If you find yourself in need of cash, it might seem tempting to sell some of your investments, such as stocks, bonds, or mutual funds. Before you do, weigh the pros and cons carefully. While selling investments can be a necessary part of the investing cycle, making a sale that is not part of your plan might have outcomes and implications you haven’t prepared for.

Evaluating your financial needs

If you’re facing a cash crunch, the idea of unloading stocks or other investments to access some quick money might seem appealing but before acting, consider your broader financial picture. Selling investments can provide immediate liquidity, but it may also have long-term consequences on your financial situation.

1. Selling bonds. Bondholders may decide to sell for various reasons, such as changes in interest rates or personal financial needs. However, selling bonds may cause you to incur taxes due to accrued income or gains. If you need the money for personal financial reasons, consider pulling cash from a high-yield savings account or borrowing the funds instead. Keep in mind, if sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.

2. Selling stocks that have lost value. If you don’t feel positive about the outlook for a stock’s future value, it may be time to consider selling your shares. Selling at a loss can result in a capital loss, which can offset other capital gains and result in tax benefits. If your losses for the year exceed your gains, you may be able to deduct up to $3,000 from your ordinary income on your taxes. 

3. Selling stocks that have gained in value. When a stock has appreciated, selling can lock in profits. However, be prepared for capital gains taxes. The tax rate varies depending on whether the investment is short-term (held for 12 months or less) or long-term (held for more than 12 months). Short-term gains are taxed at higher ordinary income rates, while long-term gains receive help from lower rates between 0% and 20%. Consulting a tax advisor can help refine your tax strategy.

4. Selling shares in a mutual fund. The sale of mutual fund shares involves tax considerations that are like stocks. However, there are certain factors that can be a bit more complicated. Fund managers may incur capital gains or losses inside the mutual fund that affect your tax liability. These tax implications may not always be clear to you when you decide to sell. Consider speaking with your tax and financial advisors who can work with you to help paint a clearer picture.

5. Cashing out of tax-deferred accounts. Making withdrawals from tax-deferred accounts like IRAs or employer-sponsored retirement plans, such as a 401(k), 403(b), or governmental 457(b), before age 59½ can trigger an additional tax penalty on early withdrawals, in addition to ordinary income tax. However, Roth contributions can be withdrawn tax-free, as they were made with after-tax funds. For tax-advantaged college accounts like 529 plans, non-qualified withdrawals may result in recapture of state tax deductions and are subject to federal and state income tax and a 10% penalty.

Before withdrawing funds from your retirement account or educational account, consider that the money you withdraw is no longer working for you toward your financial goals and may have an impact on how much you are able to save.

Strategic planning

Planning and weighing the pros and cons of selling investments can help you maximize the potential of your investments.

Pros for selling taxable investments:

• Liquidity: Selling investments can provide immediate cash flow, which can be crucial in times of financial need.
• Tax benefits: Selling at a loss can offer tax advantages by offsetting gains and reducing taxable income.
• Profit realization: Selling appreciated assets locks in profits, which can be reinvested or used toward other financial goals.

Cons for selling taxable investments:

• Tax implications: Capital gains taxes can reduce the net proceeds from a sale, impacting your overall return.
• Market timing risks: Selling during market downturns can result in losses and missing out on potential rebounds.
• Long-term growth sacrifice: Selling investments prematurely can hinder long-term growth.

One reason many people consider selling investments is to pay for an emergency expense. Keep in mind that establishing an emergency fund or securing a low-interest line of credit can provide a financial buffer, and help you avoid hasty investment decisions.