Lump sum withdrawals are taxed using which method?

• A. FIFO
• B. LIFO
• C. Pro rata
• D. Specific basis method

Answer: (B)

When you take a lump-sum withdrawal from an investment, the tax you owe depends on which cost basis you’re considered to have disposed of. The method used to allocate that basis determines the taxable gain on the withdrawal. Last-in, first-out (LIFO) means the most recently purchased shares are treated as sold first. In a rising market, selling the newest lots first typically yields a smaller taxable gain on the withdrawal, since those lots have a higher cost basis, while the older, cheaper shares remain in the account for potential future sales. If you could identify the exact shares being sold, you could choose the shares with the highest basis to minimize taxes, but when a specific identification isn’t used, LIFO is the method that allocates the withdrawal to the most recently acquired shares.