Withdrawing from a brokerage
January 28, 2025 12:42 PM   Subscribe

Pulling funds out of a brokerage account-- what do I need to know?

So I am rethinking the amount of risk that I'd like to be exposed to in the stock market.

I have a decent cash emergency fund (HYSA and short term CDs) and retirement funds-- I'm "on track" for retirement in thirty years or so.

I also have around $30k in a broad index fund that I opened in September (Vanguard VTSAX). I am thinking I would like the pull some or all of that money out asap and beef up my emergency fund. I'm fine with the 'set and forget' approach for my retirement. But this $30k was really intended to be more medium-term money and I have found myself to be more risk-averse than I was in September (lol).

I have never done this before and am looking for help on the tax implications or anything else I should know. I know that I will pay taxes on gains (around $3k) and my understanding is that those taxes will be more because I have not had the money invested for a full year (the same as my income is taxed at the highest bracket). Is all of this correct? Is there anything else I should know?
posted by ambulanceambiance to Work & Money (11 answers total) 3 users marked this as a favorite
 
Timing the market is a bad idea - 30 years is long enough to recover from anything that happens even if it happens for a full 4 years.


But removing money from a brokerage is generally just clicking a button and if you have bank account links set up, that's it. If not then they will send you a check.

They will send you a 1099 form (tax form) at some point (or a note you need to download it) that should have your starting price, sale prices, and appropriate dates required to determine the tax impacts. The amount of tax you will pay is generally dependent on how long you hold, and your total taxable income. Most brokerages do not hold back any taxes automatically. A tax professional or tax software should be able to handle this.
posted by The_Vegetables at 12:50 PM on January 28 [3 favorites]


Response by poster: To clarify:

My retirement accounts are invested on the 30 year timeline. I am not considering taking any money out of those.

The $30k I am considering pulling out was just excess savings that I couldn't invest elsewhere. I had initially saved it for a down payment, then that didn't seem like it was going to happen any time soon, I had enough in my emergency fund, so I figured what the hell and invested it. Now I think there is a good chance I will want that money liquid in the next five years so I would rather not have it fluctuating with the stock market.
posted by ambulanceambiance at 12:53 PM on January 28 [1 favorite]


On a basic level, long-term capital gains on investments - ie, investments held over a year - are taxed advantageously over short term investments, ie, those that are cashed out in less than a year, and which are taxed as ordinary income.

What makes sense here has everything to do with your personal income and situation and so we can't provide specific guidance. That being said, it is generally best, if possible, to hold on to any investment for over one year (ie, until September 2025 in your case) to ensure the lowest level of taxation on any gains when you withdraw those investments.

If you cash those funds out after September 2025 for a down payment, there's functionally no penalty (unless there is a loss due to market conditions). That being said, you can always withdraw them at any time before then with any gains taxed as ordinary income.

It may be best to simply keep those funds there for the time being, but if you are especially concerned about fluctuations in the market and expect to make a down payment late this year, you could cash out in September after one year and deposit in your existing HYSA without any appreciable penalty.
posted by eschatfische at 1:13 PM on January 28


Yeah, you're not missing anything.

An investment tax thing I've discovered: Sometimes the investment banks can get extra time before they send you the final tax documents. I have my accounts at Raymond James, and I have some more complex investments at this point. Every Feb. 15, they send me a letter that says they need to delay sending my 1099 "because we are waiting for information from issuers regarding certain holdings." I get a final composite 1099 (1099-DIV, 1099-MISC, 1099-B and 1099-INT) on either Feb. 28 or March 15. I don't remember that happening back when I just had index funds, but the delay can be an annoyance if you're used to being able to file as soon as you get your W-2.
posted by katieinshoes at 1:16 PM on January 28


Changing your investments and withdrawing it from the brokerage are two different things. If you do decide to sell some of the VTSAX, the simplest thing would be to just keep it at Vanguard in a lower-risk asset, such as CDs or money market. If you ever do need it, transferring it to a checking account or other institution should be quite quick, though you'd have to check with Vanguard to see exactly how long.
posted by Mr.Know-it-some at 1:17 PM on January 28 [5 favorites]


Yeah, you just sell your position and then transfer the money out of the account, set aside a third of the gains as a "don't touch in case of tax" amount, then do whatever your tax prep software tells you to do.

You didn't ask, but if I were in your shoes (nervous, conservative) I'd put $10k into I Bonds.
posted by phunniemee at 1:19 PM on January 28


As Mr Know-it-some says above, the simplest way to do this is probably to sell it and re-invest the proceeds in VMFXX or their cash deposit product. You'll get between 2.5% and 4.5% (at current rates), which is probably similar to your emergency fund at roughly similar risk.
posted by true at 1:25 PM on January 28 [1 favorite]


Response by poster: Thanks everyone! Re-investing in something more conservative at Vanguard sounds like a great option.

You didn't ask, but if I were in your shoes (nervous, conservative) I'd put $10k into I Bonds.

I actually had it in I Bonds prior to investing it in Vanguard.
posted by ambulanceambiance at 1:48 PM on January 28


Seconding that you should set aside a few hundred bucks for the capital gains taxes you'll owe, but otherwise yeah it's easy - it generally takes a couple of days from when I sell something in my Vanguard brokerage to when the funds show up in my bank account.
posted by mskyle at 2:04 PM on January 28


If you don't need these funds now, but are focused on hedging your risk, are you considering holding on to them until you pass the one year mark?
posted by neutralhydrogen at 2:10 PM on January 28


Keeping the money at the brokerage but putting it into a cash vehicle (i.e., a money market) is a good idea. Keeping the money out of your "normal" bank will make you more likely to save it, in my experience. Transfer to checking/savings is one step closer to spending it, in my experience.
posted by Mid at 2:23 PM on January 28 [1 favorite]


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