A couple months ago I learned about Infinite Banking. It involves buying and pre-funding a whole life insurance policy which allows you to borrow against your own money, while remaining invested in the product and continuing to have life insurance. Detractors say, these whole life products are too expensive, and I agree… but is there some way I could achieve the same goal?
S.P.I.C.E., Infinite Banking’s Turbo Charged Little Brother
- Standard (&)
- Poor’s
- Invested
- Cash
- Engine
I’ve written recently about the S&Ps long history of returns. The TLDR is that over incredibly long periods of time, it has returned 9-12% per year on average.
To build your own bank with SPICE, all you need is a Robinhood gold account and a moderate to high tolerance for risk.
There are a few ways to build it, but it’s easiest to do once you’re mostly debt free. Instead of buying an insurance policy, you just by shares of VOO or SPY, an ETF that is pegged to the S&P 500 index.
When you need money, you can borrow cash against your portfolio in the form of margin. Currently the interest rate is 8%. There are risk to using margin, namely that if the S&P drops, you can get margin called. This means your broker sells your stock and repays your loan.
MATH
We know it costs us 8% to borrow money from Robinhood, but if you’re single and make over $47,000 per year or married and filing jointly and make over $93,400 per year, Uncle Sam is going to take 22% of your cash. You can save 14% on this $7000 (22% your tax rate, minus 8% your cost to borrow) up front by borrowing against your portfolio. That means that you put in $7,000 into your IRA and $1540 of it would have went to Uncle Sam, and the contribution of $7000 to your portfolio only cost you $5460.
Even better, if the S&P has an average (recent) year and returns 12%, it pays for the 8% you paid in interest, and earned you an additional 4% on your SPICE portfolio, but your IRA portfolio earns the full 12%.
Financing
The principles we’re discussing here are related to financing. It’s the concept that the future value of money can offset the cost of borrowing today if you earn a greater return on the borrowed money than your cost to borrow it.
The stock market is one way to generate a return with risk, but using borrowed funds to reduce your tax bill is an example of low hanging fruit and an easy way to generate a guaranteed return. If you know it will cost you $8 for every $100 you borrow but you get $22 back, then it’s a no brainer, and that’s exactly how this trick works.
In this strategy we actually take advantage of two different concepts. The first is the tax savings, the second is the compounding power of money. If we just put $7,000 from our savings account into the IRA, we save the $1540 just the same, but we now no longer have access to the $7000, it’s locked up until we retire. We earn the return from 1 portfolio, our IRA.
When we borrow against our SPICE portfolio, the money we used as collateral is already invested in the stock market earning a return and we essentially use the same asset twice to earn money in two portfolios (SPICE portfolio and IRA) at the same time!
Disclaimer:
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