When it comes time to make a big purchase, you may feel inclined to pull money from your investment accounts. While it may be tempting or sometimes a necessity, it’s not always advisable to do so. 

Financial advisors generally say selling investments should be avoided if possible as it not only means that your money will stop growing but also that you may owe taxes. Remember, your investments are important for long-term financial goals. 

But there may be instances where you need to consider tapping into your retirement accounts. Here’s how to determine whether or not you should sell your investments to make a big purchase, and what to do if you decide to.

Should you pull money from your investment accounts for a large purchase?

When you invest in the financial markets, you’re taking advantage of compound interest, or the interest you earn on your principal investment and interest. Thanks to compound interest and the power of financial assets like stocks, a $5,000 investment assuming a rate of return of 7% would grow to nearly $40,000 over thirty years. 

“The more money you put into the investment account — the earlier, too — the more it compounds,” says Eric Roberge, a certified financial planner and founder of financial planning firm Beyond Your Hammock. The danger of pulling your money to the sidelines of the stock market is that it will miss out on that compounding interest.

But another downside comes from the tax implication. When you sell investments, the IRS requires that you pay taxes on any earnings. Tax-advantaged accounts like 401(k)s and IRAs allow you to minimize the tax burden by having your money grow tax-free or tax-deferred, depending on the type of account. But you have to keep your money in the account until you withdraw at age 59 ½ or later to avoid paying penalties. Taxable brokerage accounts don’t come with tax advantages (though you also won’t face any early withdrawal penalties). 

Because of these downsides, it’s best to not pull money from your investments if you can avoid it, especially if those funds are set aside for retirement. 

“As a default you should avoid it if at all possible,” Roberge says. “Plan ahead of time and save up your cash through your income.” 

What to do if you have to pull money for a large purchase

Sometimes, you don’t have a choice but to pull money from your investing accounts. If that’s the case, there are moves you can make to minimize the impact. 

Because you’ll have to pay capital gains taxes on any earnings when you sell, first look at the unrealized gain or loss of the investment to get a sense of how much tax you’ll owe.

Gains from investments you’ve held for at least a year (long-term capital gains) are taxed at a 0%, 15% or 20% rate, depending on your income. But those you sell less than a year after buying (short-term capital gains) are taxed as ordinary income, which goes up to 37% for tax years 2023 and 2024. 

“It’s much more strategic to sell things that have a long-term gain than those that have a short-term gain,” Roberge says. 

It may also make sense to sell an investment at a loss and offset taxes on your gains via tax-loss harvesting, he adds. Though it’s best to first speak with a financial advisor or tax expert as this can be a complicated strategy. 

Bottom line

Selling an investment means missing out on the power of compound interest and potential growth of that money, plus a possible tax bill. But if you have to sell, do so strategically. Calculate and plan for the taxes you’ll have to pay on the earnings of that investment, and consider speaking to a financial advisor.