Hi Reader,

Back in 2007, my foray into retirement investing began with the government's Thrift Savings Plan. By the time I left the service in 2011, I had accumulated a modest portfolio of about $20k — not too shabby considering what they paid us.

Since then, I've consistently maxed out my retirement contributions, often taking advantage of company matches to boost growth.

My strategy? Predominantly growth stocks, capitalizing on my long investment horizon. This approach has served me well over the years, but time brings change, and my investment outlook has evolved. I'm not so young anymore.

Retirement account options

Aside from the occasional 30-40% market drawdowns, a key drawback of a stock-heavy retirement portfolio is the tax implications. Growth stocks, when sold, typically incur capital gains, call it 15-20%. Since this isn’t steep for long-term holdings, it raises a question: Are these the best assets for tax-sheltered accounts?

There's also the matter of flexibility. Stocks in regular brokerage accounts offer access to margin loans, providing liquidity without incurring taxes from selling. Although margin rates have risen sharply in recent months, the principle of leveraging your portfolio for liquidity remains compelling for long-term holders o

Then there's real estate. It's not my top choice for retirement accounts, either. If you're invested in real estate, even as a passive LP, you should seek ways to offset income with depreciation. Tax-sheltering tools like cost segregation studies and bonus depreciation can make a significant difference in what you get to keep.

Why hard money loans stand out

So, what's the ideal asset for a retirement account? Look for assets taxed as ordinary income. My favorite? Hard money loans.

Both Pete (co-founder at Longleaf) and I actively deploy a significant portion of our self-directed/solo retirement accounts into hard money loans alongside our regular balance sheet portfolio at Longleaf. Here’s why:

• Tax Efficiency: Interest income from hard money loans is taxed as ordinary income, making it ideal for a tax-sheltered retirement account.
• Steady Returns: These loans typically offer higher interest rates than traditional fixed-income investments, enhancing your portfolio's growth.
• Asset-backed Security: Hard money loans are secured against property, adding a layer of security to your retirement investments.
• Diversification: This approach diversifies your retirement portfolio beyond the usual stocks, bonds, or other private investments.

Example: the power of tax-deferred growth

Let’s consider a scenario where you invest $1.0 million in hard money loans at a 10% rate compounded annually, without additional contributions:

Scenario 1: ordinary income

Assuming a 35% tax-rate on your interest checks, the value of your hard money loan portfolio after 10 years would be $1.88 million.

Scenario 2: tax-sheltered

The same investment in a tax-sheltered account would grow to $2.59 million pre-tax. Even after a 35% tax at withdrawal, you’d end up with about $2.04 million — a clear advantage of around $160k offered by the retirement account.

Final thoughts

Investing in hard money loans within a retirement account not only aligns with tax-efficient strategies but also offers a blend of security, higher potential returns, and diversification.

And a quick reminder: while I've shared my personal investment approach and views, especially on tax-related matters, it's important to consult with your CPA before making any investment decisions tailored to your unique situation.