A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to the high-net-worth investor and consumer. Sign up to receive future editions, straight to your inbox. Private credit has exploded in popularity among investors, with the market soaring from $1 trillion in 2020 to $1.5 trillion at the beginning of 2024, according to alternative data provider Preqin . The firm expects this figure to reach $2.6 trillion by 2029. But private credit investing comes with a serious catch. The returns from direct lending are taxed as ordinary income, which has a top federal tax rate of 40.8%, rather than long-term capital gains, for which rates top 23.8%. This can cost investors millions in returns. For instance, a $5 million investment in private credit could incur $4.3 million in tax drag over 10 years and $61 million over 30 years, according to Bernstein Private Wealth Management. There are several ways for investors to mitigate their tax liability. The most straightforward is investing through a Roth IRA, but these tax-advantaged accounts are off-limits to high earners . Instead, high-net-worth investors are increasingly turning to insurance to save on taxes. Instead of investing directly in a private credit fund, they take out insurance policies that invest the premiums in a diversified portfolio of funds. “You’re getting taxed on the insurance product, rather than being taxed on the underlying private credit investment,” said Yasho Lahiri, funds lawyer and partner at Kramer Levin. These insurance dedicated funds (IDFs) have multiplied rapidly, according to Lahiri. (The exact number is unclear as many of these funds are unregistered …
