What to do if you must cash-in investments during COVID-19
By ATB Wealth 21 May 2020 4 min read
The COVID-19 pandemic has hit a lot of businesses and individuals hard financially. Job loss and loss or reduction of income have presented challenges for many. If you’re having trouble making ends meet, you might be considering selling or cashing in some of your investments. Before doing so, there are critical things to consider.
Consider your savings and your current expenses
The first thing you need to determine is how much money you have in savings and how much you need to maintain your living expenses.
“You must review how the pandemic has impacted both your income and your expenses,” says Salma Garde, Senior Financial Advisor, ATB. “You might have experienced job or income loss, but many are finding that their regular expenses have gone down, too. Look at your budget again, and see where you land from an income and expense level.”
Because of the pandemic, we’re spending less on gas, travel, dining out and entertainment. If you’re accustomed to having to support those expenses with your savings, you might find that your savings are going further. Creating a new budget for your current situation is key to understanding how much money you’ll need in the months to come.
“Once you’ve determined how much money you have, and how much you will need to pay for your current expenses, then you can start reviewing your options for obtaining cash flow,” said Garde.
Look into your credit options first
Cashing in your investments can have an impact on your taxes and your long-term savings. So, first, consider your credit options. Because of COVID-19, interest rates have dropped, which means borrowing on low-interest lines of credit is cheaper. When considering credit as an option, you'll need to have a good understanding of your cash flow—this will tell you whether or not you can afford to make the payments on borrowed amounts.
Consider your line of credit or home equity line of credit for cash flow options, but avoid expensive credit options like credit cards.
The impact of using an affordable line of credit could be less than the negative implications withdrawing from investments can have on your taxes and savings.
Review your investments with a financial advisor
If credit is not an option, you might have to take money from your investments. Start by consulting with a financial advisor. Every situation is different, depending on an individual’s financial position, types of investments and cost of living.
“If you need to withdraw money from investments, take this journey with a financial advisor. They can guide you through an analysis of your investments and situation to find the best way to take those funds out,” advises Garde. “They will help you determine how much money you need, the most tax-efficient source to take it from, and how it will impact your investments now and in the future.”
There’s a lot to think about before deciding where the money will come from, whether it’s from your non-registered accounts, tax-free savings account (TFSA) or your registered retirement savings plan (RRSP). Under each of these accounts, you could be holding cash, guaranteed investment certificates (GICs), mutual funds, or individual stocks and bonds.
For non-registered accounts, prior to selling investments such as GICs, mutual funds and stocks, consider things like capital gains, which can affect your taxes and cause you to lose valuable interest income.
“If you have a $100,000 GIC but only need $20,000, you still need to take out the entire amount. That means you will lose interest on that entire amount, not just the $20,000 you need,” says Garde. “We can put the remainder back in a GIC, but should do so in smaller parcels so that if you need more funds, your loss will be less with each withdrawal.”
There are strategies for cashing in and re-deploying GIC contributions to best suit your situation. Because every investment is different, it’s essential to consult with a financial advisor or personal banking specialist before selling one of these investments.
Withdrawing from your TFSA will have no impact on your taxes. There will be no penalty, and you can recontribute the same amount after the year you withdraw. However, if you’ve experienced a market loss on your TFSA, you will not be able to claim it as a capital loss for tax purposes. This is something to keep in mind when weighing out your options.
Cashing in your RRSPs should be your last resort—you will pay taxes on every dollar you withdraw and you can never make up that RRSP contribution again regardless of your income. Still, every situation is different, and for some, taking out a portion of an RRSP could be the most tax-efficient choice for you compared to other options. An advisor can help you determine the best course of action.
Connect with a financial advisor first
Whether you need money to support your immediate financial needs or want to have a safety net of funds available to you during uncertain times, there is a strategic way to do it. An advisor will help you determine what is most tax efficient, will have the least impact on your investment returns in the long term, and the best way to draw out the cash you need right now.
“We can also help you refocus on your original financial goals. If you are selling investments to find security in these turbulent times, we can help you get the cash flow you need. Then, we’ll work with you to derive a plan for your long-term savings that helps you feel calm and stay the course towards your long-term goals,” says Garde.
Reach out to one of our ATB Wealth experts to review your options and help find the best solution for your unique situation.
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