Looking to make a move prior to selling your home

Many retirees consider the benefits of downsizing their home at some point. According to Zillow, 46% of baby boomers who sold their homes in 2017 were in the process of downsizing.1 But what happens if you find your ideal retirement home—whether that be in a community that requires an entry fee or a smaller, more manageable space in a warmer climate or friendlier tax jurisdiction—before selling your primary residence? To the extent that you have after-tax portfolio assets, a pledged asset line may be a good short-term solution.

What is a pledged asset line?

Similar to a home equity line of credit, a pledged asset line can provide liquidity at a relatively low interest rate.2 Instead of using the home as collateral, however, retirees may use portfolio assets that they have accumulated in after-tax accounts. This would include individual accounts, joint accounts and certain types of trusts. Retirement accounts, such as an IRA, Roth IRA or 401(k), are typically not eligible to be used as collateral for a pledged asset line. Just as with margin loans, pledged asset lines allow investors to leverage their portfolios to provide liquidity while maintaining ownership of investments in the pledged account.3 Unlike margin loans, pledged asset lines cannot be used for the purchase of more securities.4 This typically means that the interest payments are also not tax deductible.

What are some of the potential benefits?

Let’s assume that a retired couple has a portfolio worth $4 million. They have $2 million in pre-tax IRAs and $2 million in a joint account. We can also assume the cost basis of that joint account is $1 million, so there is an unrealized gain of $1 million if they were to liquidate that joint account. Let’s finally assume they have a home worth $1.2 million.

They have identified a continuing care retirement community where they would like to spend the remainder of their retirement years. The entry fee for a spacious two-bedroom unit with a den is $700,000. In this hypothetical situation, these units rarely become available, but one has just opened, and they need to make a decision within 30 days, which is too short of a timeframe to list and sell their home.

If they were to raise the cash in their joint account, they would most likely be looking at capital gains tax of more than $50,000 (assuming a 15% long-term capital gains rate on the sale of assets). It could be higher if their taxable income pushed them into the 20% capital gains rate threshold, if they were subject to additional Medicare surtax on investment income and if capital gains were taxed at the state level. Drawing from the IRAs would not help since IRA distributions are taxed at even higher ordinary income rates.

By using the pledged asset line against the $2 million joint account, they most likely would not need to sell investment assets but rather could use them as collateral for the $700,000 loan. For the time that the loan remains outstanding, it would be subject to monthly interest payments, but the principal from the sale of their primary residence in the future could pay off the line completely. Also, while the loan is outstanding, dividends and interest generated in their portfolio can be used to help offset monthly interest payments.

What are some of the potential downsides?

While pledged asset lines can provide a lot of convenience for tax planning, in our experience they usually don’t work well for retirees with only pre-tax retirement accounts. Additionally, the bank providing the pledged asset line will typically need to approve any withdrawals or transfers from the account, which may create some inconvenience for cash flow planning. Furthermore, as with margin loans, a pledged asset line may be subject to a margin call if the investments decline in value.

Do you have an opportunity on a retirement home that may require immediate liquidity? Do you have concerns about the tax impact of raising cash or the timing of the sale of your existing home? If so, a pledged asset line may be a viable solution. Please contact your CI Wealth Advisor to discuss this further.


1 Ready to downsize? These are the biggest things to keep in mind (pressconnects.com)
2 How to Use a Pledged Asset to Reduce a Mortgage Down Payment (investopedia.com)
3 How to Use a Pledged Asset to Reduce a Mortgage Down Payment (investopedia.com)
4 3 Ways to Borrow Against Your Assets | Charles Schwab


James Ciprich, CFP®, MBA

James Ciprich, CFP®, MBA

Partner, Wealth Advisor

Jim joined RegentAtlantic in 2007 and has served as chair of the Financial Planning Committee. Serving a broad range of clients, he has a particular focus on retirees considering care and housing options. Jim founded and co-chairs RegentAtlantic’s “Senior Solutions” practice specialty. He is often asked to speak at retirement communities, client events, and is frequently quoted in the media. Jim also serves on an advisory council to the MIT AgeLab. He holds the CERTIFIED FINANCIAL PLANNER™ designation and he has an MBA and a BA in Economics from Rutgers University. He served as an Adjunct Professor at Fairleigh Dickinson University in the CFP® program. Jim is a past president of his local estate planning council, and he has also served as a trustee for Morristown United Methodist Church. In recent summers, he has volunteered with Appalachia Service Project. In a prior career, Jim worked in the music industry where he was awarded multiple RIAA certified gold and platinum albums.


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