Other Borrowing Approaches
Borrowing from Your Brokerage Account
If you have a brokerage account, you may be eligible for a loan. Many firms make it easy for you to borrow money against the value of the investments you have on account with them. These loans are typically called margin loans. The investments in your account are used as collateral for the loan. You may use the money that you borrow for any purpose, although most investors borrow on margin to purchase securities, i.e., stocks, bonds, etc. So how does a margin loan work?
- Investors are usually permitted to borrow up to 50% of the current market value of their investments (this may be less depending on the volatility of the stock involved and various other factors).
- Interest rates are typically competitive.
- There is usually no fixed repayment schedule, but you may have to put up additional collateral (stocks, bonds, etc.) if the market value of your investments in the account declines.
- Some firms may require that you make up the difference in cash if the market value of your investments used for collateral declines.
Is the Interest Tax-Deductible?
If you take the cash you receive from a margin loan and don't use it to purchase other investments, the interest is not deductible. On the other hand, if you use the money to buy investments, the interest is fully deductible to the extent it does not exceed net investment income. Here is a formula to help you calculate net investment income.
Ordinary dividends + Interest income + Annuities + Royalties − Investment expenses = Net investment income
IMPORTANT NOTE: Qualified dividends and net capital gains are not included in net investment income. But you can make an election on your tax return to include part or all of these amounts in investment income. If you do, these amounts are not eligible to be taxed at the qualified dividends or capital gains tax rates. Contact your tax professional for details.
IMPORTANT NOTE: If you use the money to buy tax-exempt securities, the interest will not be deductible. The theory is that if you don't have to pay income tax on the interest income, you should not be entitled to a deduction for the interest expense.
Share Article:
Securities and advisory services are offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. Franklin Mint Federal Credit Union and Mint Wealth Advisors are not registered as a broker-dealer or investment advisor. Registered representatives of LPL offer products and services using Mint Wealth Advisors, and may also be employees of Franklin Mint Federal Credit Union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, Franklin Mint Federal Credit Union or Mint Wealth Advisors. Securities and insurance offered through LPL or its affiliates are:
| Not Insured by NCUA or Any Other Government Agency | Not Credit Union Guaranteed | Not Credit Union Deposits or Obligations | May Lose Value |
*The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: NJ, PA, NY, DE, AZ, MI, FL, MD, TX, VA, GA, NC.
Financial Learning Center content created by TrueBridge, Inc. The information provided is based upon sources and data believed to be accurate and reliable. The content contained herein is intended for information and illustrative purposes only, should not in any way be construed as a personal recommendation, and should be used in conjunction with individual professional advice.
FAQs
What it is: Just as a bank can allow you to borrow against the equity in your home, your brokerage firm can lend you money against the value of eligible stocks, bonds, exchange-traded funds, and mutual funds in your portfolio.
Can I borrow money from my broker? ›
If you have a brokerage account, you may be eligible for a loan. Many firms make it easy for you to borrow money against the value of the investments you have on account with them. These loans are typically called margin loans. The investments in your account are used as collateral for the loan.
Can I withdraw money from my brokerage account? ›
Many investors open a brokerage account to start saving for retirement. However, the flexibility of this type of account means you can withdraw at any time and use the funds for shorter-term goals, too, such as a new house, wedding, or big remodeling project.
Can I spend money from my brokerage account? ›
Yes, you can pull money out of a brokerage account with a bank account transfer, a wire transfer, or by requesting a check. You can only withdraw cash, so if you want to withdraw more than your cash balance, you'll need to sell investments first.
How much money can you borrow from a broker? ›
Brokerage customers who sign a margin agreement can generally borrow up to 50% of the purchase price of new marginable investments (the exact amount varies depending on the investment).
How to borrow against assets to avoid capital gains? ›
How does borrowing against assets help avoid capital gains tax? Borrowing against assets helps avoid capital gains tax because, by receiving loan proceeds without selling the assets, you're not realizing any capital gains. This strategy is often used through options like HELOC or SBLOC.
Can you withdraw money from a broker? ›
Stockbrokers may offer different withdrawal options like bank transfers or withdrawals to certain electronic wallets. The option to transfer the money to your bank account is the most fundamental method, but you can go through the other options available and choose your preferred method.
Is it easier to get a loan through a broker? ›
They Can Make the Application Process Faster – given that mortgage brokers have good relationships with the lenders they work for, they can actually speed up your application, making it two to three days faster than usual.
Do brokers give out loans? ›
Mortgage brokers don't advance loans but do provide a one-stop shop with access to multiple lenders, while a direct lender is a single entity that cuts out the middleman.
Why should no one use brokerage accounts? ›
Brokerages tend to offer lower annual percentage yields (APYs) on savings, money market and interest checking accounts than the best online banks. Brokerages typically don't have cash-handling employees in brick-and-mortar locations. Brokerage accounts don't offer all the services that a traditional bank offers.
With brokerage accounts there are no contribution limits (as you would have with IRAs), and there are no withdrawal penalties either. But brokerage accounts are taxable, unlike IRAs which are either tax-deferred or tax-free and have rules around contribution and withdrawals.
Do I have to pay taxes on money I take out of a brokerage account? ›
You'll pay taxes on brokerage account income in the tax year you earn it. What matters for taxable brokerage accounts is when the money is earned or gains are realized, not when it is withdrawn and enjoyed.
What can I do with cash sitting in my brokerage account? ›
Options for Managing Your Cash
Typical options for your uninvested cash include leaving it in your brokerage account, “sweeping” (automatically transferring) it to a bank deposit account as part of a bank sweep program, or sweeping it to a money market mutual fund as part of a money market sweep program.
Do you have access to your money in a brokerage account? ›
Generally, if you take out money from retirement accounts before you reach a certain age or before you've had the account for a certain amount of time, you will be dinged with early withdrawal fees. With a brokerage account, any money you contribute or earn is yours to withdraw at any time.
How much money can you safely keep in a brokerage account? ›
Holding cash here is appropriate if you plan to spend the money within a few days or would like to quickly place a trade. Assets in your brokerage account are protected up to $500,000 per investor, including a maximum of $250,000 in cash by SIPC in the event a SIPC-member brokerage fails.
Can I use a broker for a personal loan? ›
If you're looking specifically for a personal loan, you may find a specialist personal loan broker can offer you better solutions than a finance broker with a general focus. It is also possible to find personal loan brokers that specialise in specific loan purposes, like car finance and debt consolidation brokers.
How do you borrow stock from a brokerage? ›
In some cases, all you have to do is enter a short order with your brokerage. If available they will lend you the shares and automatically sell them at the current market price. Note that in order to borrow and short stocks, you must have a margin trading account with your broker.
