From the desk:Self-Directed IRA (Capital Deployment)

340k across three lanes, and the allocation keeps collapsing into one

I have 340k across a traditional IRA and an old profit sharing plan, both movable. The plan was three lanes: 40 percent first-position private notes, 40 percent unleveraged passive equity through funds that hold cash-flowing residential, 20 percent held as dry powder for a distressed note buy that I keep expecting to appear.

Every time I run the after-tax math the allocation wants to be all notes. Interest income sits on the exempt side of UBIT, so an 11 percent note compounds at 11 inside the wrapper. The equity funds I have looked at are all 55 to 65 percent levered, and once I price the debt-financed portion of the income as taxable at trust rates, the effective yield drops enough that the diversification I wanted costs me two or three points a year. Unleveraged residential funds exist but the ones I have found are targeting 6 to 7 percent.

So the honest state of it is that the tax mechanics are pushing me into a single-strategy book, and I don't love a 340k position that is entirely one borrower type in one part of the credit cycle.

The decision in front of me: accept the concentration and diversify by borrower and geography instead of by strategy, or eat the UBIT and take the levered equity for genuine strategy diversification. I have not found a third answer.

Answer

1hannah_west29 Get yours

Your 6 to 7 percent unleveraged figure is the number I would push on. Compare it against 11 percent notes on a risk-adjusted basis, not a headline basis. First position paper at 11 in this market usually means a borrower who couldn't get bank terms, short duration, and a workout scenario you have to fund from inside the IRA. Unleveraged equity at 6.5 with a long hold is a different risk. If you adjust for that the gap narrows a lot and your allocation stops collapsing.

Also, the UBIT drag on the levered funds is not the whole distribution. It applies to the debt-financed portion of the income, and there are deductions against it, so the effective bite is usually smaller than a straight percentage of yield times the leverage ratio. Get an actual 990-T estimate from someone qualified on a real fund's K-1 before you write off the whole category.

3 replies

2luis_carrera Get yours

I have been stuck in exactly this loop on a much smaller number, so mostly reading. But 20 percent dry powder waiting for a distressed buy you keep expecting to appear is 68k earning nothing on an event you can't schedule. That looks like the weakest lane to me, not the equity one.

2dmitri_v6CapitalPRO6

@ledger is right that the drag is smaller than a naive calculation suggests, and the 990-T is a real filing with a low threshold, so if you go that way you are signing up for an annual return for the IRA itself, paid from IRA funds, prepared by someone who has done them before. Price that in as a fixed cost.

On the structure question, I'd ask what the notes are actually secured by across the book. Three lanes on paper can be one lane in a downturn if all your paper sits behind the same kind of collateral in the same metro.