Should You Cash Out Investments to Cope With Inflation?

Inflation is still a problem for a lot of people these days. Granted, inflation levels have receded since peaking in mid-2022. But all told, living costs are still higher than usual, and a lot of people, at this point, no longer have money in a savings account to tap to cope with larger bills.

It's therefore not so shocking to learn that a lot of people are resorting to drastic measures to deal with inflation, according to a recent Quicken survey. A good 18%, for example, have been selling possessions, while 16% have dipped into their 401(k) plans. And 15% of Americans are liquidating investments to cope with current economic conditions.

If you have investments in a brokerage account, you may be thinking of selling some of them to drum up cash if money has gotten tight. But before you do that, make sure you understand the financial and tax consequences involved.

Here's what happens when you sell investments

The good thing about investing in a regular brokerage account, as opposed to an IRA or 401(k) plan, is that you can access your money at any time without penalty. With an IRA or 401(k), removing funds before age 59 1/2 generally means facing a 10% early withdrawal penalty.

But that doesn't mean there aren't financial implications to consider when liquidating brokerage account investments. First of all, if you sell stocks at a time when their value is down, you'll permanently lock in a loss.

Now, you can use that sort of loss to your financial benefit. It can offset gains in your brokerage account, if you have any. And if you don't, you can use an investment loss to offset a limited amount of ordinary income (up to $3,000 per year).

But still, let's say you bought 10 shares of a given company for $100 apiece, only now those shares are only worth $50 each. If you were to sell today, you'd take a $500 loss, whereas if you were to wait a few years, the value of your shares might climb back up to $1,000 -- or even beyond.

Now, let's say you're not looking at selling investments at a loss. Even if you're looking at a nice gain, you should know that you'll have to pay taxes on that gain, the extent of which will hinge on how long you've owned your stocks or assets before selling them.

If you're selling assets you've held for at least a year and day, you'll be bumped into the long-term capital gains category, which means you'll pay a lower rate of tax on your gains than you would with a short-term gain. But still, that's some money you're parting with.

That said, if you're a lower earner, you might be able to avoid paying taxes on long-term capital gains. This will hold true if you're single earning less than $44,625 or married earning less than $89,250.

But if you're selling a stock you've held for a year or less, you'll be subject to a short-term capital gains tax rate that matches your ordinary income tax rate. If you're a moderate earner, that could easily mean being taxed at a rate of 12%, 22%, or 24%, depending on your income.

Be careful when cashing out investments

Liquidating investments might seem like a good way to cope with inflation. And in some cases, it could be a reasonable move when your bills keep mounting and your paycheck can't keep up.

But if you're going to sell off investments, make sure you understand what that will mean for you financially. You may even want to consult with an accountant before moving forward to make sure you're covering your bases.