Issue link: https://resources.envestnet.com/i/1527631
Leveraging Both Sides of the Balance Sheet to Help Build Wealth l 8 Tax Savings Case Study The following hypothetical scenario showcases how the use of lending can help an investor avoid a tax consequence of liquidating securities to meet a cash flow need. Scenario A is the conventional option of liquidating assets in a portfolio to meet a cash flow need. In this example, the client is liquidating $750,000 worth of securities with a cost basis of $200,000, representing a sizeable capital gain. With a 20% marginal tax rate, the client can expect a tax bill of $110,000 as a result of the liquidation. Now consider scenario B, where the client utilizes a securities-based loan to fund their $750,000 cash flow need. The 4.15% annualized percentage rate on the loan leads to a one-year loan cost of $31,125, but the client does not incur the significant tax consequences of liquidating securities, and keeps the assets invested, potentially allowing for further market appreciation. Scenario A Scenario B Portfolio $ 5,000,000 $ 5,000,000 Liquidation Request $ 750,000 $ – Cost Basis $ 200,000 Taxes Paid $ 110,000 $ – Remaining Investment $ 4,250,000 $ 5,000,000 Year-One Loan Cost $ – $ 31,125 One-year cost savings (Taxes Deferred Minus Interest Paid) $ 78,875 20% Marginal Tax Rate 4.15% APR Opportunity Cost Case Study Consider the following hypothetical scenario in which a client must choose between liquidating securities and taking out a securities-based loan to meet a cash flow need. We'll assume this is a tax-free withdrawal to draw the focus to opportunity cost. In scenario A, the client sells $750,000 worth of securities, while the rest of the portfolio continues to earn a 6% return. In scenario B, the client uses a securities-based loan to fund the $750,000 need, while the full $5,000,000 continues to appreciate. Despite having to pay interest on the loan, scenario B leads to a net benefit of $28,875 compared to scenario A. Scenario A Scenario B Portfolio $ 5,000,000 $ 5,000,000 Liquidation Request $ 750,000 $ – Remaining Investment $ 4,250,000 $ 5,000,000 Total Portfolio Return $ 255,000 $ 300,000 Year-One Loan Cost $ – $ 31,125 Net Return $ 255,000 $ 268,875 Value Gained Using Credit $ 13,875 6% return 4.15% APR © 2023 Envestnet, Inc.