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Client Case Study II

Client Profile: Husband and wife with two young children. Wife is a practicing physician and husband is working part time while also in school. She consistently participated in employer sponsored retirement plans and has fully paid for her educational expenses. They were paying his graduate school tuition as they went along, without debt, but accumulated significant credit card debt in the process. She joined a medical practice with a safe harbor 401k Plan (“The Plan”) and began to contribute and to receive the company matching contribution. They were paying aggressively on a credit card debt balance of $40,000 but with an interest rate of 11% and yearly tuition expenses of $38,000, not making much progress on the principal. She had more than $150,000 accumulated in her retirement plan from a previous employer. Contemplating future educational and other expenses for their family, the clients were anxious to pay off the credit card debt as quickly as possible while still maintaining their lifestyle and educational goals.

Standard Advisor Option: To take a partial distribution from the previous employer plan and pay down the debt to a more manageable level.

Value-added Solution: Alpha Wealth Advisors recommended an alternative source of funds to eradicate the credit card debt. As the Plan Administrator for her new employer’s 401k Plan, Alpha Wealth was very familiar with all provisions and features of the Plan. One such feature allowed participants to borrow up to 50% of their accumulated balance. The terms of such loans were set forth in the Plan documents and provide for a loan term of no more than five years and an interest rate of 4.25%. Loan payments are made through payroll deduction and are made to the Plan reducing the outstanding principal balance with every payment. The benefits of this type of transaction to the client are many:

  • Interest is actually paid to the Participant and not a third party: a significant savings and benefit to the Participant.
  • A loan is not considered a distribution and therefor is not a taxable event triggering neither taxes nor penalties (client is younger than 59 ½).
  • Participant stays fully invested during the time the loan is outstanding, foregoing the opportunity cost of taking a distribution.
  • Potential for improvement of her credit score as 401k loans are not reported to the credit agencies.

By recommending that the client rollover her previous employer’s account into her account in The Plan, Alpha Wealth Advisors was able to facilitate significant savings. The clients were very motivated to pay off the loan quickly and continued to make the same payments as they were making to the credit card companies, thereby paying off the debt in less than five years.

At the conclusion of the transaction, the clients had taken greater control over their finances and created improved financial flexibility. By acting as their own lender, they were paying interest to themselves while maintaining their investment balances. Additionally, the stress that the credit card debt was causing was eliminated. The clients paid no additional fee to Alpha Wealth for this advice and level of service as we provide financial advice to all of our clients as part of our ongoing investment fees.

Alpha Wealth Advisors offers more than investment advice. We offer financial solutions.