneficial to examine the benefits and downsides of selling an investment.

“It can be beneficial to plan ahead for unforeseen cash demands in order to prevent the penalties and losses associated with selling or withdrawing from investments too soon.”

  • A bond is being sold. Bondholders may choose to sell for a variety of reasons. There may be tax ramifications as a result of the bond's income or gains. You may have capital gains as a result of the selling. Consider seeking advice from a Financial Advisor or a tax professional.

  • Selling a stock that has depreciated in value. If you are not optimistic about the stock's prospects, you may be ready to sell. If you sell at a loss, you will experience a capital loss, which may assist decrease your tax burden by offsetting capital gains as well as up to $3,000 in ordinary income.

  • Selling a stock whose value has increased. If you want to sell a stock that has appreciated in value, you must pay capital gains tax. Be aware that long-term capital gains and losses are taxed differently from short-term capital gains and losses. If it is a short-term (12 months or less) investment, the tax rate will be the higher ordinary income tax rate rather than the long-term capital gain rate for a long-term (12 months or more) investment. When making tax-related investment decisions, it is a good idea to consult with your tax expert.

  • Selling mutual fund shares. Selling mutual fund shares entails similar considerations to selling stocks. A fund-holder, on the other hand, may be unaware of a fund manager's financial gains or losses. If this is the case, the entire tax ramifications may not be obvious when you decide to sell. If you have any questions, talk to your Financial Advisor.

  • Taking money out of a tax-deferred account. In general, if you take a taxable distribution from an IRA or a qualified retirement plan (QRP) such as a 401(k), 403(b), or governmental 457(b) before reaching the age of 5912, you may incur an additional 10% tax on early withdrawals in addition to any potential ordinary income tax. However, if you have multiple Roth IRAs, the initial amounts released from any of them are annual contributions. Roth contributions are not deductible, so they are not taxed or included in gross income, and they 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.

It can be beneficial to plan ahead for unforeseen cash demands in order to prevent the penalties and losses associated with selling or withdrawing from investments too soon. Consider building an emergency fund or applying for a low-interest line of credit to serve as a safety net if you run out of funds. If you plan ahead of time, you may be able to gain more out of your investments.

Getting started with investing is easy. If you learn about the basic types of investments and find the right Stock Advisor, you can begin making more informed financial choices for the future.

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