First: Let’s not confuse this with the Child Tax Credit

There are so many things with similar names across the tax code that it’s easy to mix them all up.

The Child Tax Credit ($2,200 per child for 2026) is for just having a child. You can use it whether or not your child is in daycare.

The Child and Dependent Care Credit is specifically for paying for care so you can work.

The rest of this article will talk specifically about whether to use the Child and Dependent Care Credit or your workplace Dependent Care FSA.

How Dependent Care FSA Works

A Dependent Care FSA lets you set aside pre-tax pay through your employer to cover care for children under 13 while you work.

• Limit: $7,500 per household for 2026 ($3,750 if married filing separately), up from $5,000. But this is only if your employer has updated its plan for the increased limits. Check before you elect.
• What it saves: federal income tax at your top rate, plus Social Security and Medicare taxes (7.65%), plus state income tax in most states.
• Household cap: if both spouses have access to an FSA, the $7,500 limit applies to the household combined, not to each of you.
• Use it or lose it: money you don’t spend on qualifying care by your plan’s deadline is generally forfeited, so elect only what you know you’ll spend.

How the Child and Dependent Care Tax Credit Works

The credit covers a percentage of your care expenses, up to $3,000 for one child or $6,000 for two or more. For 2026, the percentage depends on your adjusted gross income (AGI):

• The credit equals 50% of your care expenses if your AGI is $15,000 or less.
• It ramps down to 35% by the time you’re making $43,000
• It stays steady at 35% until your AGI exceeds $150,000 (married filing jointly) or $75,000 (other filers)
• Then it drops 1% for every $4,000 of joint AGI ($2,000 for other filers) above those levels, until it reaches a 20% floor when you make more than $206,000 joint ($103,000 for other filers)

So a married couple at $120,000 of AGI with two kids in care can get up to $2,100 (35% of $6,000). If they earn $250,000, the same family gets $1,200 (20% of $6,000).

Why you usually can’t use both

Every dollar you put towards a workplace Dependent Care FSA reduces the $3,000 or $6,000 expense limit for the credit, dollar for dollar.

Since the new $7,500 FSA limit is higher than both caps, maxing out the FSA generally leaves nothing for the credit.

But there is an exception here: if your employer’s plan is still capped at $5,000 and you have two or more kids, you could put $5,000 through the FSA and claim the credit on the remaining $1,000 of the $6,000 limit.

Three different families with three different strategies

Here are some more examples to help show how to think about the credit vs. the FSA.

Each example assumes a married couple filing jointly, taking the standard deduction, with at least $7,500 a year in care costs. FICA is an additional 7.65% in each case. State taxes are left out to keep things simple, but including them would generally favor the FSA even more.

Family 1: $99,000 AGI, two kids in daycare, 12% federal bracket

• FSA: $7,500 × (12% + 7.65%) = $1,474 tax savings
• Credit: $6,000 × 35% = $2,100 tax savings
• The credit wins by about $626.

Family 2: $160,000 AGI, two kids, 22% bracket

• FSA: $7,500 × (22% + 7.65%) = $2,224 tax savings
• Credit: $160,000 is $10,000 above the threshold, so the rate drops 3 points to 32%. $6,000 × 32% = $1,920 tax savings
• The FSA wins by about $304.

Family 3: $250,000 AGI, two kids, 24% bracket

• FSA: $7,500 × (24% + 7.65%) = $2,374 tax savings
• Credit: $6,000 × 20% = $1,200 tax savings
• The FSA wins by about $1,174.

The FSA is usually better if you have just one child

Remember, with one child, the credit only applies to $3,000 of expenses, so it maxes out at $1,050. If you spend $7,500 or more on care for one child, the FSA saves more even in the 12% bracket ($1,474 vs. $1,050).

The credit is generally the better choice if:

• Your household is in the 12% bracket or lower and you have two or more kids in care.
• Your employer doesn’t offer a Dependent Care FSA, or one spouse is self-employed.
• Your care costs are unpredictable, and you’re worried about forfeiting unused FSA money.
• You missed open enrollment and don’t have a qualifying life event to enroll mid-year.

A Simple Way to Decide

1. Confirm what your employer offers. Make sure the $7,500 limit has been adopted.
2. Estimate your care costs for the year.
3. Find your federal tax bracket and your expected AGI.
4. Compare: FSA amount × (your bracket + 7.65% FICA + state rate) vs. eligible expenses × your credit percentage.
5. Elect only what you’ll spend, and coordinate if both spouses have access to an FSA.

Liked this post?

Check out some of my other posts on family-centric financial planning:

• The Four Disadvantages of Trump Accounts
• New Parent Financial Checklist: Don’t Forget To Do These 11 Things
• Or check out our 360 Financial Tune-Up, a comprehensive, expert review of your financial plan, investment portfolios, and tax strategies. Get concrete recommendations on how to eliminate your blind spots. Just $999.

Want help with your situation?

Things get more complicated with two incomes, mid-year job changes, or shifting care costs based on work schedules. And that’s what I help many young families with. Reach out to me at my email below for a complimentary intro call to see if we’re a good fit for each other.

Nathan
Founder & Lead Advisor
[email protected]

Kangpan & Co. is a flat-fee financial advisory firm specializing in helping mid-career professionals navigate the career, family, and financial tradeoffs that come with this stage of life. This content is for educational purposes only and is not financial, legal, or tax advice. Consult a licensed advisor for help with your individual situation. Employees and clients of Kangpan & Co. may hold positions discussed in our content. Past performance is no guarantee of future results.

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Additional Disclosures: Examples are illustrative and simplified, based on 2026 federal rules. Both benefits require that care be for a child under 13 and that both spouses work, look for work, or are students or disabled. The FSA exclusion can’t exceed the lower-earning spouse’s earned income. Reducing wages subject to Social Security tax can slightly reduce future benefits. State treatment varies. This is educational information, not personalized tax advice.

Yes, you can technically roll your kids’ 529 funds into your own Roth. But it requires several steps and might take 15 years.

To transfer 529 funds into a Roth without penalties or federal taxes, three important things need to be true:

• The listed beneficiary of the 529 needs to be the same as the owner of the Roth

• The beneficiary of the 529 needs to have been the beneficiary for at least 15 years
• The specific funds being transferred need to have been in the 529 for at least 5 years

Practically speaking, for most parents considering this, it makes more sense to prioritize rolling your child’s 529 funds into their Roth rather than your own.

But what if you’re out of other options to utilize those 529 funds and want to go down this path?

Make sure you account for the 15-year rule

There are two ways to cleanly transfer your child’s 529 funds into your Roth:

• Transfer any of the 529 funds you want to roll over into your your own 529. Wait 15 years and then do the Roth rollover.

• Make yourself the beneficiary of your child’s 529 account. Wait 15 years and then do the Roth rollover.

In either situation you’ll need to make sure you qualify for all the Rollover requirements.

Beware of “tax hacks” for rolling your child’s 529 funds into your own Roth

Like any tax rule, there are lots of “hacks” online for getting around these requirements. One of the most popular ones I’ve seen is the following:

• Open a 529 with yourself listed as the beneficiary when your kids are still young.
• Once it’s been open for 15 years, you transfer funds from your child’s 529 into your account.
• Your then immediately roll those funds over to your Roth.

For example, let’s say your child is 7 years old today and has a 529 set up for college already. You want to have the flexibility to move any of their excess 529 funds into your Roth once they finish college.

You open a 529 account with yourself listed as the beneficiary today so 15 years from now when your child is 22 you’d pass the 15 year rule.

The main argument here is that technically your 529 account has existed for 15 years and checks the 15 year requirement box.

Hacks like this exist because the IRS hasn’t specified whether this is allowed. But we feel it’s always better to stick to the spirit of a tax rule rather. The IRS has a tendency to suddenly start going after people who use loopholes to work around tax or account requirements.

Use tax hacks at your own risk.

If you liked this article…

Check out some of our other posts on education and child-centric financial planning:

• The Four Disadvantages of Trump Accounts
• New Baby Financial Checklist: 11 Things to Do First
• Or check out our 360 Financial Tune-Up, a comprehensive, expert review of your financial plan, investment portfolios, and tax strategies. Get a 5-7 page report highlighting the key gaps we find and recommendations on how to fix them. Just $999.

Our firm specializes in working with young families. Reach out to me at my email below if you want someone to help you build the financial strategies to fit the life you want for your family.

Nathan
Founder & Lead Advisor
[email protected]

Kangpan & Co. is a flat-fee financial advisory firm specializing in helping mid-career professionals navigate the career, family, and financial tradeoffs that come with this stage of life. This content is for educational purposes only and is not financial, legal, or tax advice. Consult a licensed advisor for help with your individual situation. Employees and clients of Kangpan & Co. may hold positions discussed in our content. Past performance is no guarantee of future results.

I. Nail the basics

This is the basic financial admin stuff that you’ll need to complete within the first 30 days. These are mostly making sure you get your new family member added to your health insurance and that you’re taking advantage of workplace and tax code benefits from having a child.

Get them a social security number

The hospital probably told you about this already but you’ll need to get them registered for a social security number. You’ll need this before you can complete a lot of the other steps here.

Add them to your health insurance

Don’t forget to let your HR team or health insurance provider know about your new family member. Those hospital bills are going to be pretty expensive without it. Most employer-sponsored health insurance plans require you to do this within 30 days.

Compare your health insurance options

While you’re at it, if you both have employer-sponsored health insurance plans, now is a good time to consider comparing coverage options between plans. The yearly cost difference between family plans could easily add up to thousands a year.

Update your withholdings

Let your HR team know you want to update your withholdings and coordinate with them on submitting an updated W-4. Having a child decreases your withholdings amount meaning you’ll get to keep more of what you earned in each paycheck

Sign up for Dependent Care FSA

If you’re both going to keep working, look into signing up for Dependent Care FSA. This allows you to use pre-tax dollars to pay for necessary childcare like daycare, nannies, etc. Coordinate with your HR team on the specific details of your benefits.

Don’t forget about the Child Tax Credit at tax time

This one doesn’t need to be done in the first 30 days but just remember at tax time you can currently get up to $2,200 in tax credits per child just for being a parent. There are some income restrictions on this so coordinate with your accountant.

Learn more about the differences between FSA and Child Tax Credits.

II. Helping them get a head start

Start taking advantage of the tax and other benefits on offer for funding your child’s future. There are lots of other accounts and savings strategies out there but these two are the most common ones to get things going.

Sign them up for a Trump Account

If your child is born between Jan 1, 2025 and Dec 31, 2028 you’ll get $1,000 from the government to kick things off. The $1,000 isn’t automatic, you’ll need to enroll and your child needs to be a US citizen with a Social Security number. Whether you contribute more than that depends on how you feel about the account’s disadvantages and the other savings options available to you.

Learn more about Trump Accounts:

• The Four Disadvantages of Trump Accounts
• Where Do Trump Accounts Fit In?

Set up a 529

Start saving for college. Your contributions to the 529 grows tax-free and remains tax-free if you use the funds for qualified education expenses. Many states also offer state tax deductions for contributions though each state has slightly different rules.

Here are some state specific 529 nuances:

• Four Unique 529 Benefits for Pennsylvania Residents
• What to do When NJ High Earners Don’t Qualify for 529 State Tax Deductions

III. Protect their future

Make sure you have a plan in place for taking care of your kids if something happens to you. These are the big three to nail down:

Look into getting term life insurance

Protect your family in the event something happens to you. Be wary of insurance sales people trying to convince you to get anything more complicated right now.

Get a will

What do you want to happen if you pass away? Who would take guardianship over your children?

Take it a step further and set up a trust

If you want to avoid probate or have more control over how your assets will be distributed over time.

Learn more about managing asset distributions:

• 42% of Heirs Spend Their Entire Inheritance Within the First Year

Want some help?

I have two young kids and specialize in helping young families navigate the money, career, and family tradeoffs that come with this stage of life. Reach out to me at my email below if you’d like someone to help with the items in this post or with your broader financial planning needs.

Nathan
Founder & Lead Advisor
[email protected]

Kangpan & Co. is a flat-fee financial advisory firm specializing in helping mid-career professionals navigate the career, family, and financial tradeoffs that come with this stage of life. This content is for educational purposes only and is not financial, legal, or tax advice. Consult a licensed advisor for help with your individual situation. Employees and clients of Kangpan & Co. may hold positions discussed in our content. Past performance is no guarantee of future results.

Summary:

How do I find these hidden Mutual Fund fees on my statement?

Note: All returns and figures in this post are illustrative and for educational purposes only.

Mutual fund commissions and additional fees your advisor is pocketing do not typically show up as a line item in your statements. Advisors who take commissions and other mutual fund payments often just report a Net Performance number that looks something like this:

• Net Return(%): 8.0%
• Net Return($): $80,000

Is that a good return?

It’s hard to say because what you need to see is the Gross Return, which is what your assets delivered before any fees were taken out. Advisors are not required to report this number in their invoices but do have to provide it if you ask for it directly.

A Gross Return might look like this instead:

• Gross Return(%): 10.0%
• Gross Return($): $100,000 <- the missing piece of the puzzle

Now you can see you lost $20,000 somewhere along the way. Maybe your advisor quoted you 1.0% as their advisory fee at the start of the relationship. How could they be making closer to 2.0%? Those are from hidden fees.

To be fair, your advisor may not be pocketing all of those additional fees. But reporting only Net Return and not breaking out their commissions and additional fees makes it incredibly difficult to figure out how much they are actually making off your assets.

So how do you figure out how much my advisor is making from mutual fund fees?

Step 1: Find the fund’s Prospectus

In most cases, you will need to get the fund’s Prospectus directly from the fund provider (or ask your Advisor to send you the latest).

These are publicly available on most fund provider websites. Just search for the fund name and ticker. Once you are on the fund’s page, look around for something called the Prospectus. There’s usually a link to download it as a PDF.

This document provides all the fund’s fee details, including what they pay to advisors.

Step 2: Figure out what Share Class you own

Mutual funds are split by different tiers called a “Class“. Each Class has a different fee structure that is broken out in the Prospectus. You’ll need to figure out what Class your specific fund is before you can figure out what fees you’re paying.

• Pull up your paper statement or login to see your holdings.
• Look through your list of holdings and you should see something like “FUND NAME, CL A” or “FUND NAME, CL B.” The CL is short for “Class” and the letters after are the specific tier you have.
• Alternatively, you can search online for the fund’s symbol. Each Class has it’s own ticker symbol.

Step 3: Find the Fees and Expenses section in the Prospectus

Once you’ve figured out which Class you own, you can look up the fees in the Prospectus.

Each Prospectus has an upfront Table of Contents. You should see a section called “Fees and Expenses” high up in the list of items. Go to this page.

Step 4: Calculate the sales commissions

Usually (but not always), any mutual fund that pays an upfront commission to the advisor is labeled as “Class A.” These are called “Sales Loads” or “Sales Charge” rather than commissions in most Prospectuses.

You’ll see something like this

	Class A	Class B	Class C
Max upfront sales load	5.75%	0.0%	0.0%
Max deferred sales charge	1.0%	5.0%	1.0%

There are all kinds of commissions that get charged, but from what we’ve observed, most advisors who pocket commissions use upfront commissions since they get paid those immediately. There is a wide range of commission rates, but it is not unusual for Class A funds to have an upfront 5.75% sales fee.

This 5.75% sales fee means for every $100,000 you hand over, a $5,750 commission is immediately chopped off the top to pay the brokerage firm and your advisor.

You won’t receive an explicit bill or invoice for this. It just gets deducted from your cash on the day of purchase.

So of the $100,000 you put down, you only have $94,250 working for you in the market. You are technically starting off with a hidden loss of 5.75%.

This loss won’t even appear as a negative return on your performance dashboard. Your account will show a 0% return on day one and your total value will show up as $94,250 despite you putting down $100,000.

Step 5: Find the ongoing fees

Next you’ll want to look for something called “12b-1” fees. They may also be described as “Distribution and Service” fees. The table may look something like this:

	Class A	Class B	Class C
Management Fees	0.37%	0.37%	0.37%
Distribution / Service (12b-1)	0.25%	0.75%	0.75%
Other Expenses	0.31%	0.31%	0.31%

If you own the Class A share of this fund, you could be paying your advisor an additional 0.25% every year in addition to the 5.75% sales commission they pocketed on Day 1.

This is applied to the amount that’s actually invested in the fund post sales commissions.

If you have $94,250 invested after a 5.75% initial sales charge, your 12b-1 fee in the first year could be an additional $235.63 per year (0.25% fee * $94,250).

Beware of other hidden fees

The “Sales Load” and “12b-1” fees are the key numbers to track down to figure out how much your advisor may be profiting from mutual fund recomendations they make. Your advisor may not be making the full amount listed in the prospectus as the specific fee arrangement may differ from firm to firm.

There are many other ways your advisor makes money from recommending mutual funds but these are harder to identify and may be benefits provided to your advisor’s overall firm:

• Revenue Sharing: A fee paid by the mutual fund to the firm for making it onto the list of “approved” mutual funds. This can be very difficult to track down.
• Soft Dollar Benefits: Free market research, access to tools, etc. that firms would typically need to pay for but is being provided as part of the relationship with the mutual fund company.
• And more like Sub Accounting, Brokerage, Account Maintenance, Record-Keeping fees, etc.

How to avoid advisors who make hidden profits

Not every advisor accepts commissions or hidden profits from products they recommend. An entire, official category of advisors known as “Fee-Only Fiduciaries” charge only for their advice and services.

And that’s what we are. Kangpan & Co. is a proud Fee-Only Fiduciary. We do not accept commissions or any other pass backs for the investments we recommend. We want our clients to know that when we recommend an investment, it’s because we feel it’s the right thing for their portfolio, not because we somehow profit from doing so.

If you’re not sure whether your advisor is secretly profiting off your assets, email me at [email protected] for a complimentary Hidden Fees Audit. I’ll help you identify charges and profits your advisor may be hiding and benchmark your overall portfolio’s performance to see what else your advisor may be leaving on the table.

If you found this post helpful, check out:

• Hidden Fees in Wealth Management: more ways advisory firms skim extra profits from your assets
• Our Complete Portfolio Tune-Up: a structured review of your portfolios across 17 diagnostics for a one-time fee of $399. No ongoing commitment required.

Nathan
Founder & Lead Advisor
[email protected]

Kangpan & Co. is a flat-fee financial advisory firm specializing in helping mid-career professionals navigate the career, family, and financial tradeoffs that come with this stage of life. This content is for educational purposes only and is not financial, legal, or tax advice. Consult a licensed advisor for help with your individual situation. Employees and clients of Kangpan & Co. may hold positions discussed in our content. Past performance is no guarantee of future results.

Summary:

What is the 4% Rule?

The 4% rule says you can:

• Withdraw 4% of your portfolio’s value in your first year of retirement
• Adjust that initial dollar amount for inflation every year after…
• While having a reasonably high probability of not running out of money over a 30-year period

For example, if you retire with a $1,000,000 portfolio, that’s $40,000 in year one, then $40,000 plus inflation in year two, and so on for the next 30 years and you’ll have a reasonable chance of not running out of money during that time period even with the market’s ups and downs.

Where did the 4% Rule come from?

The rule is credited to Bill Bengen based on a piece he published in the Journal of Financial Planning in 1994 where he looked at different withdrawal rates across multiple US stock and bond market return periods. His main conclusion found a 4% withdrawal was the highest “safe” number that held up in the vast majority of the tested time periods.

Here’s a reprint of the original piece.

Why is the 4% Rule so popular?

It’s simple. It’s a single number that turns the complicated question of “how much do I need to retire” into a problem that can be solved on a post-it note.

All you need to do is take your expected annual spend in retirement, divide by 4% (or multiply by 25) and you have a target portfolio size needed to support your retirement. When your portfolio reaches that number, you are theoretically ready to retire.

For example, if you anticipate spending $150,000 in your first year of retirement, the 4% rule implies you can leave the working world once your portfolio hits:

$150,000 in spend / 4% = $3,750,000 target portfolio value

You don’t need a complicated spreadsheet and you don’t have to make all kinds of assumptions about future market performance.

Five places where the 4% rule falls short

Like any single number applied generically to all situations, the 4% rule is either too conservative or not “safe” enough. Researchers since the original study argue both sides with ranges between 3-5% being safe number. Here are some of the arguments across those ranges.

The 4% rule was calculated for a 30-year retirement. The original study modeled someone retiring at a traditional age and living another 30 years. If you’re aiming to retire before 50 like many of the people we work with, your retirement could easily run 40-50 years. The study doesn’t say whether the strategy fails past 30 years, it just doesn’t go that far out.

The rule assumes a steady withdrawal amount year after year. This isn’t how people budget in retirement. People adapt. They adjust their spending down in a bad market. A rigid rule that inflation-adjusts a fixed withdrawal every year doesn’t reflect how a thoughtful retiree actually behaves. 

It’s based entirely on historical U.S. market returns. Past performance modeling has an obvious limitation. The next 30-50 years may not look like the time period in the original study. Modeled future returns dramatically impact what the safe number actually is. But nobody knows, because nobody can predict what the markets will do in the future. Even if your name rhymes with Barren Wuffett.

It doesn’t account for other income sources. A single 4% number ignores things like social security, passive real estate investments, or even part-time work throughout retirement. This can mean the rule is overly conservative if additional income sources will cover a portion of your spending needs.

It doesn’t solve for sequence of returns risk. A market downturn in your first few retirement years can significantly impact the success of your overall strategy.

For example, let’s say you need $100k a year and you retire with a $2.5m portfolio ($100k / 4%). The first month after you retire, the markets drop 50%. Your portfolio is now worth $1.25m. Your $100k withdrawal is now 8% of the portfolio. 

The 4% Rule accounts for this somewhat by design (it was tested against periods that included bad early sequences), but it’s still the single biggest reason a “safe” withdrawal rate can turn out not to be safe for a specific person’s specific timing.

How I think about the 4% Rule

I applied the 4% rule to my own finances when I left a C-level corporate career at 38. I closely monitored and managed my expenses and resigned from my job when the value of my portfolio blew past 25x my expenses. 

I have yet to find a better starting point for retirement readiness calculations than the 4% rule. But it doesn’t account for how long you’ll be retired, your mix of fixed vs. variable expenses, other income sources you have available, and what happens if the markets tank those first few years of retirement.

It’s a very blunt tool but that doesn’t mean it’s a bad starting point. The more common issues I find with people trying to retire early is that they:

• Don’t have an accurate read on what their spending needs will be once they leave corporate and they often forget to include healthcare, changes in tax situation, etc.
• Aren’t prepared for a huge market drawdown within the first few years of retirement
• Count on assets locked in 401k or IRA accounts without a plan for accessing those funds

Reach out if you’d like a second opinion on your retirement calculations

I specialize in working with people who want to or have already retired early. I’ve developed a range of strategies over the years for analyzing and then mitigating the risks associated with blindly using the 4% Rule. 

I’d be happy to to help you look over your early retirement assumptions.

If you liked this piece, you might want to check out:

• What Worked: 9 Things That Made Me Financially Independent Before 40
• The Four Money Personalities I See in High Earners
• Can You Afford to Take a Pay Cut for a Job You Love?

Nathan
Founder & Lead Advisor
[email protected]

Kangpan & Co. is a flat-fee financial advisory firm specializing in helping mid-career professionals navigate the career, family, and financial tradeoffs that come with this stage of life. This content is for educational purposes only and is not financial, legal, or tax advice. Consult a licensed advisor for help with your individual situation. Employees and clients of Kangpan & Co. may hold positions discussed in our content. Past performance is no guarantee of future results.

Health Insurance Is One of the Largest Costs in Early Retirement

Most early retirement strategies focus on overall costs and safe withdrawal rates relative to the portfolio. Healthcare is typically one of the largest components of those expenses. However, our experience is that very few early retirees accurately model healthcare expenses or even develop an approach to tackling these costs until well after they’ve left their corporate jobs. Planning out an approach before you leave your job can protect your core cashflows until full retirement benefits kick in. 

The key is using your HSA as a bridge fund to pay for premiums. But it’s important to know which premiums can be paid with your HSA.

Can you use HSA funds to pay for COBRA premiums?

Yes. The IRS explicitly allows HSA funds to be withdrawn tax and penalty-free to pay COBRA premiums. This is one of the few premium types HSAs are allowed to cover before full retirement benefits. We’ll get to why this matters in a moment.

Can you Use HSA funds to pay for marketplace premiums?

No. Marketplace (ACA exchange) premiums are explicitly excluded from the list of HSA-qualified expenses. There is one exception: if you’re receiving federal or state unemployment compensation, marketplace premiums can qualify. 

Outside of that exception, if you try to go straight to a marketplace plan pay for it with HSA funds, you’ll owe income tax on the withdrawal, plus a 20% penalty if you’re under 65.

How HSA-funded premiums affect early retirement

If you’re retiring before 59.5, you’re likely relying on funds in your savings, taxable brokerage, and Roth accounts in the early years. The less you need to tap into these early on, the more assets you’ll have to carry you to full retirement age where you’ll unlock the rest of your accounts (401k, IRA, etc.). 

Let’s say you retire early at 45 in April.

You already made too much this year in earned income and your expected passive income to qualify for marketplace subsidies so you would have to pay full price for a plan. The plan you’re looking at is $1,850 a month without these subsidies.

Your COBRA plan also costs you $1,850 a month. You can use this plan for the next 8 months until the start of the following calendar year when you can take advantage of marketplace subsidies. 

$1,850 a month * 8 months = $14,800 in premiums for the rest of the year 

If you’re following the 4% safe withdrawal guidelines for typical early retirement budgeting, paying these premiums out of the accounts you’re using to support your early retirement would reduce your withdrawal rate by:

4% * $14,800 = ~$592 a year

While that’s not a huge number, every bit helps in the first stages of early retirement. The loss of that $14,800 in assets used to support your day to day living is an immediate and permanent loss of $592 in potential funds you can pull from your accounts. Ouch.

What else you need to look at

This was a simplified example to show the primary reason why an early retiree would consider COBRA over Marketplace if they have available HSA funds to utilize.

When we help clients with this decision, we look at other factors like:

• How pulling funds from the HSA will reduce the tax-deferred compounding of the account. You need to weigh the tradeoffs of doing this vs. the amount of liquidity you want available to you for early retirement.
• How much of a subsidy someone qualifies for and where their income will be for the calendar year
• The net cost of the marketplace plans they’re considering vs. the net cost of their COBRA options

If you liked this piece, you should check out:

• What Worked: 9 Things That Made Me Financially Independent Before 40
• Leaving a C-Level Corporate Career

We specialize in all things early retirement. If you want help modeling out how to approach healthcare in early retirement, reach out to me at the email below.

Nathan
Founder & Lead Advisor
[email protected]

Kangpan & Co. is a flat-fee financial advisory firm specializing in helping mid-career professionals navigate the career, family, and financial tradeoffs that come with this stage of life. This content is for educational purposes only and is not financial, legal, or tax advice. Consult a licensed advisor for help with your individual situation. Employees and clients of Kangpan & Co. may hold positions discussed in our content. Past performance is no guarantee of future results.

Selling stock isn’t your only option to finance a business purchase.

There are many points in life when you need a big chunk of capital.

Buying a business is a common one. Your investment portfolio is a natural place to look for quick capital, but selling stocks can lead to significant capital gains. But a bigger problem is losing out on future gains for the portion you’ve sold. 

People assume selling is the only option they really have. Most people don’t realize they can borrow against their portfolio. 

Lots of people have heard about “rich people” who borrow against their assets and never incur capital gains. But they assume that’s for the multi, multi millionaires and billionaires. The option is actually more accessible than a lot of people think it is. Many large brokerages offer this to investors with portfolios as low as $500,000¹.

What selling stock costs you.

Let’s do the math.

Say you need to raise $500,000. 

You have stock that you can sell to finance the purchase. But $100,000 of that sale is going to be capital gains. If you’re at a 15% long-term capital gains rate, you’re paying $15,000 in taxes on the gain before any additional state taxes or NIIT.

You’ll start with $500,000 in your portfolio, but end up with only $485,000 in cash after selling so you still need another $15k to make up the difference.

What borrowing against your portfolio costs.

A Securities-Backed Line of Credit (SBLOC) lets you borrow against your portfolio without selling anything. No shares change hands, no capital gains.

So what’s the catch? The loan will cost you in the form of interest. 

Let’s say the rate on the SBLOC is 7.5%² (rates on these are variable and move with the market, so treat this as an example, not a quote you should expect). 

On $500,000, that’s:

$500,000 × 7.5% = $37,500 a year in interest.

That sounds like a lot next to a $15,000 one-time tax bill. Until you account for what the gains in your portfolio because that $500,000 had stayed invested. A stock heavy portfolio generating an expected 9.0% gross return³ could result in:

$500,000 × 9.0% = $45,000 in portfolio returns.

Compare that to the $37,500 in interest, and you’re theoretically coming out about $7,500 ahead in a given year. 

Here’s a table to sum up the comparison:

	Option 1: Selling Stock from Your Portfolio	Option 2: Borrowing Against Your Portfolio
Capital Needed	$500,000	$500,000
– Capital Gains	($15,000)	$0
– Loan Interest	$0	($37,500)
+ Portfolio Returns	$0	+ $45,000
Net Result:	$15,000 lost to capital gains	$7,500 gained between the cost of the loan the portfolio returns

That last row in that table is the punchline: borrowing lets the money in your portfolio continue to grow. Selling means it stops growing.

As long as the growth rate of your portfolio is higher than the amount you’re borrowing, you may be able to make a spread on your borrowing cost while avoiding capital gains.

One More Thing: The interest on an SBLOC loan may be deductible if you’re using the funds to buy a business.

One more point to add to the SBLOC tally. Interest on an SBLOC can be deductible, but it depends entirely on how the borrowed funds are actually used. The IRS traces loan proceeds to their use, not to the collateral behind them. 

If the funds go toward acquiring a business, there’s a case for treating it as investment or business interest, subject to some limitations. But this is the kind of detail that requires you to work closely with a CPA or other licensed financial professional to ensure you have the right structure to take the deduction.

What can go wrong.

This all sounds great, right? There are some downsides you need to be aware of. 

An SBLOC is typically structured as a demand loan, the lender can require you to pay it back whenever they want, not just when you miss a payment. 

If the market drops and your collateral value falls with it, you can get hit with a maintenance call. Meaning you need to top up your account balance. If you can’t post more collateral, the lender sells your securities for you, at whatever price the market happens to be offering that day. 

Rates are variable. Whatever interest rate you initiate your SBLOC at isn’t what it will be going forward. The SBLOC rates move with broader interest rate trends. If rates go down, then this works in your favor. But if rates go up, you’ll end up owing more on your loan. 

Let’s chat.

If you’re working through how to fund a major purchase without selling pieces of a portfolio you’ve spent years building, I’d be happy to help you think through the specifics. Reach out to me at the email below.

Nathan
Founder & Lead Advisor
[email protected]

Kangpan & Co. is a flat-fee financial advisory firm specializing in helping mid-career professionals navigate the career, family, and financial tradeoffs that come with this stage of life. This content is for educational purposes only and is not financial, legal, or tax advice. Consult a licensed advisor for help with your individual situation. Employees and clients of Kangpan & Co. may hold positions discussed in our content. Past performance is no guarantee of future results.

1. Each financial institution has different minimums and requirements for their SBLOC programs. Work with a licensed professional if you’re researching options.
2. This rate varies widely between different institutions and the amount you are setting aside as collateral. This is purely for illustrative purposes and not a quote you should expect.
3. Markets do not return a steady 9.0% a year. This is for illustrative purposes only. Investing involves risk, including the loss of capital. Past performance is not indicative of future returns.