How to Use a Cash Out for Home, Retirement, or Investments

Converting an asset’s value into readily available cash, or “cashing out,” allows individuals to utilize the stored wealth in their possessions. This process transforms illiquid assets, such as real estate, retirement savings, or investment holdings, into liquid funds for various personal needs. This article explores common methods to convert assets into cash.

Accessing Home Equity

Home equity represents the portion of a home’s value that the homeowner owns outright, calculated as the difference between the property’s current market value and the outstanding mortgage balance. This equity increases as mortgage principal is paid down and as the property’s market value appreciates. Homeowners can leverage this accumulated equity through several financial products.

One method to access home equity is a cash-out refinance, which involves replacing an existing mortgage with a new, larger one. The difference between the new loan amount and the remaining balance of the original mortgage is then provided to the homeowner as a lump sum of cash. The process begins with an appraisal to determine the home’s current value and calculate the maximum loan amount, often up to 80% of the home’s value. Lenders require a minimum credit score, typically 620 or higher, and a debt-to-income (DTI) ratio usually not exceeding 43%. After application submission, an underwriting process reviews financial details, leading to loan approval and eventual closing where funds are disbursed.

Another option is a Home Equity Line of Credit (HELOC), which functions as a revolving line of credit secured by the home’s equity. Unlike a lump sum, a HELOC allows homeowners to borrow funds as needed, up to an approved credit limit, similar to a credit card. A HELOC has a “draw period,” usually 5 to 10 years, allowing funds to be borrowed, repaid, and re-borrowed, often with interest-only payments on the drawn amount. Once the draw period concludes, a “repayment period” begins, usually lasting 10 to 20 years, during which no new funds can be accessed, and both principal and interest payments become due.

A home equity loan provides a lump sum of cash upfront, secured by the home’s equity, with a fixed interest rate and a fixed repayment schedule over a set term. This structure offers predictable monthly payments throughout the loan’s duration. The process involves applying for a specific amount, receiving the funds in a single disbursement, and then making consistent payments until the loan is satisfied. Eligibility requirements for home equity loans are similar to other home-secured financing, involving factors like credit score, debt-to-income ratio, and the amount of equity in the home.

For all home equity products, interest paid may be tax-deductible if the funds are used to buy, build, or substantially improve the home. This deductibility is subject to limits, with interest on up to $750,000 of combined mortgage debt (for loans taken out after December 15, 2017) potentially deductible. Taxpayers must itemize deductions on their federal income tax return to claim this benefit.

Cashing Out Retirement Funds

Retirement accounts are for long-term savings, so accessing funds before a certain age involves specific rules and potential tax consequences. These accounts often have provisions to discourage early withdrawals to ensure funds are available during retirement years.

Withdrawals from traditional IRAs and 401(k) plans at or after age 59½ are subject to ordinary income tax. Funds withdrawn before age 59½ are subject to both ordinary income tax and an additional 10% early withdrawal penalty. This penalty is imposed on the taxable portion of the distribution. The process for withdrawal involves contacting the plan administrator or custodian, completing required forms, and then receiving the funds.

Several exceptions to the 10% early withdrawal penalty allow penalty-free access to funds, though withdrawals remain subject to ordinary income tax. These exceptions include distributions for:
Unreimbursed medical expenses exceeding a certain percentage of adjusted gross income.
Qualified higher education expenses for the account owner or their dependents.
A first-time home purchase, limited to $10,000.
Total and permanent disability.
A series of substantially equal periodic payments.
Separation from service at age 55 or later for employer-sponsored plans.

Roth IRAs and Roth 401(k)s operate under different tax rules because contributions are made with after-tax dollars. Qualified distributions from Roth accounts are entirely tax-free and penalty-free. A distribution is considered qualified if the account has been open for at least five years and the owner is age 59½ or older, disabled, or the distribution is used for a qualified first-time home purchase.

For non-qualified distributions from Roth accounts, a specific ordering rule applies: contributions are considered to be withdrawn first, followed by converted amounts, and then earnings. Only the earnings portion of a non-qualified distribution is potentially subject to ordinary income tax and the 10% early withdrawal penalty. This structure means that direct contributions to a Roth account can be withdrawn at any time without tax or penalty, regardless of age or holding period. The withdrawal procedure for Roth accounts is similar to traditional accounts.

Cashing Out Investment Portfolios

Converting assets held in non-retirement investment portfolios into cash involves selling securities within a taxable brokerage account. Common assets in such portfolios include stocks, bonds, mutual funds, and exchange-traded funds (ETFs). The process is straightforward, but tax implications depend on the holding period and the gain or loss realized.

To sell investments, an investor places a sell order through their brokerage account, which can be done online or by phone. Different order types are available, such as a market order, which executes immediately at the current market price, or a limit order, which specifies a price at which the investor is willing to sell. After a sale, a settlement period of two business days (T+2) for stocks occurs before funds are available. Once settled, funds can be transferred from the brokerage account to a linked bank account via electronic transfer, or received by check.

Profits from selling investments, known as capital gains, are taxable. The tax rate applied depends on how long the investment was held. Short-term capital gains, which result from selling an asset held for one year or less, are taxed at the investor’s ordinary income tax rates. In contrast, long-term capital gains, derived from assets held for more than one year, qualify for preferential, lower tax rates.

Calculating the capital gain or loss requires knowing the investment’s cost basis, which is the original purchase price plus any commissions or fees. Subtracting the cost basis from the sale price determines the gain or loss. A specific rule, known as the wash sale rule, impacts the deductibility of losses. This rule disallows a loss if an investor sells a security at a loss and then repurchases the same or a “substantially identical” security within 30 days before or after the sale date, creating a 61-day window. If a wash sale occurs, the disallowed loss is added to the cost basis of the newly acquired shares, deferring the recognition of the loss until the new shares are sold.