Portfolio loans can be a way to put debt in your favor


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Debt often seems like a bad thing. Still, there may be ways for you to use it to your advantage.

If you need money for, say, a one-time expense and have a brokerage account, you may have access to a portfolio loan or line of credit, which uses a portion of your investments as guarantee. While this way of borrowing money comes with risks, it can also result in tax savings and other financial benefits, depending on the specifics of your situation.

These title-based lines of credit are called differently by the banks that offer them, but they generally all work the same: once you’re approved, you can quickly get the cash and use it for a variety of reasons. (except to buy more securities, which differentiates it from a so-called margin account or a margin loan).

Here’s what you need to know.

The risks

The amount you can borrow depends on the financial institution making the line of credit available, although it can be up to 70% of the value of the assets you pledge.

“I tell my clients, ‘yes, you can borrow 70%, but I wouldn’t get close to that,’ said certified financial planner Blair duQuesnay, New Orleans-based investment advisor at Ritholtz Wealth Management.

The amount a bank will lend can also depend on how risky your investments are, she said. The more secure they are, the more you can borrow. For example, if you use bonds as collateral, you may be able to get more than if you pledge risky stocks.

The most immediate risk is that the value of your investments will fall, in which case you may be required to replenish the account containing the collateral. There may also be cases where the lender may sell your account assets (i.e. you don’t start paying off the loan within a certain period of time or you don’t pay more assets when this is necessary).

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“There is a risk whenever you plan to borrow more than what you could cover,” duQuesnay said.

Some banks offer these lines of credit even if you hold the assets at another financial institution. And, the rate of interest tends to be more favorable than other means of borrowing. The bigger the loan, the better the rate, duQuesnay said.

“This is where it really benefits the rich,” she said.

For example, it might be possible to get a $ 3 million loan with a rate below 2% right now, she said. In comparison, credit cards have an average rate of around 19%, according to LendingTree. For personal loans, interest rates typically range from around 9% to over 22%, depending on your credit score.

There is a risk whenever you plan to borrow more than you could cover.

Blair du Quesnay

Investment Advisor at Ritholtz Wealth Management

Be aware, however, that despite the low rates on the Portfolio Lines of Credit, they are variable and not fixed, which means the rate you pay may go up or down.

“Rates are extremely low right now, but you shouldn’t expect them to stay that low,” said CFP David Mendels, director of planning at Creative Financial Concepts in New York. “This is okay with short term borrowing, but beware of relying on it for anything longer term.”


If you should have offloaded investments to generate the cash you need, a portfolio line of credit avoids selling assets that could have continued to rise in value. And as long as the interest rate you pay on the borrowed money is less than what your wallet earns, the math works in your favor.

“If you borrow at 2% and expect your assets to return 6%, you are maximizing your net worth by keeping your money invested and borrowing against it,” duQuesnay said.

Additionally, if you sold your investments, you would face capital gains taxes if the assets were worth more than when you bought them. Short-term gains (for investments held one year or less) are taxed as ordinary income and long-term gains (anything held beyond one year) are taxed at 0%, 15% or 20%, depending on your overall income.

On the other hand, your portfolio loan is not taxable (nor declared on your income tax return).

So not only do you potentially avoid paying capital gains taxes, but you also avoid pushing your income into a higher tax bracket. This, in turn, could avoid other implications of higher income.

For example, a net investment tax of 3.8% applies to individuals whose modified adjusted gross income is at least $ 200,000. For married couples who file a joint tax return, tax applies to income of $ 250,000 or more.

Or, if you are affiliated with Medicare, higher income may translate into higher payment of your insurance premiums, both for Part B (outpatient coverage) and Part D (prescription drug coverage) . The surtaxes apply to adjusted gross income over $ 88,000 for individuals and $ 176,000 for married couples filing a joint return.

In addition, making your investments grow also comes with tax benefits for your heirs.

Typically, you pay capital gains taxes on the difference between its “base price” (its value when you bought the asset) and the price at which you sell it.

However, inherited assets are assigned a “rolling basis” – the value on death of the owner. In other words, gains made during the deceased person’s lifetime are generally not taxed for these investments. When the heir sells the asset, all gains (and subsequent taxes) would be based on that updated value.

“This is something very wealthy families are doing with large individual positions in equities,” duQuesnay said. “They use dividends to pay interest on [portfolio loan], and then when the first generation dies, there is the base increase. “


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