Why Turn On “Margin” in Your Taxable Investment Account


I can hear the horror stories now, just spare me please! Let’s look at the facts first regarding a margin account. 

Most investors don’t understand the power and flexibility of having your taxable investment account classified as a “margin account”. There is NO downside to doing this other than taking foolish risks. A Margin Account is like attaching a line of credit to your brokerage account, or a Home Equity Line of Credit to your house. If you don’t take the money there is no interest expense. However, if you ever need it it is there immediately. In addition, this type of loan does not show up on any credit report.

Here are some of the benefits to converting your account into a margin account:
1. Leverage. You can use your existing securities to help you buy more securities. It can increase the size and value of your portfolio, especially during up markets. Let’s say that you are pretty comfortable that the S&P will go up 10% in the next 6 months. You can use money in your margin account to buy the S&P  index. Your gains will exceed your interest expense and you will profit on borrowed money. If you are a day trader, you must have a margin account to be able to get in and out of large positions. For example, when I was day trading, I had a relativity small professional account, about $100,000. However, I had purchasing ability intra-day of 4 x (Tradestation), allowing me to make multiple buy-sell trades up to $400,000 each. 
2. A Quick Convenient Loan. What if you had say $500,000 in your brokerage account and you needed an immediate $100,000 to cover an emergency. You need it tomorrow, you can wait for a loan, how would you come up with these emergency funds. Just tap your margin account, on-line transfer $100,000 from your brokerage account to your checking account at your bank and you have it! You did not have to sell any securities to do it. There is NO preset payment plan required. Your account must just continue to meet your margin requirements. By the way, the interest charged on your margin account is FAR less than interest on any credit card. Many times it is equivalent to a Home Equity Line of Credit (HELC) interest rate. 
3. Tax Deductible Interest. Interest on margin loans may be tax deductible. Consult your tax advisor for details regarding your particular situation. 
4. Short-Selling and Options. Having both a margin and an options agreement allows you to place advanced options orders such as spreads, butterflies, and uncovered options on equities, ETFs, and indexes. In addition most brokerage houses require a margin account to allow you to “short” a stock (betting that it will go down, not up). When you short a stock, you are actually behind the scenes “borrowing” it from your broker.

How easy is it to have your current account at say Fidelity, Charles Schwab, etc converted to a “margin account”. Years ago I just called my Fidelity rep, told him I wanted to convert my account and by the following morning all of the securities in my account were shown as “margin”. From that point on I invest (buy or sell) in my margin account. There is NO fee or extra effort required. In my case right now I don’t use any “margin”, but I could and I could access a large sum of cash for any emergency.

I would be remiss in not acknowledging the “risk” of a margin account. The risk is identical to a credit card risk when you charge more than you can afford and get stuck with high interest expenses. If you are irresponsible with credit, maybe a margin account is not for you.

Does a Million Dollars Make You Rich Anymore?

Millionaire 3

I remember being worth a millions dollars at the age of 37. I had a 6 nice figure income, was an officer in company that had just gone public and made INC magazine top 100. My 144 stock (restricted shares) were tracking the common shares and I was going to be rich, rich, rich! Sort of glad I never “spent” any of that, a year later in a dispute with the founder I resigned and in 6 months they filed for bankruptcy. The stock was worth nothing, had I had to start over again. I did have better experiences at other businesses where my employee stock purchase, ESOP plans and the sale of a business produced much better results.

So, the question is, does having a million dollars make you rich today? In 2016 there were 9.4 million individuals with a net worth between $1 million and $5 million. There were 1.3 million people worth between $5 – $25 million. Net worth is assets less liabilities. It’s possible that a $1 million net worth is now in the upper middle class. By the way, a million dollars in 1984 would be worth at least $2.3 million in 2017 just based on inflation alone.

So, can you retire on a million dollars? Well it depends on a lot of issues. Let’s look at some of the issues.

 A Million might not be enough:

  1. Let’s first define this $1 million as “liquid”, not including your principle residence. This means that you have $1M+ in a combination of your 401K, IRA, Roth, after taxable brokerage account and savings.
  2. Using a simple rule of thumb one might calculate that a standard 4% withdrawal rate will give you $40,000 a year
  3. But wait, can you count on a “guaranteed” 4% without running out of money, maybe, maybe not.
  4. Will it be easy to generate on average 4%, year over year? If you are in bond funds and an annuity (more bonds) you might have a challenge. If you are 70 years old and follow the old adage, have your age in bonds (70%), you just aren’t going to make it to be 95.
  5. Never disregard inflation, right now it is very small, but a 4% return is maybe only 2% with inflation. You need a 6% total return to get a 4% return after inflation.
  6. Now let’s calculate taxes. There are some very unfriendly places to have your $1 million, namely any tax referred account, like that 401K, IRA, bonds or an annuity. This is because each of these is taxed as ordinary income. The tax issue is more complicated because withdrawing money from your $1 million dollar net worth will trigger taxes on your Social Security, up to a maximum of 85%. We’ll figure out how all this works below.

Best Places to Have Your $1 Million (best to worse):

  • ROTH IRA – this is the best place because it is 100% tax free. A Roth withdrawal does NOT count towards determining Social Security tax.
  • After Tax Brokerage Account – This is your normal taxable account where you invested your savings over the years. It’s a good place because qualified dividends and capital gains withdrawn can be at 0% – 20% max. These distributions do count towards the determination of Social Security being taxable.
  • 401K, IRA, Bonds, Annuity – The distribution from these are always taxed as “ordinary income”.
  • Cash – This is a little tricky. If you had all cash you would save on taxes, however, with no investment growth your 1 million will not last nearly as long a having that money in a mix of the other places listed above.

Now let’s look at a few possible outcomes for your $1 Million. In this chart I’ve shown the effects of modest inflation and taxes on both a 4% and 6% average rate of return.


If you assume that you and your spouse were living on a nice fat 6 figure income before retirement and didn’t exactly “feel rich”. You now collect your, say $45,000/yr combined Social Security, plus another $30 – $40,000 a year in investment withdrawals you’ll be living on $75,000 – $85,000 a year after taxes.

I’m not sure you’ll feel like you are a “millionaire”!






Have You “Made It” Financially – Here’s How to Check

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  1. “Made It” in life is when you have enough “cash” and retirement income TODAY, that you don’t HAVE TO
  2. There are some simple steps you can take to measure if you have Made It.
  3. We’ll determine your net worth and future income
  4. We’ll match it to minimum required expenses
  5. We’ll account for the tax man
  6. We’ll look at how to improve your situation so that you too,  Made It!

Everyone dreams (or worries) about the time in their life when they don’t have to work and can retire. You may want to work because you enjoy it or want to further build your nest egg, but you don’t have to work any longer. You might think that once I have a million dollars, you’ve Made It! Well, being a millionaire might not be enough anymore, depending on your age and future expenses.  I have a future article coming where I’ll explain this.

Here are the simple steps that we’ll discuss, determine “liquid net worth”, determine basic expenses, look at future income, subtract taxes and finally see if you have Made It.

The first step is determining your net worth, sounds like you need an accounting degree, but you don’t. I’ll walk you through a few steps. The key here is to determine your “liquid” net worth, normally your net worth would include the value of your house, cars, furniture etc. These items are liquid, you can’t easily turn them into cash to live on, besides you need a house, a car etc. to live after you’ve Made It. Normally determining your true Net Worth you would add in the cash value of all assets, house cars etc and then subtract out all “liabilities” balance of your mortgage, credit card debt, all loans etc. In our example, we’ll just include the monthly payments for these liabilities in our living expense calculations.

Liquid net worth include your savings, stocks, bonds and mutual funds that you can actually cash in. You can include your 401K, IRA and Roth IRA accounts. Do not include life insurance or an annuity. Calculate your Liquid Net Worth including your spouse if you are married. Here is a template showing what it will look like. Start with last year, then project out both the current year. Notice that I projected a 13% increase in investments in 2017. This is highly unusual and I only use it because 2017 looks to be a hot year in the market. For planning purposes I would suggest a 4-5% yearly increase based on your type of investments.

Combined Liquid Net Worth    
  12/31/2016 12/31/2017
Savings $80,000 $85,000
Brokerage Account – Taxable $300,000 $340,000
IRA Accounts $300,000 $340,000
Total Liquid Assets $680,000 $765,000


Your Liquid Net Worth can now help us determine how much you can withdraw during retirement so that you won’t run out of money.

Now we’ll determine how much income you’ll have available to live on. The money you live on in retirement will come from both withdrawals and “retirement income”.

Let’s calculate withdrawals. The issue becomes how much can you safely withdraw from your Liquid Net Worth each year in addition to Social Security and pensions. There are a lot of excellent articles about this topic, including this one here. The range is usually 3-4%, a safe bet is a 3.5%, that’s what my wife and I use. It also happens to be pretty close to the Minimum Required Distribution (RMD) rate from Social Security.

So, let’s do the math based on our expected Liquid Net Worth for 2017 – $765,000

                3% Withdrawal Rate – $22,950/year

                3.5% Withdrawal Rate – $26,775/year

                4% Withdrawal Rate – $30,600/year

Let’s examine Retirement Income. This includes Social Security and pensions. It is easy to determine your annual Social Security income, just go on-line and check it out. Beginning at age 62 you and/or your spouse can start receiving a reduced Social Security income. Waiting till your Full Retirement Age (FRA), usually 66 or 67, you can get your standard SS amount. However, if you wait until you are 70 you get a premium amount (an extra 8% per year from FRA until age 70). Financially waiting until 70 is a GREAT deal. In our SS calculations we’ll include one spouse at 100% and of course the other spouse is entitled to an additional 50% (there are lots of rules around all of this).

Retirement Income  
Social Security – Spouse 1 $25,000
Social Security – Spouse 2 $12,500
Pensions $7,000
Total Retirement Income $44,500


 Let’s add these together, here is the total income available:

Income Available  
3.5% Withdrawal Income $26,775
Retirement Income $44,500
Total Income $71,275

The next step is to determine your retirement living expenses. Many suggest that you just use 80% of your pre-retirement income as a short-cut calculation. I suggest that you take the time to calculate exactly what you will need, if you were a high income earner, you paid off your house and have no debt, you can probably live very comfortably on a lot less than 80% of your final income. In your annual expense calculations, include a line for “other”, for example the refrigerator dies, you need a new central air conditioner etc. You need a large emergency fund to handle these, also don’t under estimate the cost of healthcare.

For our example we’ll use Annual Expenses of $65,000.

So you might think that you have Made It, your expenses are less than your income. But, we haven’t included income taxes. We’ll calculate them now, if you are like me and moved to Florida to escape all state and local income taxes you just have to calculate federal taxes.

Federal Income Tax. Using the above income and the 2016 tax tables for Married Filing Jointly, age 65, using standard deductions here is what the Federal Taxes are.

Adjusted Gross Income:   $47,021

Taxes Due:                                  $ 2,834

Effective Tax:                               6%

Note that of $35,000 in joint Social Security only $13,246 was taxable income.

So have you Made It?

Income: $71,275
Less Expenses: $65,000
Less Federal Tax: $2,834
Balance:  $3,441



If you haven’t made it there are a lot of things you can do to make sure when you decide to retire that you have Made It. It’s actually simple, just generate more income or reduce your expenses. Most of these you control. Many other have Made It, you can too!


Freeze Your Credit – Keep The Bad Guys Out!


Many people know how to protect their financial information, like changing passwords, shredding documents etc. However, very few know that the bad guys can potentially access your credit report or set up credit cards without your permission.

There is a simple and cheap way to protect yourself – freeze your credit report!

Not only can you freeze your credit report, but each of the 3 credit reporting agencies will let you use a PIN# so temporarily “unfreeze” your account of a legitimate inquiry that you approve.

If you freeze your credit report it won’t impact your existing credit cards or loans.

In the past freezing credit has been available for free to victims of identity theft. Now all three of the major credit bureaus allow anyone to freeze their credit for a small fee. Many states have laws keeping the costs down or have NO FEE for credit freezes. In all cases it is really cheap to both freeze and do a un-freeze.

Please keep in mind that there are 3 credit bureaus and you need to pay each one to freeze your account. In most states once you freeze your credit it remains that way until you remove it.

For example, I live in Florida and I’m 65 or older, my freeze is FREE and $10 to remove the freeze!

Here is how you Contact the Credit Bureaus:

Transunion – web site click here

Equifax – web site click here

Experian – web site click here

There is a much smaller credit reporting service that may also want to contact called Chexsystems, you can find their web site here.

You can learn much more about the Freeze Credit process at the Federal Trade Commission, click here. On their site you can also investigate how to place a “Fraud Alert”.