PAL Loan In Lieu of Selling Investments -- Cash Flow and ACA Planning

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J295
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PAL Loan In Lieu of Selling Investments -- Cash Flow and ACA Planning

Post by J295 »

62 y/o couple. One retired and the other with some self employment income. Big driver for us is premium tax credit for Affordable Care Act, which means keeping our modified adjusted gross income below $69,000 and paying net $0 for a Bronze Plan that would otherwise have an annual premium cost of $26,500. We understand that the "cliff" is eliminated for ACA in 2021 and 2022, and that going past threshold will generally be a cost of 8.5% ACA premium plus federal tax and state tax.

We have sufficient resources and have had no debt for the last 20 or so years. Taxable accounts are all equity with lowest unrealized gains of 250% of purchase price (buy and hold). I'm thinking in the next year or so we will sell appreciated equities up the the threshold as we can do that at 0% federal capital gains rate. We do not draw out of retirement accounts and will not do so until RMD time.

So, thinking about a Personal Asset Loan (Schwab at about 1.4%) to fund cash flow down the road as needed. If rate on PAL spikes we can re-evaluate.

Does this make sense? Are there other options we are missing? (Could do a HELOC at a much higher variable or fixed rate for 5 years, but that doesn't seem as attractive as the PAL).

Note: our self employment income exceeds MAGI threshold so we reduce MAGI by solo 401k and HSA, so alternate ways to stay under ACA threshold don't seem available.
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MP123
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Re: PAL Loan In Lieu of Selling Investments -- Cash Flow and ACA Planning

Post by MP123 »

J295 wrote: Thu Oct 21, 2021 9:59 am Does this make sense? Are there other options we are missing? (Could do a HELOC at a much higher variable or fixed rate for 5 years, but that doesn't seem as attractive as the PAL).
You might also consider using a simple margin loan from the taxable account. Compare rates with the HELOC and PAL.

Any of them would be a good way to keep income low for ACA while still having money to spend.
Ron Ronnerson
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Re: PAL Loan In Lieu of Selling Investments -- Cash Flow and ACA Planning

Post by Ron Ronnerson »

How much are you thinking of borrowing and for what timeframe?
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J295
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Re: PAL Loan In Lieu of Selling Investments -- Cash Flow and ACA Planning

Post by J295 »

Ron Ronnerson wrote: Mon Oct 25, 2021 7:48 pm How much are you thinking of borrowing and for what timeframe?
Good question and I haven’t drill down on it. But for sake of answering and also for me doing my own analysis would say borrow $100,000.
Ron Ronnerson
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Re: PAL Loan In Lieu of Selling Investments -- Cash Flow and ACA Planning

Post by Ron Ronnerson »

J295 wrote: Mon Oct 25, 2021 7:59 pm
Ron Ronnerson wrote: Mon Oct 25, 2021 7:48 pm How much are you thinking of borrowing and for what timeframe?
Good question and I haven’t drill down on it. But for sake of answering and also for me doing my own analysis would say borrow $100,000.
Ah, I see. The reason that I asked is that depending on the timeframe and amount you wanted to borrow, opening up a couple of 0% credit cards (one for you and one for your spouse) on purchases for 21 months might be an option to consider. The ACA cliff is gone for the time being so if you were to open up cards in 2023 and make the minimum payments during the promotional period (of almost 2 years), that could perhaps get you to Medicare age or pretty close to it.

However, I'm not clear about how long you'd like to borrow for and carrying credit card debt is certainly not for everyone. However, a 0% rate for 21 months is a pretty good deal if it will meet (or partially meet) your needs. It could help with a short-term cash flow issue and, if inflation is anything like it is these days, allow you to pay back what you borrowed with cheaper dollars when the time comes.
Starfish
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Re: PAL Loan In Lieu of Selling Investments -- Cash Flow and ACA Planning

Post by Starfish »

Ron Ronnerson wrote: Mon Oct 25, 2021 7:48 pm How much are you thinking of borrowing and for what timeframe?


This type of loans are for lifetime and are paid after death from estate on a step up basis.
In this way the investments are allowed to grow and the income is maintained low for tax purposes/ACA etc.
Last edited by Starfish on Tue Oct 26, 2021 12:43 am, edited 1 time in total.
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cchrissyy
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Re: PAL Loan In Lieu of Selling Investments -- Cash Flow and ACA Planning

Post by cchrissyy »

Yes this seems fine
If the rate seriously rises, you should be prepared to pay the whole thing off and accept the impact on your insurance costs.
The PAL is far cheaper than normal margin or a HELOC or paying capital gains. Please do notice they'll make you take one large initial draw when you open it, and those funds are not allowed to be invested.
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Tanelorn
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Re: PAL Loan In Lieu of Selling Investments -- Cash Flow and ACA Planning

Post by Tanelorn »

J295 wrote: Thu Oct 21, 2021 9:59 am thinking about a Personal Asset Loan (Schwab at about 1.4%) to fund cash flow down the road as needed. If rate on PAL spikes we can re-evaluate.
Are you sure you’d get that 1.4% rate? That’s not what I’m seeing on their site for a loan of $100k. Schwab says their PAL rate for a $100k minimum draw is floating rate + 4.65%, currently 4.70%.

https://www.schwab.com/pledged-asset-line

Maybe their site is out of date?
cchrissyy wrote: Tue Oct 26, 2021 12:32 am The PAL is far cheaper than normal margin or a HELOC or paying capital gains. Please do notice they'll make you take one large initial draw when you open it, and those funds are not allowed to be invested.
In my experience margin loans are cheaper. Compared with the above, Interactive Brokers charges 1.58% currently for loans under $100k and you wouldn’t have to borrow the whole thing up front if you didn’t need it, saving on the amount borrowed.

https://www.interactivebrokers.com/en/index.php?f=46376

Of course if you really could get 1.4% (and not 4.7%), that would be better for the PAL than a typical good margin rate.
Starfish wrote: Tue Oct 26, 2021 12:19 am This type of loans are for lifetime and are paid after death from estate on a step up basis.
No, Schwab’s PAL product is for 5 years and then you have re-qualify if you want to renew / continue it.
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J295
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Re: PAL Loan In Lieu of Selling Investments -- Cash Flow and ACA Planning

Post by J295 »

Tanelorn wrote: Tue Oct 26, 2021 7:02 am
J295 wrote: Thu Oct 21, 2021 9:59 am thinking about a Personal Asset Loan (Schwab at about 1.4%) to fund cash flow down the road as needed. If rate on PAL spikes we can re-evaluate.
Are you sure you’d get that 1.4% rate? That’s not what I’m seeing on their site for a loan of $100k. Schwab says their PAL rate for a $100k minimum draw is floating rate + 4.65%, currently 4.70%.

https://www.schwab.com/pledged-asset-line

Maybe their site is out of date?
cchrissyy wrote: Tue Oct 26, 2021 12:32 am The PAL is far cheaper than normal margin or a HELOC or paying capital gains. Please do notice they'll make you take one large initial draw when you open it, and those funds are not allowed to be invested.
In my experience margin loans are cheaper. Compared with the above, Interactive Brokers charges 1.58% currently for loans under $100k and you wouldn’t have to borrow the whole thing up front if you didn’t need it, saving on the amount borrowed.

https://www.interactivebrokers.com/en/index.php?f=46376

Of course if you really could get 1.4% (and not 4.7%), that would be better for the PAL than a typical good margin rate.
Starfish wrote: Tue Oct 26, 2021 12:19 am This type of loans are for lifetime and are paid after death from estate on a step up basis.
No, Schwab’s PAL product is for 5 years and then you have re-qualify if you want to renew / continue it.

The 1.4% I used is a negotiated rate. You are correct it is much lower than the published rate online Last month our son got this rate for a $250,000 PAL supported by a $500,000 brokerage account at Schwab. If we pursue the PAL I would expect our rate to be this or slightly lower. The lowest I have heard recently is 1.25%. Fully aware that it is a floating rate.
Topic Author
J295
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Re: PAL Loan In Lieu of Selling Investments -- Cash Flow and ACA Planning

Post by J295 »

Starfish wrote: Tue Oct 26, 2021 12:19 am
Ron Ronnerson wrote: Mon Oct 25, 2021 7:48 pm How much are you thinking of borrowing and for what timeframe?


This type of loans are for lifetime and are paid after death from estate on a step up basis.
In this way the investments are allowed to grow and the income is maintained low for tax purposes/ACA etc.
Thank you!
Topic Author
J295
Posts: 3399
Joined: Sun Jan 01, 2012 10:40 pm

Re: PAL Loan In Lieu of Selling Investments -- Cash Flow and ACA Planning

Post by J295 »

cchrissyy wrote: Tue Oct 26, 2021 12:32 am Yes this seems fine
If the rate seriously rises, you should be prepared to pay the whole thing off and accept the impact on your insurance costs.
The PAL is far cheaper than normal margin or a HELOC or paying capital gains. Please do notice they'll make you take one large initial draw when you open it, and those funds are not allowed to be invested.
Thank you!
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