Deciding acct to pull money for a new car?

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CFIT
Posts: 68
Joined: Mon Apr 07, 2014 7:57 pm

Deciding acct to pull money for a new car?

Post by CFIT » Sat Jan 20, 2018 11:26 am

It looks as though I'll be purchasing a new car in the next week or so. Like a good Boglehead I will be paying cash. I am retired. The question is which Vanguard investment account to use:

1) Vanguard brokerage (non-retirement)
Pro: I'll only have to pay capital gains on the withdrawal.
Con: This will liquidate my brokerage account. Not sure if I need to have a non-retirement account along with my IRA and Roth IRA.

2)Roth IRA
Pro: Tax free withdrawal.
Con: I'd like to leave the Roth alone to grow and multiply for eventual tax free withdrawals.

3)IRA
Pro: Well, the money is there. This is where the bulk of my assets are.
Con: Withdrawal will be treated as income.

I'm leaning towards just wiping out my brokerage account but thought I would call on the wisdom of the forum to see if there is anything I'm missing.
Thanks!

JC565
Posts: 57
Joined: Wed Jan 03, 2018 1:07 pm

Re: Deciding acct to pull money for a new car?

Post by JC565 » Sat Jan 20, 2018 11:43 am

if its a new car, and your have the ability to pay cash, you most likely qualify, so why not opt for something with a 0% financing so you can leave your money invested? not only due you keep your money compounding, but inflation actually makes your new car cost less than if you paid in cash in full right now. (you can use that as bargaining power by the way if you truly dont want a payment)

Broken Man 1999
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Joined: Wed Apr 08, 2015 11:31 am

Re: Deciding acct to pull money for a new car?

Post by Broken Man 1999 » Sat Jan 20, 2018 12:07 pm

I used my taxable brokerage account to fund the first 6 months of my retirement. Right now we have a whopping $27.09 in the account.

I didn't want to withdraw any funds in our tax-deferred accounts, TIRAs and Roths until I absolutely had to do so.

However, every person probably has reasons of their own as to where to draw funds from when in retirement.

Our Roth accounts are tiny compared to our TIRA accounts, so I don't image I'll draw from them for a long, long time.

I would certainly look into perhaps getting a very favorable interest rate loan, as JCBiggs suggested, might work out well.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

mortfree
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Re: Deciding acct to pull money for a new car?

Post by mortfree » Sat Jan 20, 2018 12:15 pm

Get a loan if the car manufacturer offers 0%, 0.9% or 1.9%.

btenny
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Joined: Sun Oct 07, 2007 6:47 pm

Re: Deciding acct to pull money for a new car?

Post by btenny » Sat Jan 20, 2018 12:17 pm

Your situation is why I leased my Subaru in 2013 rather than pay cash. I was too young to have to do RMDs and did not want to pay big capital gains taxes if I withdrew the money from my Brokerage account. So I just did a ultra low cost lease rather than pay cash. I ran the numbers and in my case the extra lease fees were less than the cap gains taxes.
Then late in 2016 I bought the car at the end of the lease. So I kept most of my money working and did not do big withdrawals.

You might also do a low cost loan of 0% to 1%. I bet you can negotiate the loan fees to very low numbers such that it is cheaper than the taxes due to paying cash.

Good Luck

Big Dog
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Joined: Mon Sep 07, 2015 4:12 pm

Re: Deciding acct to pull money for a new car?

Post by Big Dog » Sat Jan 20, 2018 12:21 pm

Second the idea about a low-cost loan from manufacturer, or check with a local credit union or two.

1.9% generally beats capital gains.

Dantes
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Joined: Wed Feb 25, 2015 6:38 pm

Re: Deciding acct to pull money for a new car?

Post by Dantes » Sat Jan 20, 2018 12:22 pm

It also depends on what your tax rate would be on withdrawals from tax deferred; if you would owe capital gains then its possible you are in the new 12% bracket. That would certainly be attractive. You don't say if you are receiving Social Security and if there would be tax impact there as well.

inbox788
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Joined: Thu Mar 15, 2012 5:24 pm

Re: Deciding acct to pull money for a new car?

Post by inbox788 » Sat Jan 20, 2018 12:46 pm

CFIT wrote:
Sat Jan 20, 2018 11:26 am
I'm leaning towards just wiping out my brokerage account but thought I would call on the wisdom of the forum to see if there is anything I'm missing.
First question is why not get a low interest loan? Is it low enough to arbitrage a benefit? If you can get a 0% loan and a 1-2% CD or savings account, then you're being paid to drive the car. Or you can choose to forgo the dollars for the sake of simplification. You can raise the stakes with statistical arbitrage of 2-3% loan vs 5-8% investment return, but that carries risk, which may not be worth it if the difference is only 2% but might be if it's bigger than 6%, especially if it's helped by a subsidized loan.

If you choose to spend down your accounts, the next question is to ask how or if it differs from the general spending strategy. My guess is that it doesn't.
https://www.fidelity.com/viewpoints/ret ... ithdrawals
https://www.myretirementpaycheck.org/Ho ... iquidation

The strategy you pursue will depend on what your current tax rate is and whether it's changing up (more income, RMD, SS, etc.) or down in the future. I would be choosing between IRA up to my expected average retirement tax bracket or high cost basis/low tax consequence brokerage account.

Topic Author
CFIT
Posts: 68
Joined: Mon Apr 07, 2014 7:57 pm

Re: Deciding acct to pull money for a new car?

Post by CFIT » Sat Jan 20, 2018 3:25 pm

Thanks for all the quick, helpful replies!

I hadn't thought of getting a low interest loan or leasing. Toyota doesn't have 0% financing of the 4Runner I'm getting but I'll check to see about loans from other sources.

aristotelian
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Joined: Wed Jan 11, 2017 8:05 pm

Re: Deciding acct to pull money for a new car?

Post by aristotelian » Sat Jan 20, 2018 5:12 pm

Are you retired? I assume you are past accumulation phase and there would be no penalty on the IRA withdrawal?

What is your tax bracket and taxable income situation?

Do you have a withdrawal plan for retirement?

Topic Author
CFIT
Posts: 68
Joined: Mon Apr 07, 2014 7:57 pm

Re: Deciding acct to pull money for a new car?

Post by CFIT » Sat Jan 20, 2018 6:47 pm

Yes, I'm retired. I'm in the 24% fed bracket. No penalty on the IRA withdrawal but it would be taxed as income.

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