BiggerPockets Money Podcast - How to Build a Tax-Efficient Portfolio (Advanced Strategies)

Episode Date: November 11, 2025

Most people think index funds are the only path to financial independence—and they'll get you there in 15-20 years. But what if you could get there faster? In this episode, Mindy Jensen and Scott Trench team up with John Bowens from Equity Trust to reveal advanced portfolio strategies that can accelerate your FIRE timeline. This episode covers: Strategic allocation across your Roth IRA, HSA, and 401(k) to maximize tax advantages How to hold alternative investments like real estate, private equity, and crypto inside tax-advantaged accounts Tax loss harvesting strategies that can save you thousands Managing physical gold within retirement accounts Balancing aggressive and conservative investments for optimal growth Advanced tactics for tax-efficient portfolio optimization Whether you're building wealth aggressively or protecting what you've already built, this episode gives you the roadmap to optimize every account for maximum tax efficiency and long-term growth. And SO much more! Learn more about your ad choices. Visit megaphone.fm/adchoices

Index funds will get you to fire, but will they get you there fast? If you're willing to take on more risk for potentially faster wealth building, there's a whole world beyond the traditional stock bond portfolio. The question is, should you go there? Hello, hello, hello, and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen, and with me as always is my trustworthy co-host, Scott Trench. Thanks, Mindy. Great to be here. You're my financial model co-host. Thank you so much for all you do. We are so excited to be joined by John Bowens from Equity Trust on today's episode. He has been on the podcast before, and he's just such a wealth of knowledge. We're going to be talking about advanced portfolios strategies in today's episode. And before I monologue about them, I do want to welcome, John. John, thank you so much for coming back. Hey, thank you, Scott and Mindy, as always for having me. Awesome. All right, now for the promised monologue here. We got to set this up because this is a really advanced discussion. If we're going to be investing in alternative assets like private equity, private lending, venture capital, real estate, private businesses, and other types of similar assets, inside of our retirement accounts, we need to be aware of or have a philosophy, I believe, or strategy for where to allocate those assets.

and how to hold them in the context of our entire net worth or more broadly diversified portfolio. In the context of a broadly diversified portfolio, generally speaking, I believe that best practices are as follows. First, we're going to keep the most aggressive portion of our investment assets inside of a Roth IRA or an HSA or equivalent. Second, we're going to put the least aggressive, the most conservative portion of a portfolio inside of the 401k or tax. Deferred Plans. That means by process of elimination, we're going to have the more balanced or hybrid assets inside of the after-tax portfolio outside of those retirement accounts. The reason for this is that the Roth grows tax-free and can be passed to Ayers tax-free. We typically, in most withdrawal strategies or order of operations, will withdraw funds and assets from the Roth IRA last for tax maximization purposes. and therefore we can stomach or handle the largest possible amount of long-term growth and largest amount of volatility inside of that Roth IRA.

The pre-tax accounts like the 401K are often going to be withdrawn first or second in most retirement planning scenarios. These accounts are likely going to be taxed at some point, either in our lifetime or when they're past or heirs, and all withdrawals or conversions will generate ordinary income. While there are opportunities to convert or withdraw in low marginal tax brackets, As a rule, the 401 funds will be subject to higher relative tax brackets. Thus, it makes sense to have the relatively conservative portions of our portfolio more concentrated in these tax-deferred accounts.

Last, our after-tax investment positions will either generate ordinary income or equivalence, short-term capital gains, or long-term capital gains in qualified dividends. And for many retirees, basis recovery and generous 0% long-term capital gains brackets today means that there's going to be very little tax consequence up to about $100,000 or so for those married filing jointly on their tax returns. So in a traditional stock bond portfolio, that might mean holding more bonds in a 401k or tax deferred account and holding all equities in a Roth IRA or Roth 401k with our after tax brokerage account holding a mixture to get us to our desired overall portfolio allocation.

But how does that change if we're investing in alternatives like real estate, private debt, private equity, crypto, gold, or commodities that aren't as common and may generate substantial amounts of ordinary income or simple interest. That's why we're going to talk to John Bowens today. I believe those rules will shift and change in specific scenarios, and there's additional considerations to think through. So, John, first of all, grade me on my approach, on my setup here. How am I doing in framing the challenge of portfolio theory in the context of using self-directed accounts? I think you're doing well, Scott. what you're doing is you're presenting a lot of the foundational principles that are used in

traditional financial planning. Now, having all that being said, you then mention at the very end, well, what happens when we introduce alternative investments like real estate? And within real estate, you have different forms or asset classes within real estate. For example, a single family rental property, a apartment building syndication, a private debt fund, we've talked a lot about that. You referenced interest income, Scott. And so you really have to look at it through the lens as an investor yourself, your specific facts and circumstances in terms of what we call asset location. So I think you may have referenced in there, Scott, allocation. So looking at how you allocate your overall, your broader portfolio across your taxable and non-taxable accounts.

But I think that this is much more a topic of asset location, meaning where do we put specific assets like a single family rental property, real estate syndication, and then, of course, for those that also are diversified into publicly traded assets like stocks, mutual funds, bond funds, there's different nuances as we think about that. I think a good way to break this down, Scott, for viewers, is there are three buckets. that we always talk about. There's a taxable bucket, number one. So that's your brokerage accounts, your savings accounts, your checking accounts, your business checking and savings accounts, you can put that in there as well. That's your taxable account. Every dollar that you invest,

if you're making profit, unless you can write off a bunch of that profit through like depreciation, you're going to pay taxes, right? That's the reality of it. Bucket number two is what we call our tax deferred bucket. And then bucket number three, three is what we call our tax-free bucket. And you reference that, Scott, which is traditional type accounts, 401K, pre-tax, and then you have Roth accounts, which would be funded with after-tax dollars and grow tax-free and distributions are tax-free. We could also add in there if you wanted to, Scott, the HSA health savings account and the solo 401K plan. And once we get into those nuances, there are specific types of assets that we might want to consider using a solo

401 plan in comparison to a traditional IRA, Roth IRA, or HSA. And of course, as we always say here, Scott Mindy, and certainly myself on behalf of Equity Trust, I don't give specific tax legal or financial advice or recommendations on allocation percentages, but I can certainly speak to these fundamental principles that are followed in traditional finance to help viewers. Now let's hear a note from our show sponsors. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening.

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What are some of the thoughts that you have around those allocation buckets? And do you agree that the aggressive portion, from principals' perspective, ought to generally be in the Roth or HSA and the conservative portion in the tax-deferred accounts like the 401K and other traditional retirement accounts? You are right, Scott. So the general rule of thumb is your higher growth, higher yielding investment opportunities, whether those are publicly traded assets or private investments like real estate, private equity, cryptocurrency, et cetera, you would hold in your tax-free accounts, like your Roth IRA, and you could also include in there your HSA. Additionally, with a solo 401k plan, remember you have a traditional side, call it a

pre-tax side and you have a Roth side of that solo 401k plan. So within the plan, you have traditional and Roth. They're not IRAs. You just have pre-tax money and post-tax Roth money. So your principle of higher yielding, higher growth investments in the tax-free account to reduce what we call tax drag can make a lot of sense. Now, Scott, there's always caveats, right, based on an individual's facts and circumstances. And here's what it is. In some cases, when you look at the risk to return continuum based on a specific type of investment that someone might be holding, higher yield or higher return might mean higher risk. And so if high risk could actually mean a loss in principle, well, now you've paid taxes to get the money into the Roth,

and now you're sustaining losses. Again, that's a caveat. That's a risk that an investor needs to take, they need to look at, they need to analyze, and maybe they need to talk to a professional like a CPA or financial planner as they navigate those waters. All that being said, Scott, I'll also say that in some cases, high return does not always mean high risk. I've been working with real estate investors almost exclusively for nearly 20 years and I'm a real estate investor myself. And I see a lot of real estate investors that have a really good track record in success rate of investing in real estate. It's not for everybody, but for people that have a very high success rate, they might say, hey, I'm making a significant return in real estate already. And I would love to

do that in my Roth IRA, my HSA, my solo 401k with the Roth component. And I feel that it's very low risk based on my specific facts and circumstances. So in that case, it would make a lot of sense for that person to hold those types of higher yielding, higher growth potential investments in their Roth IRA. One last item that I'll mention in this portion, Scott, is what about HSA health savings account in comparison to a Roth IRA? Well, Roth IRA, you can't distribute until you're 59 and a half unless you're using the Roth IRA layered cake approach that we talked about, which is distributing from our contributions and our amounts that we've converted before $15.5.5.5.5.5.5.5.com. But your earnings have to stay in there until you're 59 and a half. Otherwise, you're going to have

taxes and penalties. And so your longer duration investment opportunities, arguably in your Roth IRA, your higher yielding short-term investments. For example, I have clients that lend money secured by real estate. So they lend money to like house flippers. And they'll charge between 12 to 16% return in some cases. And so those types of investments, I'll see anywhere between 12 to 18 month terms. So they're lending their money and they're getting their money back plus interest in 12 to 18 months. And remember, this is self-directed. So you make the decision on those terms and how long that investment is going to be held in your account. And so for those types of investments, someone might do that in their HSA because they can make a quick return, they can compound their growth tax-free, triple the tax

benefits of an HSA, deductions going in, tax-free growth, tax-free distributions, and you can use that for your medical expenses well before the age of 59.5. And then like we've talked in other episodes, you can do what we call medical bill stacking. So you can distribute from your HSA and reimburse yourself for previous years health care-related expenses. So you could use the rule of thumb of having your higher yielding shorter-term investments in your HSA, your health savings account, and then your higher yielding, higher growth investments to your point, Scott, in your Roth IRA, in your Roth solo 401K plan. I agree completely with that.

And that's how I intend to structure my accounts there with the HSA and the Roth. Whenever the opportunity comes along to create a self-directed HSA for those purposes. So I completely agree. I think that makes all the sense in the world to have realizable income that is reasonably liquid from the HSA because of that reimbursement component there. Whereas the Roth, you can just invest in the highest possible long-term growth thing, regardless whether it is liquid or not. Right. And the reason why that is, Scott, and you started to say that, traditional IRA, money that went into a 401K, TSP, 403B, deferred compensation 457, if it's all tax deductible, you got the tax deduction now, but guess what? When you take the money out, you're going to have to pay taxes. So in your retirement years, you're going to have to pay taxes when you distribute the

money. And that's where you start to feel the effects of what we call tax drag. So you're making returns in that account that are deferred, but eventually when you take the money out, whatever amount is distributed is added to your ordinary income. And remember, once you start bringing dollars into the proverbial tax net distributions from your traditional account, that impacts many different things in your overall tax situation, from Irma to Social Security tax to the net investment income tax, if that might apply, if your income is too high, and even in your retirement years, those types of things can happen. And that's why there are folks out there that come from the school of thought of hedge against future tax rate increases, hedge against inflation, using a Roth IRA

or Roth Solo 401k plan, even if that means converting from traditional to Roth. And add in here that Congress gave us the deal of the century with the one big beautiful bill, making the tax brackets permanent. So now individuals can look at converting from traditional to Roth at potentially a much lower tax bracket than they would have had prior to 2018 and what would have ended up happening in 2026 when the brackets were to revert to the pre-2018. But now with the permanency of those tax brackets, one might be in a more favorable tax bracket to convert now rather than waiting until later. John, I've heard people say that you shouldn't put your big real estate investments into these tax deferred accounts because then you don't get the benefits of a cost-segregation.

I'm talking more like syndications where a cost segregation can have some really big tax impacts on you. What do you say to that? That can be correct in some instances. Of course, there's always caveats with that, which we can discuss. But what you're saying, Mindy, follows the principle of you put your tax efficient investments in your taxable bucket. So going back to our three buckets, taxable bucket, tax deferred bucket, tax. free Roth or HSA bucket. So your tax efficient investments could be something like a real estate syndication where it's an apartment building, for example, or a self-storage deal, and they're doing

a cost segregation study. And with bonus depreciation, they're showing a lot of losses. And those losses, depending on your status, your tax status, could potentially offset your W-2 active income. For example, if you meet real estate professional status, which I know you guys talk about quite routinely on this podcast. And so there can be an instance based on that individual situation where because of the tax efficiencies associated with those types of real estate assets, one may want to do that in their taxable savings or their taxable bucket. And then they would reserve other investments for their traditional and their Roth. Again, following the same principles that we talked about before, your lower yielding, lower growth investments in your

traditional and then your higher yielding investments in your Roth. A good example of a tax, call it inefficient investment. So a tax efficient investment. Again, we're talking about real estate syndications in that example. But what about a tax inefficient investment? A great example is a loan secured by real estate or investing in a private debt fund. Why? Because it's all interest income. An interest income is subject to what tax rates, your ordinary income tax rate. So let's say I'm married filing jointly and I have $300,000 in income. I'm at the 24% tax bracket. So that means 24 cents on every interest dollar that I make on a private money loan or an investment

in a private debt fund is going to be subject to 24% tax, right? 24 cents on every dollar of interest income that I generate. So that would be considered a tax inefficient investment. And the tax inefficient investments, we would want to, to our best ability, have in our traditional or Roth IRA or HSA, arguably if they're higher yielding investments, where would we put those? Just like Scott said, in the Roth IRA, Roth 401K, or HSA. Yeah.

And then we did a really in-depth episode with you a couple months back, I think in Q1. of 2025 here, John, where we talked about investing in real estate, direct ownership, real estate, using an IRA. And the answer is that, yes, you can do that. And there can be advantages to that. And particularly those advantages are for folks who have most or all of their wealth in that vehicle, in their 401k or Roth IRA, and or who are just entirely comfortable with real estate comprising most or all of their portfolio, really skilled in that area. And I think that today, I think it's a good reminder, you know, these syndications, for example, that have these big losses, for example, the tax losses, those might be something that many folks want to consider outside of the

retirement accounts. If they're going to be, you know, if you've got a couple hundred thousand dollars and spread across these different buckets, the bucket that is going to be after tax, that would make a lot more sense for maybe like a traditional apartment syndication where you're a common equity participant, whereas a preferred equity or the lender on that deal, if you're part of the loan on that deal might make sense inside of the 401k, or if it's very high yielding, like a hard money note, maybe the Roth or the HSA. Another example of that is the loss that you mentioned, right? I'm in a couple of these syndication deals after tax, and they're going to get wiped out.

I mean, I've written them off to zero at this point because of the way the market is gone. And if that was in a Roth, that would be absolutely soul-crushing and devastating. Not only do I lose all that money, but there's no tax benefit. There's no tax overlining whatsoever. But because those were after-tax, I will. get a loss. So anything where there could be a loss, a total loss of principle, and that's a realistic probability, like any highly leveraged investment, that should be something you should be really careful about before putting in the Roth in particular, I think.

I'm glad you brought that up, Scott, because there are some folks that will actually take on too much risk in their retirement accounts in comparison to outside of their retirement accounts. and that's not always a good way to go about things. Because if you think about it, your IRAs, your traditional IRA, your Roth IRA, they're highly tax privileged accounts. And there's also, in many cases, some rather high creditor protections in general, I'll say, associated with these types of retirement accounts. And so one could argue that you want to cherish those tax-free and tax-deferred and you may want to take on more risk with non-retirement accounts than in your retirement accounts. Again, that's all subject to the facts and circumstances of your individual situation or one's

individual situation. Now, the caveats that I was mentioning before, to Mindy's question about investing in real estate syndications, if I have a solo 401k plan and I invest in a real estate syndication, like an apartment building deal, a self-storage type deal, there's always going to be debt on these types of properties. And in a solo 401k plan, I would be exempt from a little-known tax called unrelated business income tax. It's a special tax that would apply to an IRA, traditional or Roth, when investing in those types of real estate syndications. But under Section 514C9A of the tax code, qualified plans are exempt from that tax, which makes a solo 401k plan, whether traditional side or Rothside, potentially a very attractive retirement plan to invest

in those types of real estate syndications. And the reason why I say that is because I know some investors out there that are very good at investing in real estate partnerships, real estate syndications. That's all they've done for many, many years. And so they say, well, John, I want to replicate my success investing in these types of opportunities in my retirement account, just like I do outside of my retirement account. That could be one of the exceptions to the, call it, general rules that we're talking about here or general principles that we're talking about. Thank you for bringing back John Ubit Bowens, by the way.

That's one of my favorite versions here. Let's talk about some other assets. Let's talk about traditional bonds, and let's talk about crypto, you know, which have very different characteristics, bonds being very conservative but yielding essentially all simple interest, and crypto being highly volatile, but presumably producing no income whatsoever, only short-term or long-term capital gains. Where do you think those fall into the bucket across these strategies? So our general principle for bond funds, because it's interest income, same as a private debt fund or if I'm doing private money lending and I'm generating interest income. So a bond fund or bonds are going to be

considered tax inefficient. Thus, we want to hold those where? Traditional or Roth bucket. Probably traditional bucket. Why? Because it's probably going to be a little bit lower interest bearing, right? So we're probably going to hold those in our traditional bucket. Our more conservative bond funds in our traditional bucket. Okay. So crypto, the general principle is your higher volatile investments. And this could be for crypto or it could be for publicly traded assets. Your higher volatile investments, you would hold where? You would hold those actually in your taxable savings, which sort of contradicts what we were talking about before, right? Higher interest bearing, higher yielding, higher growth in your Roth and

HSA. Here's the reason why volatile investment. generally go into taxable. Tax loss harvesting. So if you make an investment and it goes down significantly in value, you may purposely, with intent, sell those securities or sell those assets to take a loss in order to offset other gains or take a loss that might hibernate to offset future gains. So there can be specific strategies that folks work with their CPAs and tax advisors on to specifically hold volatile assets in their taxable savings for what we call tax loss harvesting.

All right. Let's use a similar but, you know, obviously different component of portfolio in gold, right? A lot of people view Bitcoin and gold these days for fairly similar long-term purposes. Would gold's less volatile nature change that for you? Gold and silver, that's an interesting one because the dynamics of holding gold and silver in a retirement account are different than taxable. There are tax advantages, of course, holding gold and silver and traditional and Roth, as well as a long-term hedge against inflation, a long-term, just call it hedge in general. Here are some challenges with holding precious metals in a retirement account, pros and cons. So the pro of holding precious metals in a retirement account,

like a traditional or Roth is what? Well, let's assume that it continues to go up in value. All right. Then your portfolio continues to go up in value. And in a Roth, it's tax-free. And maybe your goal is to leave it to your children or grandchildren. So there's a little bit of legacy planning intersecting with retirement planning there, right? Here's some of the drawbacks of holding physical gold and silver in your retirement account. You can't hold the physical gold and silver. Now, we have plenty of clients that hold physical physical gold and silver in their retirement accounts, and they have good reason to do that. But you got to keep in mind that you can't hold that physical gold or silver in your basement. In fact, there was a tax court case

on it in 2021, the McNulty case. It's a very exciting fun read. Essentially, you can't hold physical metals in your basements, okay, or in your house, in your facilities. You cannot hold physical metals yourself that are owned by your retirement accounts, a prohibited transaction under 4975 of the code. And so there are some investors out there that the reason why they're buying physical gold and silver is so that they can use that physical gold and silver if they need to. And so if it's stuck at a depository somewhere because it's owned by your retirement account, it might be hard to get access to it. Now, can you distribute medals from your retirement account and gain access to it? Of course you can. But the point here is you've got to understand the dynamics of owning physical metals in your retirement account

versus outside of your retirement account, it becomes much more of a mechanical or logistical question, not so much a tax question for some people. No idea you were barred from holding gold and silver in a retirement account physically. Oh, hold on, Scott. I don't think he said you can't hold it in your retirement accounts. I think he said for the people who are wanting to own it for the purposes of having access to it, should something happen to the American currency, then you have more of an issue getting your hands on the physical gold that you're holding in your retirement account. So if you're doing it

in that way, then you should have it in a different account. Am I summarizing that correctly, John? That is correct, Mindy. And I also know of clients that they really enjoy and they're really passionate about owning physical metals for a long-term perspective investing strategy. And for some of them, they're good at it. They know what types of metals to buy. They know who to work with, what metals dealers to work with, and they really enjoy it, right? That's a passion of theirs. And some of those people own physical metals inside and outside of their retirement account. So they allocate some of their retirement portfolio to physical metals. And then they also have liquid assets in their retirement accounts. Because keep in mind with retirement accounts,

you may need those in your retirement, obviously, not just leaving them to your children or grandchildren. And also with pre-tax accounts, like a traditional IRA, the pre-tax side of your solo 401k plan or 401k in general, at the age of 73, and it'll eventually go to the age of 75, you have to take what are called required minimum distributions, RMDs. And that's based on your life expectancy rate. So you have to do a calculation and take a certain amount every single year. Well, if you have illiquid investments like metals, real estate, etc., you have to address that. Now, Can you distribute assets in kind like physical metals? You could certainly do that.

So there are ways to address that, but you want to be smart about how you're allocating your retirement portfolio so that you can address these types of tax situations that come up later on in life. Sorry, I ruined your joke, Scott. Oh, yeah. Well, we're long past that one. Now, let's talk about trading next. So if you're an active trader, I presume that the answer is if you're very good at it,

you want to do that in your Roth. And if you're very bad at it, you want to do it in your after-trial. tax account. Is that correct, John? Yes, that you could use that general rule of thumb or principle. Trading, interestingly, if you started to get into a realm of too much trading, that there could be other implications. But as a general rule of thumb, I think you got it there, Scott, which is in a Roth, maybe an HSA, maybe Roth solo 401K plan. And then you're more. volatile investments, maybe you do purposely do those in a taxable arrangement in order for you to be able to take advantage of tax loss harvesting. All right, we're going to go, I are away

for a moment, and then we'll be right back with more after this. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is going, and more importantly, where your taxed refund can make the biggest impact. Because the goal isn't just to look backward, it's to actually make progress. Simplify your finances with Monarch. Monarch is the all-in-one personal finance tool designed to make your life easier.

It brings your entire financial life, including budgeting, accounts and investments, net worth, and future planning together in one dashboard on your phone or your laptop. Feel aware and in control of your finances this tax season and get 50% off your Monarch subscription with the code pockets. What I personally like is that Monarch keeps you focused on achieving, not just tracking. You can see your budgets, debt payoff, savings goals, and net worth all in one place. So every decision actually moves the needle. Achieve your financial goals for good with Monarch, the all-in-one tool that makes money management simple.

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Get more with Northwest Registered Agent at Northwest Registeredagent.com slash money-free. Thanks for sticking with us. We're going to convert back to our discussion. Let me see if I can spit back some of the things that we've, learned today that I think are really new information for me and things that I need to absorb and digest and put into my overall portfolio philosophy. So the first is we agree with the basic premises of more aggression, more aggressive, longer term investments in the Roth and HSA, more conservative in the tax deferred accounts. But that has to be couched with you can't run risk

of ruin in these. And I think there's a reasonable case to be made that you're not going to get ruined in your Roth if you're invested in the SMP 500, right? The idea that all, that the S&P 500 or a broad-based index fund is going to go to zero is, you know, we have bigger problems if that happens, then what you're worried about from your financial portfolio in that point. But a highly leveraged position against the S&P 500 or a highly leveraged real estate investment asset does come with risk of total wipeout of that portion of your portfolio. And that may not be appropriate to put it really in any position, but especially not in a Roth IRA. And similarly, a speculative bet on a single

company stock that comprises most of that position might be inappropriate inside of a Roth, it might be a better suited position for a small piece of your after-tax portfolio, because that company could go to zero in there, and that would wipe out a portion of the retirement savings. So those are, there's some components. If there's two assets that are both high-yielding, maybe plus 10% expected return, the one that is generating ordinary interest income might be better considered for the HSA versus the Roth, if you have that choice, as a part. part of that discussion. We talked about real estate items that have these loss, these tax efficiencies.

They may be better considered outside of the retirement accounts if you're going for a very broad portfolio diversification and have room to put various different assets and all these different buckets. Although, of course, you can use these tools to isolate or concentrate in one specific area that has most of your expertise. And then one last thing that we didn't talk about today, but we've talked about previously, is the concept of active management of a portfolio. And you kind of hinted at that a little bit with a trading question, right? If that's your business, you can't really do that inside of your retirement accounts. You've got to have, you'd be thoughtful about it, about triggering these violations of the rules of self-directed retirement accounts. Can you refresh us on those? Because those do come

into play when we think about certain syndications holding physical gold inside your basement, inside of a self-directed IRA. And I think that also comes into play with real estate and certain business activities. Yes, stock trading is not as of a concern. People have been doing it for a very long time, right? It's reasonable that let's say I'm a financial advisor. I'm not a financial advisor, but let's say I was. And then I'm also managing my own retirement account and investing in stocks and mutual funds.

As long as I'm abiding by all of my rules associated with the license that, I would have, using just the hypothetical if I was a financial advisor there, then I'm okay, right? That's people have been doing that for years and years. But in terms of managing real estate, that's where we, yes, absolutely, we have to be mindful of the prohibited transaction rules. For example, let's say I'm the GP general partner of a real estate syndication. And so I'm getting management fees as a GP. I'm the one who is boots on the ground, found the opportunity working with contractors. If my IRA or 401k came in as an LP investor, arguably that's a prohibited transaction. 4975 C1C furnishing of good services and facilities,

and 4975 C1D, which would be what we call the personal benefit rule. So I'm using my IRA to then benefit me as a general partner. That's going to be an issue. So the idea is, is passively investing with the self-directed Roth, traditional HSA, solo 401K plan because of the 4975 prohibited transaction rules. One of the questions I get quite routinely is, well, what about a rental property? What if I own a rental property in my self-directed IRA or my solo 401K plan? Or maybe I form an LLC, we call that the real estate checkbook IRA LLC. I form an LLC and I'm the manager of the LLC, but my IRA or 401 is the 100% owner. Well, in those cases, I would want to follow the rule of thumb of doing just the desk work and not doing the physical sweat equity. So that is, again,

a general rule of thumb that can be followed based on the gray nature of the Internal Revenue Code 4975 prohibited transaction rules. I think that's yet another consideration. And I think that if you are somebody who has a distributed net worth position across tax deferred accounts, post-tax accounts like the Roth IRA in an after-tax position, that hopefully today's discussion has given you enough to think about, you know, and begin moving the pieces about generally speaking where certain opportunities fit inside these buckets and a couple of the gotchas. It's by no means a definitive playbook here.

This is very, it's very hard to get specific and prescriptive in this world. given the complexities and likely the higher net worths of individuals that are considering these types of challenges. But I think it is a good starting playbook for folks when they're thinking about, hey, I may not be wealthy today, but in 10, 15, 20 years, if I continue to contribute to these accounts, I'm going to have these opportunities or these challenges from a tax planning perspective to think through. And what decisions I make today will compound into what those options look like in the future. And I think it's an important discussion. I agree, Scott. It's a very important discussion. And as we've been mentioning throughout, everybody's in a little different

situation. Some folks have a vast majority of their overall net worth in the tax deferred bucket or tax-free Roth bucket. So they have very little in their taxable bucket, and then they have a lot more in their tax-deferred or Roth bucket. And some people, it's all tax-deferred. All they have is bucket, too. And so they're looking at, hey, how do I strategically convert to bucket number three? That's what we call Roth conversions. Now, on the other side of the spectrum, you have people that they have a lot of taxable savings, but they don't have any tax deferred or tax-free Roth or HSA savings. Maybe they started a little bit later on in life.

And so now they're looking at, okay, how do I catch up? How do I maximize contributions? For example, to a solo 401k plan or maximize contributions to an HSA while doing that also contribute to an IRA, because as we talk about the power of compounding interest in the absence of taxation is really incredible in these Roth accounts. I have a client who just this past year, he made just on two transactions about six, he saved $16,000 in taxes, you know, on just two transactions. So now he's got $16,000 more that he can put towards more investments in 2026 and then so on and so forth. So once you start applying, once you start putting together spreadsheets.

And Scott, I know you like spreadsheets. I know you have spreadsheets there with all of these calculations on there. Someday we'll have to on a podcast actually show some viewers, some of our spreadsheets that we have, where we actually show the compounding tax-free growth of these various types of accounts. It's really powerful. You know, there's always more to tease out on the self-directed in, you know, IRA world. One last thing that I will tease out there is you mentioned private lending, right? there's a lot of discussion or, you know, another advanced strategy of, you know, if you're going to do a private loan and it's not matured, maybe it's in a liquid asset. How is that going to get valued when it's time to convert an asset in a self-directed 401K, for example, into a Roth IRA? And so that's a pretty fun conversation as well that has to do with more advanced tax planning. And of course, there's lots of eyes to dot and t's to cross. But there can be really efficient games to play if you, you

you're going to use something like that solo 401k as an entrepreneur and stack away tremendous amounts of money for a married couple tax deferred and then have the opportunity to convert that with certain of these self-directed strategies as well, which is something that I intend to look into and begin using for my purposes on a go-forward basis. You're correct, Scott. You're referring to what's called a discount conversion. And for example, I had a client. Her name is Linda.

she invested with the traditional side of her solo 401k plan into a real estate syndication. It was an apartment building deal. $100,000 investment. She went to a CPA. The CPA performed a valuation on her underlying investment. And because the CPA was able to argue that she had a lack of control, no voting rights, and a lack of liquidity at about a five-year horizon, so lack of liquidity, lack of marketability, lack of voting rights, that the value was $55,000. at 100,000. She then converted the asset in kind. So that real estate syndication, she converted from the traditional side of her solo 401k plan into the Roth. So she paid taxes on 55,000 instead of 100,000. Effectively, she got 45,000 of value into the Roth side of her solo 401k plan and paid

0% tax on that. And that's the discount conversion strategy that you're talking about, Scott. You are correct. It's very nuanced. It can be very technical. You have to have a good CPA involved. And you're operating, if you will, arguably in a little bit of the grayer areas. But if done effectively, it can be a technique for people to be able to convert from traditional to Roth in the most tax-efficient way possible. And that's all stuff that's not possible with, you know, the traditional side of the house. It's worth knowing about the self-directed world and the opportunities in it because there's a lot of a lot of interest. games to play, a lot of interesting ways to build the portfolio and theory to put to use. And it's still relatively new. So there's a lot of emerging thought on this as well, especially to most people. I would say a very tiny percentage of the population even knows about, much less uses self-directed retirement accounts and really by and large sticks their wealth in mutual funds, stocks, bonds, and other publicly traded liquid assets. Well, John, thank you so much for

shining a light on this area and coming back on the Bigger Pockets Money podcast, I think for the fourth or fifth time now. It's always a privilege to chat with you. And thank you for having such a great discussion and imparting so much knowledge on our listeners. Yeah, likewise, Scott and Mindy. Always happy to be here. Just give me a call. Thank you, John. I really appreciate your time. I'm going to have to go dive deeper into that discount conversion thing you were just talking about because that is very interesting to me. And I was not aware of that. So one of the things I love, when you come on is that then I have homework. Oh, what does this mean? What does this mean? I'm furiously taking notes as you're talking so that I can get all this information back into my head

in a more deep dive way. So thank you. Thank you again for the homework. Thank you. All right, John, where can people find out more about you? Easy to find us. Trustetc.com is our website, Equity Trust Company. We have a YouTube channel. We have a lot of content on Bigger Pockets as well, and just launched the new book, Wealth Beyond Wall Street, which is a self-directed field manual. So I wrote that book going back about a year and a half ago. We just launched that. So there's plenty of opportunities to find us through that resource, our website, YouTube, and then again, the Bigger Pockets community. We're very active in that community.

We're very appreciative of what you guys do and everything you've done for. so many real estate investors across the country. So easy to find us. All right. Well, thank you so much, John. Hope you have a great rest of your day and talk to you soon. All right, Scott. That was John Bowens from Equity Trust and that was a very heavy conversation. But I'm super excited about all the homework that I have from him to go and start diving even deeper than this excellent information that he already gave us. What did you think of this episode? I always think it's fascinating and really interesting in this space. And I think that, again, the advantages of the self-directed plan are if you want to concentrate your investments in an area you know really well, or if you want to

diversify towards the end of your journey in assets that are not as easy to be accessed via traditional retirement planning accounts. And I think the takeaway, if you're not there yet on either of those, is just to stay with that high-level philosophy of keeping your more aggressive positions in the Roth, you're less aggressive positions in the tax deferred account and the hybrid positions after tax. And that will give you the option later on to move portions or all of these accounts into self-directed plans and take advantage of the major tax advantages, the tax games, for lack of a better word, that can be played legally with these accounts later in life. Yeah, I think there's a lot of options available if you're ready to look into these options.

This discussion was not a beginner level discussion. This is for people who understand the beginner levels and are looking for the next step that they can take their wealth-building journey to. So I learned a couple of things today. I heard a few phrases that I now have to go dive into. So this was a lot of fun, Scott. Should we get out of here? That wraps up this episode of The Bigger Pockets Money podcast. He is Scott Trench. I am Eddie Jensen saying stay keen, Jellybean.