I made $500,000 from a stock sale in my IRA. Could this change my retirement?

By Alessandra Malito

Diversification and tax planning go hand-in-hand

A large profit from a stock sale within an IRA shouldn't be treated separately from the rest of the portfolio balance. (Photo subjects are models.)

Dear Help Me Retire,

My question is short and sweet: What do I do with an extra $500,000 in my IRA? The money came from the recent sale of a stock.

Stock Seller

Dear Stock Seller,

I understand why you would wonder what to do with that $500,000. That's a large sum of money. Such a profit could really change the way you plan for your retirement, depending on how old you are, when you plan to retire - and how you ultimately invest or spend it.

It's also worth putting your $500,000 in context. How much of your total investable portfolio does it represent? If you have $5 million invested elsewhere, the sale proceeds make up only 10% of your portfolio. If your total portfolio is $750,000, the decision what to do with this money is far more significant.

It's also worth putting your $500,000 in context. How much of your total investable portfolio does it represent? If you have $5 million invested elsewhere, the sale proceeds make up only 10% of your portfolio. If your total portfolio is $750,000, the decision what to do with this money is far more significant.

Diversification and tax planning go hand-in-hand. For example, investments that generate substantial ordinary income may be better to hold in a traditional IRA, while investments whose returns receive favorable capital-gains or dividend tax treatment may make more sense held in a taxable account.

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I asked some experts to weigh in. You should not treat the $500,000 as "a standalone pile of money," said James Mayo, a certified financial planner and principal of IronFjord Wealth Management. "Treat it as part of the household portfolio."

From there, you will have a better sense of how to use it. If you are near retirement, then you know that your entire portfolio, including those sale proceeds, shouldn't be invested too aggressively. If you have plenty of time until you get to retirement, you can be a bit more open about your options.

Ask yourself what the money needs to do for you, said Eustache Clerveaux, a certified financial planner and partner at Fidare Wealth Solutions. "If the stock represented a large share of their portfolio, the sale creates an opportunity to diversify. I would review their retirement timeline, spending needs, other investments, and tolerance for risk before recommending an allocation."

Where to start looking

Start with the investment policy, said Charles Sachs, a certified financial planner and chief investment officer at Imperio Wealth Advisors. "For a married couple especially, it should be viewed as one part of the family's overall portfolio," he said.

He asked: "How much should the household have in stocks, bonds and cash?" From there, you can decide what investments to hold and where they should be housed.

For example, if your household portfolio is intended to be 60% stocks, 35% bonds and 5% cash, the $500,000 doesn't necessarily need to be divided along those lines. You may already have plenty of stocks in your other accounts.

The sale itself shouldn't trigger a tax event if it remains in the account. But you still want to think of the tax implications of your decisions. "If the stock was sold inside a traditional IRA, the sale itself generally isn't the tax issue," Mayo said. "The bigger question is how that IRA fits alongside their taxable and Roth accounts."

Contributions to traditional IRAs are made with pretax dollars and then taxed at distribution, making these accounts good homes for "tax-inefficient investments," Sachs said, such as investments that generate large bills taxed at ordinary income rates or less-liquid products (like real estate) that the investor wouldn't need to liquidate immediately.

Of course, you shouldn't rush to take the money out of your IRA to use elsewhere. "Taking the proceeds out of a traditional IRA unnecessarily could create a substantial tax bill, plus a 10% early-withdrawal penalty before age 591/2 unless an exception applies," Clerveaux said.

Some people like to leave a portion of their balance in cash to hedge against market volatility. "If they do want to leave the money in cash, just make sure they are getting a reasonable yield on the cash," said David Haas, a certified financial planner and owner of Cereus Financial Advisors. "Many brokerage platforms give rather poor yield in the cash sweep account. An alternative could be a low-cost short-term treasury ETF."

The puzzle

"There is no single answer for what to do with the $500,000," Sachs said. "The better question is how that money fits into the family's overall investment, tax and distribution strategy."

Think of that $500,000 as a piece of the puzzle, and the puzzle is your entire retirement plan. How were you saving for retirement prior to this sale, and does this extra income fill in any big gaps in your financial plans?

What is your risk tolerance versus risk capacity - the former being the risk you're comfortable with versus the latter, which is how much risk your portfolio can handle without disrupting your financial goals?

Is the purpose of this IRA to fund your retirement, or is it more of a back-up account you intend to eventually leave to your loved ones or a charity? How far are you from your target retirement date and retirement "number"?

Fees are another consideration. Have you discussed this with your adviser? Review any trading costs, advisory fees and account fees before moving this money. Even a small annual fee can add up to thousands of dollars over a long retirement.

Once you can answer all of those questions, you'll be closer to finishing the puzzle.

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Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com

-Alessandra Malito

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10-03-26 0923ET