Life changes from year to year, and at times, in significant ways. It’s the more significant changes—marriage, buying a vacation home, expanding your business, a career change, an untimely death—which can cause large shifts in financial priorities. When these events occur—or better yet before they occur—it is an appropriate time to re-evaluate your goals and the financial plan you put in place to help you achieve them.
When used appropriately, strategic borrowing can help you enhance your overall wealth plan. Below are examples when borrowing may be needed, and some solutions that may be beneficial.
1. Optimize Cash Flows and Income
Consider using credit, which may help to optimize cash flows and income, and provide greater efficiency, flexibility, and convenience to help you stay on track with your planning objectives. If you have limited access to available cash and emergency funds, leveraging credit card debt to meet short-term unexpected expenses may help. Using credit wisely may assist in plugging cash flow gaps, meeting financial commitments without depleting cash reserves, achieving life and family goals, and maintaining liquidity for unforeseen events.
2. Maximize Tax Efficiencies
Leveraging strategic credit may help maximize tax efficiencies while preserving and growing your wealth. If you are purchasing a home, planning home improvements, or seeking more efficient wealth transfer, credit may help provide tax deductibility, minimize tax implications by avoiding portfolio disruptions or other capital gains events, and may contribute to increasing efficiency in asset allocation/ diversification and estate financial planning.
Example: Consider maximizing the tax efficiency of a past or future home purchase with a tax-aware borrowing strategy. You may be able to pay for an investment property in cash or leverage an unencumbered property you may already own and then undertake a cash out refinance with the proceeds used for purchasing additional investment property. In this way, interest on the loan is classified as investment interest—which is uncapped and may be deducted fully against your investment income. By contrast, the standard mortgage interest deduction is limited to interest on no more than $750,000 of acquisition debt*.
3. Finance Purchases of Assets
Borrowing may be an appropriate financial strategy when considering a purchase of assets to avoid the depletion of cash reserves and/or portfolio disruptions. If you are planning a major purchase and the return on a purchased asset is greater than the cost of borrowing, or you have limited liquid assets/cash reserves in hand, then borrowing may provide a low-cost option for asset purchases. This strategy may help to minimize disruption of investment goals, realize purchase plans without capital gains implications, and prevent purchases from depleting cash reserves.
Example: A securities-based loan allows you to borrow against the value of eligible securities held in a non-retirement account. Interest on this loan accrues monthly and the principal can be repaid at any time. The loan may be used to gain access to funds for a variety of reasons that cover both investment and non-investment needs. The use of securities-backed lending may provide quick access to cash, which may contribute to it being a good source of bridge financing to facilitate the purchase of big-ticket items before securing permanent financing. By leveraging the securities you own, you may have all the advantages of cash acquisitions—more favorable pricing and terms—while helping to allow you to remain fully invested without sacrificing potential portfolio appreciation.
4. Manage Investment Allocation
The prudent use of leverage to seek asset growth and/ or diversification may allow you to generate higher returns and lower portfolio risk. If you lack appropriate portfolio diversification and/or allocation to meet goals, are pursuing asset purchases with limited liquidity, are seeking to minimize capital gains and tax implications from investment sales, then use of credit may help to avoid the sales of assets which could trigger large capital gain taxes, reduce your portfolio risk through diversification, take advantage of timeline investment opportunities, invest in additional asset classes, or better align a portfolio with your investment goals.
Example: If your portfolio holds shares of one stock (or other security type) that represents a large portion of the overall portfolio, your wealth becomes concentrated in one position. With a margin account you may be able to use the concentrated position as collateral for a securities-based loan. This loan may be used to diversify your portfolio without having to sell your original shares of stock. A “margin account” is a type of brokerage account in which the broker-dealer lends the investor cash, using the account as collateral to purchase securities. Margin increases investors’ purchasing power, but also exposes the investor to the potential for larger losses. This strategy may help avoid potential capital gains on the sale of the concentrated position and the margin interest expense may be deducted against net investment income in certain circumstances. The IRS allows certain taxpayers to take a tax deduction for the interest expense on some loans using Form 4952.
Working with your Janney Financial Advisor, you have access to a full platform of lending and credit solutions which include margin, securities-based lending, residential mortgages, unsecured lines of credit, and credit cards.
Working With Janney
Depending on your financial needs and personal preferences, you may opt to engage in a brokerage relationship, an advisory relationship or a combination of both. Each time you open an account, we will make recommendations on which type of relationship is in your best interest based on the information you provide when you complete or update your client profile.
When you engage in an advisory relationship, you will pay an asset-based fee which encompasses, among other things, a defined investment strategy, ongoing monitoring, and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory accounts.
For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.
By establishing a relationship with us, we can build a tailored financial plan and make recommendations about solutions that are aligned with your best interest and unique needs, goals, and preferences.
Contact us today to discuss how we can put a plan in place designed to help you reach your financial goals.
*IRS Publication 936 (2021) Home Mortgage Interest Deduction
When you purchase qualified securities, you may pay for the securities in full or you may borrow part of the purchase price from Janney. If you choose to borrow funds, you must open a margin account with Janney. Before trading securities in a margin account, you should carefully review the margin agreement provided by Janney. Consult your Financial Advisor or contact Janney regarding any questions or concerns you may have about margin accounts. The securities purchased, as well as other securities in your margin account, are Janney’s collateral for the loan to you. If the securities in your account decline in value, so does the value of the collateral supporting your loan, and, as a result, Janney can take action, such as issue a margin call and/or sell securities or other assets in any of your accounts held at Janney in order to maintain the required equity in the account.
While investors who use margin may increase the profit potential of investing, there are significant risks to margin borrowing which should be understood before embarking on a margin strategy. Your Janney Financial Advisor can provide you with further information and help guide you in making good investment decisions. For more information on margin borrowing, please visit www.janney.com/margin.
Examples provided are hypothetical and do not take into account any specific situations. Hypothetical examples are provided to help illustrate the concepts discussed throughout and do not consider the effect of fees, expenses, or other costs that will effect investing outcomes. Janney Montgomery Scott LLC does not provide legal tax or accounting advice and the information contained herein should not be construed as such.
The proceeds from a mortgage/home equity line of credit or non-purpose securities based loan may not be used to purchase, trade or carry margin stock or securities or repay margin debt.
Janney Montgomery Scott LLC is a registered Broker/Dealer, Member SIPC, and not a bank. Where appropriate, Janney Montgomery Scott has entered into arrangements with banks and other third parties to assist in offering certain banking related products and services.
Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
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