Looking to Make a Move Prior to Selling Your Home?

At some point, many retirees consider the benefits of downsizing their home. According to an AARP survey, about 75% of adults 50 years and older want to “age in place,” but their home of choice is often one that’s downsized relative to their current residence.1 But what happens if you find your ideal retirement home—whether  in a community that requires an entry fee or a smaller, more manageable space in a warmer climate or friendlier tax jurisdiction—before selling your primary residence? To the extent that you have after-tax portfolio assets, a pledged asset line may be a good short-term solution.

What is a pledged asset line?

Similar to a home equity line of credit, a pledged asset line can provide liquidity at a relatively low interest rate.2 Instead of using the home as collateral, however, retirees may use portfolio assets that they’ve accumulated in after-tax accounts. This could include individual accounts, joint accounts and certain types of trusts. Retirement accounts, such as an IRA, Roth IRA or 401(k), are typically not eligible to be used as collateral for a pledged asset line. Just as with margin loans, pledged asset lines allow investors to leverage their portfolios to provide liquidity while maintaining ownership of investments in the pledged account.3 Unlike margin loans, pledged asset lines cannot be used for the purchase of more securities.4 This typically means that the interest payments are also not tax-deductible.

What are some of the potential benefits?

Let’s assume that a retired couple has a portfolio worth $4 million. They have $2 million in pre-tax IRAs and $2 million in a joint account. We can also assume the cost basis of that joint account is $1 million, so there is an unrealized gain of $1 million if they were to liquidate that joint account. Let’s finally assume they have a home that’s worth $1.2 million.

They have identified a continuing care retirement community where they’d like to spend the remainder of their retirement years. The entry fee for a spacious two-bedroom unit with a den is $700,000. In this hypothetical situation, these units rarely become available, but one has just opened, and they need to make a decision within 30 days, which is too short of a timeframe to list and sell their home.

If they were to raise the cash in their joint account, they would most likely be looking at a capital gains tax of more than $50,000 (assuming a 15% long-term capital gains rate in 2024 on the sale of assets).5 It could be higher if their taxable income pushed them into the 20% capital gains rate threshold, if they were subject to additional Medicare surtax on investment income and if capital gains were also taxed at the state level. Drawing from their IRAs wouldn’t help since IRA distributions are taxed at even higher ordinary income rates.

By using the pledged asset line against the $2 million joint account, they most likely would not need to sell investment assets but rather could use them as collateral for the $700,000 loan. For the time that the loan remains outstanding, it would be subject to monthly interest payments, but the principal from the sale of their primary residence in the future could pay off the line completely. Also, while the loan is outstanding, dividends and interest generated in their portfolio can be used to help offset monthly interest payments.

What are some potential drawbacks?

While pledged asset lines can provide a lot of convenience for tax planning, in our experience, they usually don’t work well for retirees with only pre-tax retirement accounts. Additionally, the bank providing the pledged asset line will typically need to approve any withdrawals or transfers from the account, which may create some inconvenience for cash flow planning. Furthermore, as with margin loans, a pledged asset line may be subject to a margin call (i.e., the need to add money to your account so minimum capital requirements are met) if the investments decline in value.

Do you have an opportunity on a retirement home or other desirable downsizing option that may require immediate liquidity? Do you have concerns about the tax impact of raising cash or the timing of the sale of your existing home? If so, a pledged asset line may be a viable solution. Please contact your Corient Wealth Advisor to discuss this strategy further.


1 https://www.aarp.org/home-family/your-home/info-2023/future-of-aging-in-place.html
2 How to Use a Pledged Asset to Reduce a Mortgage Down Payment (investopedia.com)
3 https://www.investopedia.com/terms/p/pledgedasset.asp#:
4 3 Ways to Borrow Against Your Assets | Charles Schwab
5 https://www.forbes.com/sites/davidrae/2024/01/18/new-2024-tax-rates-on-capital-gains/


James Ciprich, CFP®, MBA

James Ciprich, CFP®, MBA

Partner, Wealth Advisor

Jim is a Partner, Wealth Advisor and Investments Leader in our Morristown, NJ, office. Serving a broad range of clients, he has a particular focus on retirees considering care and housing options. Jim founded legacy firm RegentAtlantic’s Senior Solutions practice specialty. He is often asked to speak at retirement communities and client events and is frequently quoted in the media. Jim also serves on an advisory council to the MIT AgeLab. He holds the CERTIFIED FINANCIAL PLANNER™ certification and has an MBA and a BA in Economics from Rutgers University. He served as an adjunct professor at Fairleigh Dickinson University in the CFP® program. Jim is a past president of his local estate planning council, and he has also served as a trustee for Morristown United Methodist Church. In recent summers, he has volunteered with Appalachia Service Project. In a prior career, Jim worked in the music industry, where he was awarded multiple RIAA-certified gold and platinum albums.