Americans continue to be plagued by the high cost of living, with prices of everyday goods such as groceries and gasoline remaining high despite the Federal Reserve’s attempts to curb inflation. The Fed’s two-year campaign to cool inflation took rates from 9% to 3%, but in the past six months its strategy has weakened and inflation has risen to 3.5%. As consumer prices continue to erode purchasing power, some people now find themselves in the position of being forced to dip into their investment portfolios and retirement accounts for temporary financial relief.
Contrary to popular belief, there are cases where it may be appropriate to lighten your wallet or even dip into your retirement savings. However, these are rare events and withdrawing from your investments means missing out on future growth potential in exchange for a brief monetary reprieve, so the decision to do so should not be taken lightly.
Here’s what you need to know if you’re planning to sell your shares.
How to Sell Stocks in a Brokerage Account
Investors open brokerage accounts for many reasons. For some, it’s about supplementing retirement savings without dealing with the contribution limits of a 401(k) or IRA. For others, it’s making some money and learning the ins and outs of the market. Regardless of why investors open brokerage accounts, they may have to sell their stocks and ETFs to offset living expenses. If so, what is the best way to do it?
While taking gains from stocks and ETFs that have performed well since they were purchased might seem like a fiscally responsible move, that’s not necessarily the case. Conversely, if you need to make money quickly, consider eliminating losers from your portfolio first.
It might seem counterintuitive; after all, you lost money on those investments. But Dr. Bob Johnson, a finance professor at Creighton University, explains that this idea is a logical fallacy. “As human beings, we save our victories and our feared losses,” he says. “People will have a losing stock in their portfolio and say, ‘Well, I’ll sell it as soon as it gets back to where I bought it,’ because they rationalize that they haven’t lost anything until they sell it.” . I call it ‘getting even.’”
According to Johnson, it is more costly to fall into this situation of “breaking even” and selling off winners than it is to abandon underperformers. “The tax code is set up so that you should actually sell your losers over your winners,” he says.
If you need to cash out some positions, the tax code makes selling positions at a loss a better choice: If you make more losses than you earn in a tax year, you can use up to $3,000 in losses to offset your ordinary income, instead of pay a sum of money. capital gains tax of up to 37% on the proceeds of a winning stock, depending on the length of the investment. You can also use additional losses to offset the gains you want to make on your winners later.
This strategy not only gives a cash-strapped investor the ability to obtain liquidity without paying capital gains tax, but also allows them to refocus their portfolio; you can walk away from fundamentally weak investments with little damage, and you’ll walk away more informed when it comes to finding a strategy that works for you. Quoting famed mutual fund manager Peter Lynch, Johnson says that “selling winners and holding on to losers is like cutting flowers and watering weeds.”
As for the timing of selling stocks at a loss, it depends on how many you own relative to the amount of money you need. If you have sizable unrealized losses in fundamentally weak positions, it is a good idea to get rid of them before fundamentally strong positions that are in the red. But if your portfolio is full of winners, you’ll probably want to close out your losing positions before taking a tax cut on the winners.
Early withdrawal and loan from a 401(k)
Let’s be clear: in general, you don’t want to mess with your nest egg. “There are two reasons not to raid your 401(k) and try pretty much everything else first,” Johnson says. The first of these, he explains, is that you have to pay a penalty when you withdraw money. In addition to ordinary income tax on money withdrawn from a tax-deferred account, you will also take a 10% early distribution penalty on 401(k) investments if you are under age 59.5.
Second, and perhaps more importantly, Johnson says that withdrawing money from a 401(k) early leaves you with fewer options later in life as you race to offset those early withdrawals. “Your options are to work longer or live at a lower standard of living, neither of which are good alternatives,” he says. Think of raiding your 401(k) as borrowing from your future financial comfort: accessing funds now means less later.
That said, it’s very possible to withdraw funds from a 401(k), but because it’s a tax-deferred account, you won’t get the benefits of realizing losses like you would by selling stocks in a brokerage account. An alternative option, which allows you to tap into your 401(k) with less of a penalty than selling account assets, is to borrow against it.
401(k) loans allow cash-strapped investors to access money from their retirement accounts without suffering penalties or capital losses resulting from early withdrawal. Even better, since you’re borrowing from yourself, no credit check is required, getting the loan is much quicker than getting a traditional one, and interest rates are generally lower than those offered by traditional lenders. In the end, you are getting paid back and on friendlier terms.
In most cases, borrowers have up to five years to service the loan, giving you ample time to recover from whatever precarious financial situation forced you to borrow your retirement savings. The main downside is that when you borrow from a 401(k), you also have to make your regular contributions into your account, to avoid losing out.
If you find yourself short of money due to the rising cost of living, selling some of your investments is not ideal, but it is AND doable. Depending on the type of account you hold your assets in and the amount of liquidity you need access to, you may be able to lighten your portfolio or borrow from your accounts in a way that minimizes financial damage by providing at the same time the money needed to exit an account. pinch.
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