We all know the wealthy invest — but what really sets them apart is how they invest. Their strategies go beyond “buy stocks and hold.” Rich investors use tools that help them avoid taxes, earn high returns, and preserve their wealth for generations.
Here are three investing tactics the rich use — and what the rest of us can learn from them.
1. They use private placement life insurance to avoid taxes
Private placement life insurance (PPLI) lets wealthy investors grow money tax-free while reducing estate taxes.
How it works
- The investor funds a life insurance policy with high-dollar contributions (often millions).
- Inside the policy, that money can be invested in things like hedge funds, real estate, and private equity.
- Investment gains inside the policy are tax-free, and when the policyholder dies, the payout passes to heirs without taxes.
Can ordinary people do this?
Not really. PPLI typically requires a net worth in the millions — and the premiums alone may be over $3 million per year. However, you can get similar tax advantages with a Roth individual retirement account (IRA) or a health savings account (HSA).
In fact, a Roth IRA is my personal favorite investing account.
- Capital gains and dividends within the account are tax-free.
- Withdrawals are free from income tax.
- If you pass your Roth IRA on to your heirs, they can withdraw funds tax-free, too (with some exceptions).
If you want to start investing more like the rich, then check out our list of the best IRA brokers and open an account today.
2. They use “buy, borrow, die” to spend millions without selling assets
This strategy helps the rich live large without selling investments and thus paying capital gains taxes.
How it works
- Buy: They buy assets that grow over time, like stocks or real estate.
- Borrow: Instead of selling those assets for income, they take out loans against them. Loans aren’t taxed.
- Die: When they pass away, their heirs inherit the assets with a stepped-up cost basis, erasing the capital gains that would have been subject to tax.
Can ordinary people do this?
To a degree, yes. If you own a taxable investment account or real estate, you can borrow against those assets — often at low interest rates.
Just be careful: This strategy only works if the asset continues to grow and the loan terms are favorable. Everyday investors are usually better off leaving their investments untouched.
3. They use backdoor Roth IRA contributions to get around income limits
People who earn more than a certain amount cannot contribute directly to a Roth IRA. The income cutoff points for 2025 are $150,000 for single filers and $236,000 for joint filers.
But there’s a loophole in the tax code that allows wealthy Americans to invest through a Roth IRA anyway.
How it works
- They make a contribution to a traditional IRA (anyone can do this, regardless of income).
- Then, they quickly convert that money into a Roth IRA.
- Once in the Roth, investments grow tax-free, and withdrawals in retirement are also tax-free.
Can ordinary people do this?
Absolutely. If you earn too much income to contribute to a Roth IRA the usual way, you can use the same strategy. Just be aware of the “pro-rata” rule, which can complicate things if you have other traditional IRA assets.
If you need help with retirement planning, it might be smart to hire an advisor. A short questionnaire from our partner, SmartAsset, helps match you with up to three fiduciary financial advisors, each legally bound to work in your best interest.
Start investing smarter
You don’t have to be a millionaire to invest or to save yourself and your heirs a fortune in taxes. While some tactics require big money, others — like investing in a Roth IRA — are doable for almost everyone. Learn the rules the rich play by, and you can start making moves that build serious wealth over time.