A financial advisor in Boca Raton can help you decide where money should come from before a large purchase or other financial decision. Holland Capital looks at the tax cost, borrowing cost, investments, and retirement plan together before deciding what to sell, what to borrow, and what to leave alone.
You can write the check. The harder question is whether you should.
The closing is six weeks away. The seller wants cash, or close to it. The money exists, but much of it is sitting in a brokerage account invested in stocks and funds that have grown a long way from what you paid.
Selling raises the cash and creates a tax bill. Borrowing leaves the investments alone but adds interest and another risk if markets fall. A mortgage may preserve the portfolio, but now the house comes with a payment. Using some of each changes all three.
The bank can tell you what it will lend. Your brokerage firm can tell you what you can sell. Neither answer tells you which choice leaves the rest of your finances in the better position.
It may not be a house. It may be a second home, a boat, help for one of your children, or a year away from work. The same question comes up whenever the money is there but getting to it has consequences.
And if you are still earning well, the problem does not stop after the purchase. The 401(k) gets funded. More money goes into the taxable account. Dividends, interest, and distributions keep showing up on the tax return. Eventually the question is not simply how much you have accumulated. It is how all of it should work together.
When You Need a Large Amount of Cash
Selling investments is the direct path. The cost is tax on the gain. Long-term gains are taxed federally at 0, 15, or 20 percent, and at higher incomes a 3.8 percent net investment income tax can apply on top. Which shares you sell changes the bill. Selling the lots with the highest cost first can raise the same cash with a much smaller gain. That choice is part of capital gains tax planning.
Borrowing against the portfolio takes a different path. A securities-based line of credit is usually quick to open and carries a variable rate. The investments stay in place, but they are now collateral. If the portfolio falls far enough, the lender can ask for more collateral or sell holdings to cover the loan, on a date you did not choose. The money generally cannot be used to buy more securities.
A conventional mortgage gives you another choice. It takes longer to arrange, the rate can be fixed, and interest on a mortgage for your main home may be deductible within federal limits.
The median owner-occupied home in Boca Raton is valued at about $723,000, according to Census Bureau QuickFacts. But the decision is not really about the price of the house. It is about what has to happen elsewhere on your balance sheet to pay for it.
Often, the answer is not all cash or all debt. You might borrow for a year while appreciated shares are sold across two tax years. You might sell positions with little gain now and keep the ones with a much larger embedded tax bill. Cash that was already sitting idle can be used first. Highly appreciated shares that may eventually pass to your heirs at a stepped-up cost basis may be left alone.
We put those choices next to each other: the tax this year, the interest cost, what remains invested afterward, and what happens if markets fall while a loan is outstanding. A bank or your custodian provides any loan. Our job is to determine how the financing decision fits the rest of the plan.
Our advisory fee is based on the assets we manage. Selling managed investments reduces that fee. Borrowing against them while they remain managed does not.
Still Earning, and the Taxable Account Keeps Growing
You funded the 401(k). You may have done that for years. The problem is that your savings did not stop when the contribution limit did.
The rest went into the brokerage account. As the account grew, so did the amount showing up on the 1099 every February. Dividends. Interest. Fund distributions. Some of that tax is the price of making money. Some of it comes from how the account is built.
A fund that distributes capital gains every year can create tax you did not decide to pay. Bond interest is taxed at ordinary rates, while qualified dividends and long-term gains are taxed at lower ones. Municipal bond interest is generally free of federal income tax, and at a high bracket it can leave you with more than a taxable bond paying a higher rate.
The investments you choose matter, but so does where you own them. Putting each investment in the right kind of account, choosing funds that distribute less, harvesting losses to offset gains, and giving appreciated shares to charity instead of cash can each lower the bill. One part of that work is asset location.
The taxable account eventually gives you something else: options.
Money there can be spent at any age. It can cover the years between your last paycheck and the age when IRA and 401(k) money comes out without a penalty. That can change when work becomes optional, how much taxable income you recognize in the first years of retirement, and which account supplies the next dollar. We test those years as part of retirement planning.
The goal is not to make every investment decision about taxes. It is to stop paying taxes that did not need to be created in the first place.
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Build the Portfolio Around What the Money Has to Do
Money for a purchase next year does not belong in the same investments as money you may not touch for twenty years. Before deciding what to own, we decide what the money has to do and when it has to be available.
A loan against the portfolio changes that calculation. The account is no longer only an investment account. It is collateral. A sharp decline can force a sale at exactly the wrong time, so the amount borrowed and the risk behind it have to be considered together. That is part of investment risk management.
The investments already there matter too. Stock bought years ago may carry a large gain. One position may have become a much larger part of the portfolio than you intended. Some holdings may be better candidates to sell. Others may be better kept, borrowed against, given to charity, or reduced gradually over several years.
Those decisions come before rebuilding the portfolio.
Day to day, investment management carries out the plan: what stays, what changes, where new money goes, and what needs to be adjusted when a purchase, retirement date, or tax situation changes.
Working with Holland Capital
Holland Capital Management is an independent registered investment adviser and a fiduciary. M. Chad Holland, CFA, CFP® works directly with clients and is responsible for the planning and advice.
The first meeting usually starts with whatever decision is sitting in front of you. You are buying something. You are considering leaving work. The tax bill is getting harder to ignore. You have accumulated enough that one decision now affects three others.
We work outward from there. If raising cash means selling investments, we look at the tax return before deciding what to sell. If borrowing changes the risk in the portfolio, we account for it before deciding how the investments should be built. If a decision belongs with your CPA or attorney, we plan it with them.
The first conversation is free. If there is work worth doing after that, we will define the scope and cost before you decide whether to move forward.
Our Florida office is in Winter Park. If you are looking for a financial advisor in Boca Raton, we can work together without your adviser being down the street. Most meetings are by video or phone. When it makes sense to sit down together, we can meet by appointment at the Regus center at 433 Plaza Real in Mizner Park. Holland Capital does not maintain a branch office in Boca Raton.
We work with clients throughout Florida. You can see the other Florida communities we serve here.
See what we do for how engagements are structured.
RETIREMENT ENGINEERING™
The Order Matters
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Frequently Asked Questions
Should I Pay Cash for a House If I Can Afford To?
Sometimes. Paying cash avoids interest and makes an offer simpler. It also moves money out of investments and into a house, where it is harder to reach later.
If the cash has to come from appreciated investments, include the tax on the sale when you compare the choices. A mortgage may cost interest but avoid realizing a large gain all at once. Some lenders will also arrange a mortgage within a few months after a cash purchase, which lets you buy quickly and rebuild your investments afterward.
What Happens to a Securities-Based Loan If the Market Falls?
The lender sets a maximum loan amount based on the value of the pledged investments. If their value falls enough that the loan exceeds that limit, you have to add collateral or pay down the loan, often within days. If you do not, the lender can sell investments, and any gains on those sales are taxable to you.
Borrowing well below the maximum leaves more room for a bad market. So does keeping the pledged account diversified.
How Do I Compare Municipal Bonds with Taxable Bonds?
Divide the municipal bond’s yield by one minus your federal tax rate. A 3 percent municipal yield in a 35 percent bracket is roughly equal to a 4.6 percent taxable yield.
Florida has no state income tax, so owning Florida municipal bonds adds no state tax benefit. Municipal bonds also belong in taxable accounts. Inside an IRA, their tax advantage is wasted.
When Can a Taxable Account Help Me Retire Earlier?
Money in a taxable brokerage account can be spent at any age. That makes it available for the years after your last paycheck but before you want to take money from retirement accounts.
Whether it actually lets you retire earlier depends on how much the account can provide, the taxes created when investments are sold, your other income, and what the rest of the portfolio must support. Those years should be modeled before you pick the retirement date.
Is Every Financial Advisor in Boca Raton a Fiduciary?
No. “Financial advisor” is not a legally protected title, so it tells you little about the standard behind the advice.
A registered investment adviser owes a fiduciary duty to its advisory clients across the relationship. A broker recommending an investment must act in your best interest at the time of that recommendation under Regulation Best Interest. Some professionals work under both, depending on the account. Ask anyone you are considering whether they act as a fiduciary for all of the advice they give you, and ask for the answer in writing.
Are You a Fee-Only Financial Advisor in Boca Raton?
We offer financial planning on a fixed-fee basis, subject to the scope of the engagement. Investment management is offered on a fee basis, generally calculated as a percentage of the assets we manage. When providing financial planning and investment advisory services, we act as a fiduciary.
Photo: Infrogmation of New Orleans / Wikimedia Commons / CC BY 3.0, cropped.
