FIFO vs LIFO Explained

By Brent Meyer — SafeMoney.com Founder & Editor Reviewed by Licensed Financial Professionals  |  SafeMoney.com — Trusted Since 2011  |  Updated Regularly Quick Answer: Discover how FIFO and LIFO impact your retirement planning. Learn the differences and make informed decisions for your financial future. Explore now! You may have heard of acronyms called “LIFO” and “FIFO” in financial discussions with your advisor or in some other circles. But what exactly do they mean? LIFO means “Last-In, First-Out” – in other words, the gains or interest earnings in an account are distributed first and subject to taxes. FIFO means “First-In, First-Out,” referring to how your principal , or the original sum of money in the account, would be distributed first and would be taxed.   While they aren’t common terms, LIFO and FIFO generally come up in discussions around retirement assets or other financial holdings. For example, non-qualified annuities are subject to LIFO for tax purposes, and both LIFO and FIFO can apply to stocks that someone owns, as another example. This article will look at both FIFO and LIFO and explain the basics of how they work. FIFO (First-In, First-Out) Let’s talk about the FIFO method in terms of stock shares inside of a brokerage account. Keep in mind that capital gains taxes will generally apply to selloffs of this asset kind. In this situation, the IRS assumes you are using FIFO. So, if you didn’t tell your financial advisor which shares to sell, your advisor will sell the oldest shares that you have. Certainly, the IRS will assume that you sold the oldest shares (hence the “first money” in and “first money out” references). Selling the FIFO shares, however, offers the advantage of probably making the sale’s proceeds a long-term capital gain, reducing your overall tax rate on your gains. However, using FIFO also means these shares could have gained the most in value of any of your shares, so your capital gain (or loss) is potentially the largest. This tax consequence occurs because the stock will likely have had the lowest cost basis (initial out-of-pocket cost) and therefore have appreciated the most. Those factors mean that you may pay more taxes than you might have on shares that you owned for less time. LIFO (Last-In, First-Out) LIFO, or again “Last-In, First-Out,” applies to more than just stocks and other holdings inside a brokerage account. As we mentioned earlier, non-qualified annuitie