Welcome back to the Net Worth Podcast.
Speaker 2: This week we are diving into unlocking the power of private credit and how it can significantly accelerate your net worth growth.
Speaker 1: Check out the full edition on our website wearenoyack.com.
Speaker 2: So today we’re really trying to distill the key insights from uh this edition about a strategy that, you know, a lot of professionals use, but maybe isn’t as well known for everyone else.
Speaker 1: It’s about building wealth.
Speaker 2: Yeah, it feels really timely, doesn’t it?
Speaker 1: For anyone listening who’s focused on growing their net worth intelligently, private credit offers some unique advantages, especially in the current climate.
Speaker 2: It connects directly to that goal of building real sustainable wealth.
Speaker 1: OK, let’s unpack this then.
Speaker 2: So private credit, what is it fundamentally?
Speaker 1: This edition defines it as basically non-bank lending, like investors providing money directly to companies, sometimes bypassing banks altogether.
Speaker 2: That’s the core idea, yes.
Speaker 1: And it’s not always giant corporations.
Speaker 2: A lot of this lending goes to uh small and medium-sized businesses.
Speaker 1: The ones that might find it harder or maybe less efficient to get traditional bank loans.
Speaker 2: We also see it in things like real estate bridge, financing those short-term loans for property deals or uh financing for specific things like equipment or even against invoices.
Speaker 1: And increasingly, you see fractional debt deals popping up on crowdfunding platforms too.
Speaker 2: The key takeaway, really, is that this capital is flowing into the real economy, supporting actual businesses, actual projects.
Speaker 1: And here’s where it gets really interesting for your net worth growth.
Speaker 2: This edition highlights typical annual returns.
Speaker 1: We’re talking 8 to 12%.
Speaker 2: Which is significant.
Speaker 1: Exactly.
Speaker 2: When you compare that to, maybe 3%, 4%, 5 % from a high-yield savings account or a lot of bond funds right now.
Speaker 1: That difference, really accelerates how fast what you own part of your net worth grows.
Speaker 2: It’s a huge difference in compounding over time.
Speaker 1: Huge.
Speaker 2: mean, think about hitting your financial goals sooner or building a bigger legacy.
Speaker 1: That jump from, say, 4 % to 10%.
Speaker 2: It’s not just a little bit better.
Speaker 1: It can dramatically change the timeline.
Speaker 2: It really shifts the needle on net worth accumulation.
Speaker 1: And historically, getting access to that kind of return wasn’t easy for individuals.
Speaker 2: was uh mostly the domain of big institutions, know, hedge funds, pension funds, endowments.
Speaker 1: Right, the big players.
Speaker 2: But that’s changed quite a bit.
Speaker 1: This edition points out several ways individuals can now participate.
Speaker 2: There are dedicated private credit funds.
Speaker 1: Some are interval funds offering limited liquidity.
Speaker 2: Others are closed end, where your capital is locked up for a set period.
Speaker 1: OK.
Speaker 2: Then you have publicly traded options called BDCs, business development companies.
Speaker 1: BDCs.
Speaker 2: OK, so if someone’s hearing that for the first time, what’s the simple way to think about them?
Speaker 1: Think of them like a specialized investment company that’s listed on a stock exchange.
Speaker 2: Their whole business is lending to and investing in private companies.
Speaker 1: So when you buy shares in a BDC, you’re getting instant diversification across a portfolio of these private loans managed professionally.
Speaker 2: And it’s publicly traded, so easier to buy and sell than a direct private deal.
Speaker 1: Generally, yes.
Speaker 2: much more liquid.
Speaker 1: Then there are the Red Sea of crowdfunding platforms we mentioned.
Speaker 2: These often have really low minimum investment amounts making it accessible.
Speaker 1: And crucially, you can often use self-directed retirement accounts for these investments.
Speaker 2: We’ll definitely circle back to that.
Speaker 1: so we know what it is, how to potentially access it.
Speaker 2: But the big question, why should someone listening seriously consider private credit right now?
Speaker 1: What are those core advantages that help build maybe a smoother net worth curve?
Speaker 2: Good question.
Speaker 1: This edition lays out a few key reasons.
Speaker 2: First, those higher yields we talked about, driven by what’s called an illiquidity premium, basically compensation for locking up capital, and a complexity premium for the specialized nature of these deals.
Speaker 1: Second, and this is really interesting, is the potential for better downside protection.
Speaker 2: How so?
Speaker 1: Well, many private credit loans are secured by specific assets collateral.
Speaker 2: So if the borrower runs into trouble, there’s something tangible backing the loan.
Speaker 1: which can help recover capital and reduce losses compared to say unsecured bonds.
Speaker 2: Okay, that makes sense.
Speaker 1: Third is genuine diversification.
Speaker 2: These are investments outside the public stock and bond markets driven by different factors.
Speaker 1: So they don’t always move in lockshed, which can help stabilize your overall portfolio returns.
Speaker 2: And you mentioned something about floating rates earlier.
Speaker 1: Tell us more about that advantage.
Speaker 2: Ah, yes, that’s a big one, especially now.
Speaker 1: Most private credit loans have floating interest rates.
Speaker 2: They adjust periodically based on benchmark rates like SOFR.
Speaker 1: So as interest rates go up.
Speaker 2: The income from these loans generally goes up too.
Speaker 1: This acts as a natural hedge against rising rates and inflation.
Speaker 2: While fixed rate bonds lose value when rates rise these floating rate loans can actually benefit protecting your purchasing power.
Speaker 1: It’s a fascinating way to potentially safeguard your wealth in this environment.
Speaker 2: Right.
Speaker 1: That definitely helps protect your real return against inflation eroding it.
Speaker 2: OK, so putting it all together, what does this mean for someone’s portfolio?
Speaker 1: Like right now in 2025, we’ve got this backdrop of stickier inflation, higher rates, general uncertainty.
Speaker 2: Exactly.
Speaker 1: In this specific environment, private credit strengths really come to the fore.
Speaker 2: It could deliver steady income when traditional bonds might be struggling.
Speaker 1: Its low correlation to stocks can add stability when markets get choppy.
Speaker 2: Less volatility potentially potentially.
Speaker 1: Yes.
Speaker 2: The floating rates as we said help combat inflation.
Speaker 1: And frankly as banks maybe tighten their lending standards there’s more opportunity for non-bank lenders to step in and fund good businesses.
Speaker 2: We’re even seeing as this edition notes a shift away from the traditional 60 40 portfolio by large institutions.
Speaker 1: They’re actively increasing allocations to private credit because it offers that steadier growth potential for net worth kind of smoothing out the ride.
Speaker 2: That’s the idea.
Speaker 1: aiming for more predictable growth, less reliance on just public market swings.
Speaker 2: OK, this is compelling.
Speaker 1: But let’s shift to the practical how to.
Speaker 2: We’ve established the potential power, but this edition rightly points out a crucial missing ingredient for many, tax optimization.
Speaker 1: Earning great returns is one thing, but keeping them is another.
Speaker 2: Oh, absolutely critical.
Speaker 1: Earning, say, 10 % is great.
Speaker 2: But if 30 or 40 % of that gain goes straight to taxes each year, Well, that seriously drags down your actual net worth growth.
Speaker 1: Yeah, it really dampens the compounding effect.
Speaker 2: It does.
Speaker 1: So the savvy approach highlighted here is using tax advantaged accounts.
Speaker 2: This lets you either defer taxes until retirement or in some cases eliminate taxes on the growth altogether.
Speaker 1: It means your interest income compounds faster and you avoid paying potentially high short term capital gains tax rates year after year.
Speaker 2: So the key question becomes, how do you keep more of what you earn?
Speaker 1: And the answer lies in the account structure.
Speaker 2: Right.
Speaker 1: And this edition walks us through the main options.
Speaker 2: First, self-directed IRAs, traditional or Roth.
Speaker 1: These let your private credit investments grow tax-deferred or potentially tax-free for retirement.
Speaker 2: Big advantage there.
Speaker 1: Huge.
Speaker 2: Especially the Roth, if you qualify.
Speaker 1: Tax-free growth and tax-free withdrawals in retirement.
Speaker 2: That’s powerful for long-term net worth.
Speaker 1: Then health savings accounts, HSAs.
Speaker 2: These are amazing, the triple tax advantage.
Speaker 1: Pre-tax in, tax-free growth, tax-free out for medical expenses.
Speaker 2: And yes, you can invest HSA funds in private credit if your HSA custodian allows it.
Speaker 1: Platforms focused on third party debt are often compatible.
Speaker 2: It’s a fantastic, often underutilized strategy.
Speaker 1: And for building wealth across generations, there are custodial accounts, UGMA or UTMA.
Speaker 2: You invest for a minor and the earnings might be taxed at the child’s lower rate, subject to kitty tax rules.
Speaker 1: Great for seeding future wealth.
Speaker 2: But here’s a really important heads up from this edition.
Speaker 1: Your standard brokerage IRA or 401k.
Speaker 2: probably won’t allow these kinds of alternative investments.
Speaker 1: That’s a key hurdle.
Speaker 2: Most major custodians for regular accounts stick to stocks, bonds, mutual funds.
Speaker 1: To hold private credit, you almost always need a self-directed IRA, S-T-R-A, or perhaps a solo 401K if you’re self-employed, and one that specifically states it permits private placements or alternative assets like Reg CF deals.
Speaker 2: So the action item is clear.
Speaker 1: Call your custodian.
Speaker 2: Ask them directly, can I hold private placements, private debt, or Reg CF investments in this account?
Speaker 1: Don’t assume.
Speaker 2: Please don’t assume.
Speaker 1: And while you have them on the line, you might ask about checkbook control.
Speaker 2: This is an optional feature some SDIRA custodians offer.
Speaker 1: What exactly does that do for an investor?
Speaker 2: It essentially sets up your SDIRA with its own LLC and dedicated bank account that you manage directly.
Speaker 1: So you can literally write a check or wire funds from the IRA’s account to make an investment quickly without waiting for custodian processing times.
Speaker 2: It offers skeed and flexibility.
Speaker 1: But more responsibility to presume a claim.
Speaker 2: Definitely.
Speaker 1: You are solely responsible for ensuring every transaction complies with IRS prohibited transaction rules.
Speaker 2: It’s not for everyone, but it’s an option for experienced investors who need agility.
Speaker 1: OK.
Speaker 2: So find a custodian that allows alternatives.
Speaker 1: This edition lists examples like Equity Trust, Alto IRA, Directed IRA for SDRAs, or maybe UNEST or Fidelity for Custodial Accounts.
Speaker 2: Then you fund it, maybe roll over an old 401k, transfer an existing IRA, or make new contributions.
Speaker 1: Exactly.
Speaker 2: Get the right account structure in place first.
Speaker 1: Right.
Speaker 2: Account set up.
Speaker 1: Now investing.
Speaker 2: This addition stresses diversification, especially when you’re starting out.
Speaker 1: Maybe allocating just five to 15 percent of your overall portfolio to private credit until you really get a handle on the risks and how it works.
Speaker 2: That’s prudent advice.
Speaker 1: Don’t go all in immediately.
Speaker 2: As for specific options for individuals, publicly traded BDCs are often a good starting point.
Speaker 1: They offer liquidity, professional management, income.
Speaker 2: Blackstone’s BCRED is a large, well-known example.
Speaker 1: Okay.
Speaker 2: Red CF crowdfunding platforms offer another route, often with those very low minimums, $100, sometimes even less, and potentially higher yields, though often with higher risk too.
Speaker 1: For larger sums, and typically if you’re an accredited investor, then direct private credit funds become an option, offering access to perhaps more institutional-type deals.
Speaker 2: Got it.
Speaker 1: And a really important practical tip mentioned.
Speaker 2: If you are using an HSA, keep a cash buffer.
Speaker 1: Don’t lock up every single dollar.
Speaker 2: Yes.
Speaker 1: Please keep a thousand dollars, maybe three thousand dollars liquid cash in the HSA for actual medical expenses that might pop up.
Speaker 2: You need that accessible.
Speaker 1: You can’t easily sell a private credit position if you suddenly need cash for a doctor’s bill.
Speaker 2: So don’t invest 100 percent of the HSA balance in these less liquid assets.
Speaker 1: Makes total sense.
Speaker 2: OK.
Speaker 1: Last crucial area rules and pitfalls.
Speaker 2: This edition emphasizes paying attention to the IRS.
Speaker 1: You absolutely have to.
Speaker 2: There are strict rules around prohibited transactions with retirement and health savings accounts.
Speaker 1: The big don’ts are lending money to yourself, your spouse, your kids, or other disqualified persons from your IRA or HSA.
Speaker 2: Also, don’t use these funds to directly benefit your own existing business.
Speaker 1: It has to be truly arm’s length.
Speaker 2: So the do is?
Speaker 1: The do is work only through legitimate third-party platforms or fund managers.
Speaker 2: Let them handle the origination and management of the loans.
Speaker 1: This keeps things clean and compliant.
Speaker 2: Getting this wrong can result in huge tax penalties, even disqualification of your entire account.
Speaker 1: If we connect this back to net worth, non-compliance can destroy it, not build it.
Speaker 2: Wow.
Speaker 1: OK.
Speaker 2: So compliance is paramount.
Speaker 1: And ensure your custodian handles the necessary admin, like annual valuations and IRS filings.
Speaker 2: Yes.
Speaker 1: Make sure they can provide the required annual fair market value statement for the assets held in your SDIRA or HSA, and that they handle required IRS reporting like form 5498 for IRAs or 5498-SA for HSAs, it keeps everything above board.
Speaker 2: What a comprehensive look.
Speaker 1: Reflecting on the final word in this edition, it really drives home that point.
Speaker 2: Private credit alone is powerful, yes, but private credit combined with smart tax optimization, that’s where things get potentially unstoppable for net worth growth.
Speaker 1: Exactly.
Speaker 2: It elevates the strategy.
Speaker 1: It prompts those crucial next level questions we should all be asking.
Speaker 2: OK, I’m earning this yield, but how do I keep more of it?
Speaker 1: How can I make this growth tax free?
Speaker 2: How does this fit into building wealth not just for me but for the next generation?
Speaker 1: Private credit within the right tax advantage structure isn’t just about chasing returns.
Speaker 2: It’s a strategic framework for building a more resilient and potentially much larger legacy over the long term.
Speaker 1: Remember to subscribe to Noyack Wealth Weekly on our website wearenoyack.com to read the article behind today’s conversation and to get our weekly newsletters straight in your inbox.
