Purchasing a vehicle? Generally, you have two options. You can pay the full price in cash. Or you can take out a loan for some portion of the price tag.
If you plan to pay cash, but you don’t have potentially tens of thousands of dollars sitting in a bank account, it may require you to liquidate some investments.
Is that something even worth considering in place of a vehicle loan? And if you are going to sell off investments to pay for something such as a vehicle, what are the strategies to consider?
How Should I Liquidate My Investments To Buy a Vehicle?
What’s the “right way” to sell off my investments so I limit my tax bill and leave myself with the largest nest egg possible in the future?
That’s what a listener recently asked Clark.
Asked Kathy in Hawaii: “Aloha. I am worried my 2005 SUV may be on its last legs. I was consulting with my friend if I should take a loan out to buy a used car or take money out of non-retirement investments.
“My concern with the latter would be that it would increase my income and I’d be taxed more. My friend talked about the aspect of not allowing the investment to grow and suggested I just get a loan and do monthly payments.
“I hate being in debt. And what’s the point of investing money if you can’t take it out and use it when you need it? Feels like I should get out of the higher cost providers first.”
Kathy also named a few of the investment companies where she holds stock funds. They represented a full spectrum from the no-cost Fidelity Zero funds to some high-cost providers.
“All things being equal, being in a high-cost provider, you’re going to have a lower return over time,” Clark says. “So the question then becomes, if you do sell some of your investments to buy the used SUV, then you would want to start with either of the two high-cost providers you have.”
Selling Your Investments: Consider the Tax Implications
Before you start selling off any investments, consider how long you’ve owned the stock, fund shares or whatever else you’re holding.
Kathy will face a tax bill for realizing gains outside of a retirement account.
Short-term capital gains — or selling a money-making investment after less than one year — result in income taxed at your federal income tax rate.
For single filers, though, on long-term capital gains — typically investments you’ve held for at least one year — you’ll pay 0% if you have income of $47,025 or less.
“That’s a little-known thing that people who don’t earn an enormous amount of money, a certain amount of investment dollars you can sell and pay no tax for selling them,” Clark says.
Doing the Math: Vehicle Loan vs. Liquidating Investments
As Kathy referenced, there’s a major opportunity cost when you liquidate your investments. The size of that opportunity cost depends on how many more years those investments otherwise would accrue value — and the rate of annual return.
Speaking of the math, one must also consider the cost of a vehicle loan at present. According to one source, the average interest on a vehicle loan is 9% right now. You can get a much better rate than that with good or great credit.
“You’re a USAA member? See what USAA will write that loan for,” Clark says. “They are a big issuer of auto loans. And see what that would be. If the rate is very reasonable, under let’s say 6%, I would go with the loan.
“If it’s more than that, I would consider selling some of the high-cost investments.”
Clark Always Avoids Debt
Some people have a philosophy on debt vs. cash that, at least for them, can supersede what the math says.
That can be a factor, as quality of life is something worth considering. One person may be totally comfortable with debt. While another may not be able to sleep at night.
“I pay cash for everything,” Clark says. “Not that that’s always the smartest thing. I despise debt. I don’t carry debt of any kind. And I just can’t stand owing anybody money. But that’s me.”
Final Thoughts
At first, the idea of selling off investments to pay for a vehicle may seem off base.
But the math may actually work depending on your long-term capital gains rate, the fees you’re paying for those particular investments and the interest rate you’re able to obtain on your vehicle loan.
If you’re going to sell off investments, start by getting rid of the higher-cost investments first. And make sure you’re aware of any tax implications before you make a move.
