Are the tax implications of liquidating stock more favorable than a premature IRA distribution?

Question

I need some cash adn I have 2 options, take some cash out of an IRA or sell some stock. I hate to do either bit which is the lesser evil?

Answer 1

Hell yes! Sell the stocks! If you've held them for more than one year, you'll be taxed at the long-term capital gains rate which is 15% for most taxpayers. Even if you've held them for one year or less and are taxed on the gain at your marginal rate there's no penalty involved.

The entire distribution from a traditional IRA would be taxed plus the 10% penalty if you're under age 59 1/2 whereas only the gain on the sale of the stocks would be taxed.

If some of the stocks are worth less than what you paid you won't pay any tax and may get a write off on the loss. The loss is limited to $3,000 per year but any excess can be carried forward to future years until it's used up.

Even if you're looking at taking the funds out of a Roth where only the gain would generally be subject to the 10% penalty the loss of the tax-free accumulation over time will greatly affect your wealth.

Sell the stocks and leave the tax-preference items alone!

Answer 2

For selling stock, you'll pay either 5% or 15% tax, on the gain only. If you take money out of an IRA prematurely, you'll pay tax at your current rate on the entire distribution, plus a 10% penalty on the entire amount. Taxwise, you're way ahead to just sell some of the stock.

Answer 3

Sell the stock, no question. You can always repurchase the stock when you have the money. You cannot restore your IRA once you have taken a distribution from it.

The taxes you will pay when you sell the stock will probably be less than the taxes you will pay when you take a distribution from your traditional IRA.

Even if your IRA is a Roth IRA, I would sell the stock rather than liquidate the Roth IRA, because once you take it out of your Roth IRA you can't put it back in.

Answer 4

More than likely. Sell the stock. Premature distribution from an IRA is subject to 10% penalty in addition to the regular income tax. Selling stock will either result in a loss for you (limited to deduction of capital loss of $3,000 per year ($1,500 if married filing separately), remainder is carried forward and used at $3,000 per year until used up), or a gain, long-term gain is taxed at maximum tax rate of 15% (5% for persons in 10 or 15% bracket (for 2008 a rate of 0% will replace the rate of 5%)). Short term gain is taxed at your normal tax rate. Selling the stock is definitely the lesser evil.

Answer 5

Liquidating Stock

Answer 6

If it's a Tradional IRA, sell the stock. You are only taxed on the profit and, if you held it longer than a year, you would be taxed at a lower rate. A tradtional IRA distribution is subject to regular tax plus a 10% penalty.

If it's a Roth IRA, you can withdraw the principle tax and penalty free.

Answer 7

Sell the stock. You will get a much better tax rate and avoid the early distribution penalty.