Borrowing in Retirement

[xraygoggles]

I don't advocate this but I find it as an interesting thought experiment.

100% VTI
IF you need funds borrow against equities with a loan.
See: https://www.businessinsider.com/amer...publica-2021-6

Has anyone in retirement used loans to pay for their expenses?

It would seem to me that low interest rates for loans as well as the potential for inflation to make the loans less in future dollars would be an option.

You don't have to be in retirement to do that.

Once you amass 1-2M, you can put it in a separate account, and use as collateral to borrow from. As long as your LTV is low (you borrow enough to allow a large margin of safety for a SP crash), you will never have to pay back the principal, and only make monthly interest payments, which are tax-deductible.

All the wealthy people do this, as we saw in the recent article. If they can do it, so can you.

[Nysoz]

Except, you just managed to change those income needs from being taxed at a low capital gains tax rates and turned them into high estate tax rates.

As has been pointed out, PLAs and HELOCs can be useful to time arbitrage over shorter time periods to manage marginal capital gains tax rates and the NIIT.

That's true, but then the amount in question will also continue to grow and compound on itself instead of being spent with taxes paid on it.

$10M portfolio taking out 5% a year for expenses or $500k. LTCG on that would be $100k or $400k to spend

$400k LOC at 1% interest would be $4k a year in interest that's potentially tax deductible.

If you left the original $500k in, compounded at 10% over 20 years is $3.36M. Which should cover the margin/LOC interest and any extra tax differences.

I'm sure there's other calculations to do that I may be missing though.

[spiritrider]

Not entirely a nothing burger. While you are right that to pay off the loan, you have to sell assets and realize gains/pay taxes, the caveat to that is you can run out the clock until you die. Say you’re a 70 year old billionaire. Open up a line of credit backed by your assets at 3%. Take out X amount a year to live on, pay only the interest until you die. Then your estate gets to adjust the basis, pay off the debt, and pay no taxes on the gains. Boom. You just dodged up to 30% in taxes (if you live in CA or another high tax state). It is just another way that step up in basis at death can be used to abuse the tax code and probably should be eliminated above a certain carveout.

Except, you just managed to change those income needs from being taxed at a low capital gains tax rates and turned them into high estate tax rates.

As has been pointed out, PLAs and HELOCs can be useful to time arbitrage over shorter time periods to manage marginal capital gains tax rates and the NIIT.

[Hatton]

It is the American way to legally find ways to minimize taxes.

[Nysoz]

Not entirely a nothing burger. While you are right that to pay off the loan, you have to sell assets and realize gains/pay taxes, the caveat to that is you can run out the clock until you die. Say you’re a 70 year old billionaire. Open up a line of credit backed by your assets at 3%. Take out X amount a year to live on, pay only the interest until you die. Then your estate gets to adjust the basis, pay off the debt, and pay no taxes on the gains. Boom. You just dodged up to 30% in taxes (if you live in CA or another high tax state).

It is just another way that step up in basis at death can be used to abuse the tax code and probably should be eliminated above a certain carveout.

You’re right about everything except the line of credit rate. Personally I get just over 1% and I’m just a chubby fish. The sharks and whales get even better rates.

This does happen and makes sense to do as long as your assets and investments are growing more than the interest rate. It’s definitely a form of leveraging and can always blow up in your face as well.

[TheTodd]

No evidence, but if a dumb doc like me could think of it then I’m sure their accountants can as well.

[ENT Doc]

Not entirely a nothing burger. While you are right that to pay off the loan, you have to sell assets and realize gains/pay taxes, the caveat to that is you can run out the clock until you die. Say you’re a 70 year old billionaire. Open up a line of credit backed by your assets at 3%. Take out X amount a year to live on, pay only the interest until you die. Then your estate gets to adjust the basis, pay off the debt, and pay no taxes on the gains. Boom. You just dodged up to 30% in taxes (if you live in CA or another high tax state).

It is just another way that step up in basis at death can be used to abuse the tax code and probably should be eliminated above a certain carveout.

I don’t disagree about the step up in basis needing a hard look. But what evidence exists that what you propose in your example is actually transpiring here? That would be especially true for everyone mentioned except for Soros.

[Tim]

I guess I didn't make my self clear.

If I have an unplanned expense that exceeds budget and emergency funds, my thought was always - I can sell my VTI in taxable account.

Instead, another option would be to borrow against the stock instead of selling - as selling would create a large tax problem in a given year. By borrowing and selling over time you have a small(er) tax problem over many years and perhaps the stock could appreciate at a rate greater than the interest rate.

Yes the interest/tax rate arbitrage can work. The key point is it could appreciate OR it could depreciate. If the amount borrowed is insignificant to the total account, you eliminate the margin call risk (and the tax hit as well).
Additionally you have retirement income (assumed) that can cushion the repayment. The key is not to over leverage the account and having a sufficient Efund. In retirement, that would be the “bond allocation”. Presto, low investment risk and low tax impact. Might want to reduce VTI and add some bonds. This is what bonds are for in a retirement portfolio, unplanned events for liquidity.

[TheTodd]

This story, like the Pro Publica article, is a big nothing burger.

“Since loans aren't considered taxable income, the wealthy need only pay back the principal and interest, rather than the higher taxes that would accompany multimillion-dollar incomes and investments.“

Ok, please describe how they pay back those loans and interest.

The bias in all this is obvious when a “true tax rate” is a wealth tax. Further, when looking at actual income Musk, who they highlight as one of the wealthy scoundrels, paid a 30% effective rate. Gimme a break. Snooze fest.

Not entirely a nothing burger. While you are right that to pay off the loan, you have to sell assets and realize gains/pay taxes, the caveat to that is you can run out the clock until you die. Say you’re a 70 year old billionaire. Open up a line of credit backed by your assets at 3%. Take out X amount a year to live on, pay only the interest until you die. Then your estate gets to adjust the basis, pay off the debt, and pay no taxes on the gains. Boom. You just dodged up to 30% in taxes (if you live in CA or another high tax state).

It is just another way that step up in basis at death can be used to abuse the tax code and probably should be eliminated above a certain carveout.

[Zaphod]

Its called a Pledged Asset Line, almost everywhere has them, I know Schwab does.

Yes, that article is terrible and their definitions terrible and the idea of taxing/refunding non realized gains is one of the dumbest things I've ever heard.

[runfast00]

I guess I didn't make my self clear.

If I have an unplanned expense that exceeds budget and emergency funds, my thought was always - I can sell my VTI in taxable account.

Instead, another option would be to borrow against the stock instead of selling - as selling would create a large tax problem in a given year. By borrowing and selling over time you have a small(er) tax problem over many years and perhaps the stock could appreciate at a rate greater than the interest rate.

[ENT Doc]

This story, like the Pro Publica article, is a big nothing burger.

“Since loans aren't considered taxable income, the wealthy need only pay back the principal and interest, rather than the higher taxes that would accompany multimillion-dollar incomes and investments.“

Ok, please describe how they pay back those loans and interest.

The bias in all this is obvious when a “true tax rate” is a wealth tax. Further, when looking at actual income Musk, who they highlight as one of the wealthy scoundrels, paid a 30% effective rate. Gimme a break. Snooze fest.

[Tim]

Reverse Mortgages have fees on top of relative high interest rates. Not cheap and you still have maintenance, taxes and insurance. LTV will be 80% or less determined by formula (usually 50%_60%)Expensive financing and MIP required for 62 and over and you must live in the home. Keep in mind, an extended stay in a nursing home can make it callable. HELOC is much more efficient than an HECM.

[TheTodd]

Some people already do this to a degree with cash out refinances or reverse mortgages only using home equity rather then stocks as collataral.

For most of us though in retirement, RMDs will negate much of the tax advantage of this strategy. It could be a way to get extra cash while trying to avoid realizing stock gains to give heirs the step up in basis.

[runfast00]

I don't advocate this but I find it as an interesting thought experiment.

100% VTI
IF you need funds borrow against equities with a loan.
See: https://www.businessinsider.com/amer...publica-2021-6

Has anyone in retirement used loans to pay for their expenses?

It would seem to me that low interest rates for loans as well as the potential for inflation to make the loans less in future dollars would be an option.