April 13, 2017

WTOP Interview: How To Make A Margin Account Work For You

LISTEN NOW: Learn what a margin account is and why it may be a better option than traditional borrowing sources
Dawn Doebler, CPA, CFP®, CDFA®

Interview Transcript:

Shawn Anderson: It is 5:11 here on WTOP, even the wealthiest people can sometimes find themselves in a cash crunch. They may not want to or be able to borrow money from a bank; for certain cash or liquidity needs using a loan called a margin account may be the right answer.

Hillary Howard: Joining us to talk about it, Dawn Doebler; cofounder of Her Wealth and Senior Wealth Advisor at Bridgewater Wealth in Bethesda, hello Dawn.

Dawn Doebler: Hello.

Hillary Howard: So, for those of us who really aren’t familiar with this, tell us what a margin account is and some of the pros and cons of using one?

DAWN: Sean said we work with a lot of wealthy clients and many times people find themselves not having enough cash. And sometimes you can’t just go to a bank and borrow money because whatever you're needing the cash for is not something they are willing to lend you money for. So in these cases we use what's called a margin account. You can think of this is a loan that uses your investment account as collateral. So couple of very important points; you can only margin a taxable for a non-retirement investment account and the laws do limit the amount you can margin usually up to 50% of the value of your equities, 75% of the value of your bonds. We do recommend that you don’t margin all the way up to the legal limit, you can get yourself into trouble, into something that’s called ''a margin call''. It's a little bit complicated, so suffice it to say, you do want to talk with someone and understand what the limits are and what kind of margins of safety you should be considering before you use a margin loan.

Shawn Anderson: Let's say you want to start a business or maybe you already own a business, can a margin account help you?

Dawn Doebler: Yes. This is actually a very common use of margin accounts. For example; we have a client who started her second business venture and because she had some minor credit issues, the bank that she was using for her investment account would not loan her any money, so she transferred the cash and her investments to us and we margin that at a very low negotiated interest rate. She was able to capitalize the business which is a start-up business, very difficult typically to get a bank loan for that situation, she was able to pay a lower interest rate, have cash available and in this case the business is going to be paying the interest expense and as the business becomes more successful it can also pay back the loan. It’s a very good use of a margin account.

Hillary Howard: So Dawn, there are so many people who find themselves in a situation that they have to take care of their elderly parents and that cost a lot of money, how can you use a margin account in that example?

Dawn Doebler: This is a less common use of margin, but we recently used this for a client and in his case, he had a 99-year-old father who was running out of money; still living in his home and was costing $10,000 a month which is a common amount to care for his father and again he was running out of money. So there were some options he could take out a mortgage, but that’s difficult when someone’s 99 years old. They could lend him some money, but in order to do that they were going to have to sell their securities which would create some tax situations for them; they would have to pay capital gains tax, they were receiving Social Security, so they’d have to pay higher taxes on the Social Security. It really wasn’t an option for them to sell securities and just simply give them the money. So we proceeded with using a margin loan on our client's account, he is the sole heir, so he knows he's going to get paid back eventually and they were able to provide for his father’s needs and make everyone feel more comfortable with the situation. One thing I want to emphasize is that, the use and the benefits and the risks are very dependent on your specific situation. So go to the website WTOP.com, read the article. It can be risky, but it also can be a great way to get cash if you have assets.

Shawn Anderson: Alright Dawn. That's a good stuff, so thank you so much. Dawn Doebler with Bridgewater Wealth in Bethesda, for more, go to WTOP.com search Her Wealth.

Sign up to receive the guide

Consider this your training manual to get and stay financially fit for life!

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form
Dawn Doebler, CPA, CFP®, CDFA®

Dawn’s experience spans more that 25 years providing wealth management, financial planning and corporate finance solutions for clients. As an MBA, CPA, Certified Financial Planner (CFP®), and a Certified Divorce Financial Analyst (CDFA®), she is uniquely qualified to understand the challenges and financial needs of clients from executives to entrepreneurs, as well as single breadwinner parents.