In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. updates everyone on the tax proposal presented last week, and why it’s concerning for Self-Directed IRA investors.

As you all know, the House Ways and Means Committee introduced new tax legislation. As part of the proposal, there are a number of key provisions related to retirement plans. Some were expected, however, there were others that came as a surprise. In this episode of Adam Talks, Adam provides an update on the government attack on SDIRA.

Key Provisions of the Tax Bill

As mentioned, the bill includes a multitude of provisions which aim to generate money for President Biden’s infrastructure bill. Check out our article which summarizes each of the major provisions. Here’s a quick breakdown of those that affect retirement savers:

• Limits contributions to a traditional or Roth IRA if your total retirement savings is over $10 million. This includes IRAs and defined benefit plans, such as 401(k) plans.
• The above limit would apply to those earning more than $400,000 or $450,000 for those who file jointly.
• New required distributions for IRAs: If you exceed $10 million in combined retirement savings in a given year, you must distribute at least 50% of the excess amount.
• If you exceed $20 million, you must withdraw from 401(k) plans and Roth IRAs first. These rules apply to those with $400,000 ($450,000 if married filing jointly) in annual income.
• The elimination of the Backdoor Roth IRA. If you are above the above-mentioned income limits, you can no longer convert to a Roth IRA. This would go into effect after 12/31/31.
• The elimination of the Mega Backdoor Roth strategy. No longer can you contribute after-tax funds into your workplace plan, or convert after-tax contributions to an IRA. This applies to everyone!
• You would be prohibited of holding assets that require accredited investor status with IRA funds. For example, you couldn’t use your IRA to invest in private placements.
• Extend the statute of limitations from three to six years on IRAs, giving the IRS more time to find asset valuation and prohibited transaction violations.
• Reduces the 50% threshold to 10% of controlling interest in an entity to be able to invest your IRA in that entity. If you own 10% of a business, you can no longer invest your IRA in that business.
• Provide the IRS with approximately $80 billion to help them with tax enforcement and update information technology.

The two provisions in bold is the most concerning for the Self-Directed IRA industry. As Mr. Bergman points out, the others were expected and there is no reason to fight them. However, the accredited investor and small business provisions are worth the fight.

Government Attack on SDIRA

The two provisions highlighted above have caused a lot of unrest in our industry. They are not big money raisers, and don’t really affect the super wealthy. They affect average Americans and small businesses especially. Here is a more detailed look at those two provisions.

Accredited Investor

There are essentially two ways to become an accredited investor – through wealth or knowledge. If you earn over $200,000 annually or have a net worth of $1 million, you may be deemed accredited. Alternatively, certain jobs, certifications, and credentials may give you that status as well. So, what’s the big deal?

Only accredited investors can invest in things like private equity, hedge funds, venture capital, and private placements. Essentially, the government is trying to “protect the average investor,” who might not have the money or knowledge to make these types of investments.

If an IRA is held by an accredited investor, it has been allowed to make these types of investments. However, this new bill will prohibit an IRA from making any investment that requires accredited investor status. Those who proposed this bill is essentially telling us that you can’t get rich in a tax-advantaged account, like a Self-Directed IRA.

Controlling Interest Threshold

The other provision focuses on the type of business your IRA is allowed to invest in. Currently, if you have a 50% stake in a business, you cannot use IRA funds to invest in that business. This makes sense as it may be considered a conflict of interest.

However, the bill would lower that threshold to 10%. Further, if you are an officer in a business, you cannot invest in it. Even if you have zero ownership. IRAs have been a big source of capital for small businesses. No more! If you have a limited interest in the business, you can no longer invest in it.

An Update

As stated, this is not a money maker for the government. The idea is to limit the Peter Thiels of the world. Thiel amassed $5 billion in his Roth IRA with smart investments. Because it’s in a Roth, the gains are all tax free when he reaches age 59 1/2. However, a cap is enough to stop that from happening again. While Adam doesn’t agree with a cap, he knows it’s inevitable. The only thing these two provisions are doing is hurting average Americans looking to save for retirement.

The industry is up in arms about these provisions and is urging everyone to speak with your elected officials. Remember, the Democrats only have a small majority in the Senate. They need everyone on board to get this bill passed. The impetus is to get someone of that side of the aisle to block these particular provisions.

Abuse and fraud are not happening with the investments these provisions are trying to prohibit. The only thing that will happen is small businesses (and jobs) will be hurt.

We need your help to get out there and voice your outrage. At IRA Financial, we feel it’s up to you to make the most of your retirement savings. We don’t limit the investments you can make with your IRA or Solo 401(k). If the government starts limiting what you can invest in, who knows what may happen in the future.

Adam will continue to provide updates on the new legislation. Hopefully, we’ll see some positive change coming soon. As always, check out our SoundCloud page, or wherever you listen to podcasts, to stay abreast on this fluid situation!