How to Use Roth IRAs to Earn Tax-Free Income from Private Credit
- Peter Newman, CFA®
- Sep 18
- 3 min read
Looking for ways to earn strong income while minimizing taxes in retirement? For high-net-worth investors, private credit can offer attractive yields. But without the right strategy, the income can come with a heavy tax burden. That’s where a Roth IRA can be a powerful tool.
What is Private Credit?
Private credit funds lend money directly to businesses, real estate developers, or for equipment leasing. In return, they offer:
Attractive yields that might range from 8% to 11% annually
Regular income payments (monthly or quarterly)
Lower correlation to public markets
The private credit market has seen remarkable growth, expanding from $1 trillion in 2020 to $1.5 trillion in early 2024, with projections reaching $2.6 trillion by 2029.
Private credit funds are complex, often illiquid, and typically require minimum investments of $100,000 or more. That’s why they are primarily used by affluent investors working with wealth managers. Some funds require a net worth of $5 million to invest.
Why is Private Credit Income Taxed So Heavily?
Income from private credit is taxed as ordinary income, not capital gains—meaning you could face federal tax rates as high as 40.8% (including net investment income tax). You may also owe state income tax. For many, that’s nearly half of the return gone to taxes.
Can Roth IRAs Help You Avoid Taxes on Private Credit Income?
Enter the Roth IRA strategy. When structured properly:
Income is earned and can be reinvested tax-free
Withdrawals are tax-free if you're over age 59½ and the account is 5+ years old
No Required Minimum Distributions (RMDs) during your lifetime
“For clients who already have a well-funded Roth IRA, this is one of the smartest places to hold high-yield, tax-inefficient investments like private credit.” ~Peter Newman
How Can High-Net-Worth Investors Earn $50K a Year Tax-Free from Private Credit?
Let’s say a client has a $5 million net worth and a Roth IRA worth $1 million. By allocating:
$600,000 across several private credit funds,
Using a hypothetical 8.5% average yield after fees and expenses
That could generate approximately $50,000/year in tax-free income.
This is a powerful retirement income stream—especially if the rest of the client’s portfolio is geared toward growth or liquidity.
What Should You Know Before Investing In Private Credit Through a Roth IRA?
Before diving in, keep in mind:
Investor must be 59½ or older for penalty-free withdrawals
Roth account must be more 5 years old for tax-free income withdrawals
Diversify across private credit managers and sectors to reduce single fund risk
Work with a wealth manager to conduct due diligence
Private credit funds are illiquid—ensure you have other assets for short-term needs
Private credit funds may require lengthy subscription documents. Your wealth manager can assist in completing the documents and reviewing whether a particular fund is suitable for your goals and risk tolerance.
Is a Roth IRA the right tool for your private credit strategy?
Private credit can be a rewarding income strategy—but only when paired with a thoughtful tax approach. For many high-net-worth individuals, using a Roth IRA to shelter income from taxes is a smart move that maximizes return and peace of mind.
Want to explore how this fits into your plan?
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About the Author
Peter Newman is a Chartered Financial Advisor (CFA®) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.
Peak Wealth Planning offers personalized concierge services to meet your wealth management needs, including financial planning, investment management, ESOP diversification, retirement income, insurance, and estate planning. As a fee-based financial advisor based in Chicago, Peak Wealth Planning serves a select group of clients in Illinois and across other states.