1. Create Liquidity From Your Investments.
Individual investment accounts, or brokerage accounts, are great vehicles to use on your journey to building wealth. Unlike qualified retirement accounts, like 401(k)s or IRAs, brokerage accounts don’t come with stipulations or rules about how or when you can access your assets. In theory, that money is yours anytime for any reason (although, in practice, you probably don’t want to dip in and out of the account and therefore unnecessarily interrupt the compounding process of that money in the market).
The cost of that freedom and flexibility? Taxes. Brokerage accounts receive no special tax treatments like qualified retirement accounts. You contribute after-tax money, and if and when you need to liquidate assets from the account, any gains will be subject to short- or long-term capital gains taxes.
Unless you consider this strategy: Instead of liquidating assets in your brokerage account, which can trigger a taxable event, use your assets as collateral to get a line of credit.
Depending on the bank or custodian you use, you can use cash in a bank account or assets in a brokerage account as collateral against a line of credit. If you needed cash quickly, you could then use the line of credit rather than selling out of positions within your investment portfolio to generate that cash and potentially rack up a bigger tax bill. This also provides you with the benefit of allowing your invested assets to stay invested (opens in new tab) while you use the cash from the line of credit for other purposes.
Of course, this isn’t just free money. The line of credit will come with an interest rate, which can be variable or fixed, and you need to repay whatever you borrow against it plus that interest. This is why, when we discuss this strategy with our financial planning clients, we frame it as a “just in case” option or a safety net.
The line of credit is there if you need it… but that doesn’t necessarily mean it’s a good idea to rely on it or to plan to use it heavily. If you’re trying to pay for a known purchase or goal, it’s better to plan ahead and use other means (like saving up for it in cash over a period of time) to finance the purchase rather than increasing your costs via interest payments.
The ability to do this will depend on your financial institution, your account balances and your credit history. Not all custodians will offer this to retail investors, either; you may need to go through an institutional custodian (which might mean working with a financial adviser to do so).
