In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses the Ways and Means Committee’s tax proposal and how the retirement provisions affect Self-Directed IRA investors.
As you’ve probably heard already, we finally have a detailed look at the democratic-led tax proposal. This is part of the larger $3.5 trillion infrastructure package and was released on Monday, September 13, 2021. While it does include the expected tax increases, especially for high-earning Americans, it also includes several retirement-related provisions. In this episode of Adam Talks, Adam Bergman will focus on those particular provisions. Further, he will explain why the Self-Directed IRA is under attack!
Important Provisions of the Legislation
You can check out our blog article to read all the major provisions of the bill, but here we will detail those related to retirement accounts and investing. Some of them were expected, however, others came out out of the blue. As with most legislation, the idea behind these provisions is to generate money for the government (and help pay for the infrastructure bill). Believe it or not, these provisions will only raise about $4 billion over a ten-year period.
The first provisions arises from the Peter Thiel situation. Thiel, who amassed a tax-free fortune in a Roth IRA, is public enemy #1. The government wants to make sure no one can ever amass billions of dollars in such a tax-advantaged account. However, the so-called Roth IRA cap is not what we are seeing. Instead, it’s a cap across all retirement accounts.
The bill calls for a $10 million cap across all of one’s retirement assets in the aggregate. If and when you exceed that threshold, you will be forced to distribute 50% of the amount above cap. There will be no early withdrawal penalty, however, the distribution will be a taxable event. It’s unclear at this time if Roth withdrawals will be taxable.
This is supposedly for individuals earning $400,000 annually, or $450,000 if you are married filing jointly. Plus, if you hit the cap, you are prohibited from contributing to a retirement plan.
The Backdoor is Closed
A Backdoor Roth allows anyone to convert traditional IRA funds to a Roth, no matter your income. However, the bill prohibits one from doing so if you are above the $400,000/$450,000 income limits.
The Mega Backdoor Roth allows one to make after-tax contributions to a 401(k) plan, and then immediately convert them to a Roth. This can be done on a dollar-for-dollar basis. Currently, one can contribute almost $60,000 to a traditional plan, and then receive the tax-free benefits of a conversion to a Roth. This rule change applies to everyone, not just high-income earners!
This certainly won’t generate revenue, as more people will look at traditional, pretax plans. Again, this is the government’s way of ensuring savers don’t amass a fortune that’s not subject to tax.
Self-Directed IRA Under Attack
The next two provisions is what is troublesome for Self-Directed IRA investors. The proposed bill will limit certain investments one can make with his or her retirement funds. Again, this is all a result of the Peter Thiel situation. It’s important to note that these stipulations probably wouldn’t have affected Mr. Thiel’s ability to make the investments he did.
Accredited Investor Status
An accredited investor is an individual who meets certain economic or academic criteria. Certain assets, like private placements and hedge funds, require this status for one to make an investment. A provision in the new bill prohibits an IRA for making any investment that requires accredited investor status.
For example, you must earn $250,000 annually to be considered an accredited investor. If a venture capital investment requires this, you are not permitted to use your Self-Directed IRA funds to make the investment. As Mr. Bergman points out, there is already a cap on retirement investments, why ban us from making these types of investments. What this hurts the most is small businesses. Private placements for start-ups are often funded with IRA money. No more!
Controlling Interest Percentage
Currently, if you have a 50% controlling interest in a business entity, you cannot use your Self-Directed IRA to invest in it. Fair enough! However, this legislation would lower that percentage to 10%. Plus, if you are an officer at a business (with no ownership), you cannot invest in it.
Therefore, if you have checkbook control of your IRA, and use an LLC to invest in real estate, for example, you cannot be the manager. You would have to rely on another party, such as your spouse.
Again, this makes no sense if the government is looking to generate revenue. Plus, with the cap, you are not going to amass more than $10 million in retirement assets anyway!
There are a few lesser provisions that are not as major as the ones listed here. But, the ones listed here are of major concern for everyday investors. It behooves anyone who wants investing freedom to talk to their state-elected officials. The Democrats need all 50 votes to get this bill passed. If you can sway one to vote against this bill, it will not get passed. These provisions do not raise money nor do they solve problems.
Of course, Adam will keep you up to date with any changes in the proposal. Obviously, this bill is not going to get through as-is. There will be changes, so keep an eye out across our social media channels, YouTube and our blog for breaking news!