Wallace Associates Financial Private Reserve Strategy Disclosure
Wallace Associates Financial, it’s advisors, or affiliates, do not recommend loans from any outside source for purposes of investing. Wallace Associates Financial is not responsible for any gains or losses associated with or implied from the use of loan proceeds.Wallace Associates Financial strongly recommends that you consider all risks before taking any type of loan, including but not limited to the following risks and factors:
Savings account/money market
Interest is taxed at ordinary income tax rates.
Loans must still be negotiated with the bank with no guarantee or assurance that the loan will be made.
Call provisions normally included in loan covenants.
Accounts are subject to creditor attachment.
Liquidity from loans not assured unless credit line previously negotiated subject to above mentioned provisions.
Certificate of Deposit
Interest is taxed at ordinary income tax rates.
Loans must still be negotiated with the bank with no guarantee or assurance that the loan will be made.
Call provisions normally included in loan covenants.
Accounts are subject to creditor attachment.
Liquidity from loans not assured unless credit line previously negotiated subject to above mentioned provisions.
Underlying principal tied up for a fixed period and penalties may exist for early withdrawal.
401(k)/Qualified Plans
401(k) loans are limited to a maximum of $50,000 or one half of the account balance, whichever is LESS.
Loans must be repaid in less than 5 years or they are considered a distribution. If this occurs and the account holder is less than 59 1/2 years old, a 10% penalty is imposed on top of their ordinary tax rate.
Interest on the loan is paid on an after-tax basis while later distributions are taxable, resulting in potential double taxation on the loan interest.
A job change may trigger a distribution event and require a loan repayment or the additional 10% tax penalty. Layoffs are considered a job change. The loan usually becomes payable in full, within 90 days maximum.
If you lose investment interest, the net effect is that you have less money to invest and to earn interest. The money you borrow — or take out — of your retirement plan no longer appreciates in value from interest, dividends and/or capital gains in conjunction with the rest of your investment portfolio.
It is not tax sheltered money anymore. Whether you repay the loan out of your salary or from a bank account, those payments are all made back into the retirement account with after-tax dollars.
Margin Account on Portfolio
Amount available typically half the value of the stock portfolio.
Amount available can change subject to Federal Regulations.
Decline in underlying stock portfolio could result in a margin call.
Margin calls require cash deposits or stock portfolio sales (possibly in a depressed market).
Margin call sales could trigger capital gains tax on stock sales.
Loan rates usually tied to LIBOR and can fluctuate.
Hedge fund shorting could trigger decline in the underlying security value and cause a margin call.
Real Estate Equity/HELOC
HELOCs must be granted by banks and are conditional on credit worthiness and bank liquidity.
HELOCs may be revoked at any time at the discretion of the bank if no loans are outstanding.
Most HELOCs have call provisions.
Given the fluctuation of house valuations, the amount of equity available for some borrowers could be insufficient for their needs.
HELOCs generally have caps on the amount of available credit.
Permanent Life Insurance
Loans are a contract feature. Contract is unilateral and provisions can only be changed by owner.
Insufficient payments, dividends or Paid Up Additions surrenders to cover base premiums may lead to policy lapse and tax consequences.
Cash value deficit during initial capitalization funding period.
Loan repayments are made at the discretion of policy owner. Frequency and amount of payments are solely at the discretion of the policy owner.