Should You Use These Money-Saving Tricks of Jeff Bezos and Other Billionaires To Fund Your Next Big Purchase?
You might think that billionaires like Jeff Bezos, among others, have all the cash in the world to purchase whatever they desire: yachts, expensive watches and luxurious homes. But often, the world’s wealthiest elite are frequently tied up in stocks. Selling those stocks leads to capital gains tax, reducing their net worth.
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There’s a way around it, though. And an increasing number of brokerage firms and life insurance providers are making this tax-saving tactic available to average investors. However, it’s important to understand the risks involved.
Borrow Against Your Investment Portfolio
For years, people have borrowed against their 401(k) retirement fund for major purchases or to pay off high-interest debt. That’s better than paying the taxes and penalties for an early withdrawal, but it’s not ideal. The benefit is that you pay the money back to yourself over time with interest.
The drawbacks, however, are that you’re missing out on tax-deferred compound interest that could bring you closer to your retirement goals, according to an article on the Merrill Lynch website. Further, if you leave your job or get laid off, you might have to pay the loan back immediately — and the amount you owe, according to Merrill Lynch, now counts as an early distribution, which could mean additional income taxes owed.
If you have stocks or other investments, however, you have expanded choices. For instance, financial services company E-Trade offers a line of credit that allows you to borrow against eligible brokerage accounts with $50,000 or more in combined collateral value. You don’t need millions of dollars in Amazon stock to take advantage of this tactic.
“What this is getting at is just the concept of leverage,” explained Matt Watson, founder of Origin Financial. “You can borrow against your investment portfolio. You can borrow against a home loan or car loan.”
However, he warned, this tactic is not for everyone. If the asset you borrowed against depreciates — or you need to sell the asset quickly before you pay off the loan — you could be underwater. It’s also a problem, Watson said, for people who borrow against assets to purchase riskier investments.
“TikTok influencers are saying to take money out of an investment and make another investment in stocks or speculative assets. What that is doing, ultimately, is just increasing risk,” he previously told GOBankingRates. “Risk should be considered in the context of a total financial plan.”
Learn More: 401(k) Growth Potential: Ways to Double Your Savings in 10 Years
Is Borrowing an Option?
However, if you’re taking out a low-interest loan against your assets to keep money in the bank or in stocks, with little risk — and you know your investment value isn’t likely to drop — you could increase your returns and avoid capital gains taxes.
It’s always smart to consult with a financial planner before leveraging or selling assets, especially if you are approaching retirement age and want to invest conservatively.
Borrow Against Your Life Insurance
Likewise, you can borrow against a life insurance policy, leaving your other investments untouched for the future.
But there are a few caveats, according to finance experts.
Jennifer Burnham-Grubbs — founder/CEO of Quantum Insurance Services and co-founder of Womxn of Wealth (WOW) — said choosing the right policy is key. She advised avoiding variable life insurance policies, since they are risky. She also recommended avoiding whole life policies, since the interest rates can be high and they are difficult to leverage.
“It’s usually better to use an indexed universal life policy with competitive loan rates if one plans on borrowing money from one’s cash value,” Burnham-Grubbs said.
Additionally, she advised: “It’s ultra important to use an experienced, ethical insurance broker — not an agent, who is tied to one single carrier — but a broker who works with all the ‘A’ rated carriers and can shop the entire market to get clients the best possible rates.”
As with borrowing against a home, you want to make sure you’ve accumulated enough equity in the investment first. “You shouldn’t really start to take loans until at least year five of a policy, so the cash inside the policy has enough time to accumulate,” Burnham-Grubbs said.
Consult With a Financial Expert
Borrowing against assets or life insurance to keep cash in the bank or earn money could be a risky move, especially if you can’t repay the loan. Plus, it’s important to consult with a financial advisor to help you choose the right products for these kinds of money moves.
“There are many, many other nuances to using a cash value life insurance policy properly,” Burnham-Grubbs said. It’s important to lean on financial professionals who understand your specific situation and offer targeted guidance if you feel this could be a strategy that will enhance your financial well-being now and in the future.
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This article originally appeared on GOBankingRates.com: Should You Use These Money-Saving Tricks of Jeff Bezos and Other Billionaires To Fund Your Next Big Purchase?
