FIFO vs. LIFO: How Does It Affect Your Financial Picture?


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 annuities also fall under the LIFO principle. That can be good to keep in mind as you are planning out your retirement income and how different sources of income are taxed.

To recap, with LIFO the gains or interest earnings are taken out and taxed first. In the case of a non-qualified annuity, the gains in the annuity contract are what will be taxable. When you take money out of the annuity, the earnings will be taxed as ordinary income (as it’s the “last money” in and the “first money” out).

Your principal, or the premium money with which you began the contract, won’t be taxed. As a result, the part of your annuity withdrawals that are your principal will be excluded from taxation. This can be a handy thing to keep in mind if you are using an annuity for a guaranteed lifetime income stream and you want to plan for diverse tax strategies in how you receive income to maximize your retirement cash-flow.

Non-qualified annuities are subject to other special tax rules, such as the aggregation rule, so make sure to talk to your financial professional and your tax advisor about your situation.

If you are dealing with stock shares, LIFO typically covers the newest shares that you have. So, in other words, LIFO is the timing choice that you have to tell your financial advisor about.

Make sure that you tell your financial advisor and that the IRS will know as well. The primary advantage to selling LIFO shares is that they will have had the least amount of time to appreciate.

Thus, any gains will be short-term gains, but there may not be much gain to worry about based on how short your holding period was. If you have any questions about other tax implications for your situation, it’s good to talk to your tax advisor and your financial professional.

Which Is Better?

Neither method is intrinsically better than the other. One may, however, be better in a particular circumstance. As we have seen above, you can, to some extent, have some control over your taxes payable depending on the method selected.  

Whichever road that you choose, make sure that your financial professional marks everything down appropriately. This has consequences whether you are tapping an annuity for retirement income or selling off stock shares, or other shares for that matter, in a brokerage account.

For example, say that you want to lock in a high long-term gain from selling FIFO shares. It won’t be good for your confirmation to appear to say that you sold LIFO shares. Your financial professional can help you think through different pros and cons for your circumstances.

Some Final Thoughts on FIFO vs. LIFO

LIFO and FIFO aren’t complicated once you understand how and why they apply in different situations. It’s good to think about these things as part of the overall tax consequences of your financial picture.

How much of your retirement money is wrapped up in pre-tax retirement accounts? What will your tax bracket be in retirement, especially if you have higher income goals than what you earned during your career?

How much money do you have in non-qualified annuities and other vehicles with after-tax money so that part of your income from those sources will be shielded from taxes? How much money is in Roth accounts so that you can have tax-free income?

All of these questions, and implications from the FIFO and LIFO methods for your retirement security, are important matters to discuss with your financial professional. If you include taxes as part of your retirement planning, chances are you will have more flexibility and choices in your retirement income.

Are you looking for a financial professional to help you with this and other retirement ‘what-ifs?’ You might consider working with someone who is independent and not beholden to one parent financial company. If that is important to you, many independent financial professionals are available here at to assist you.

Get started by using our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your goals, concerns, and financial situation at no cost to you. Should you want a personal referral, please call us at 877.476.9723.

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