In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses possible tax increases for any IRA owner, despite the Biden promise of no higher taxes for the average American.
Please note this episode was recorded before changes were made to the tax bill. The provisions talked about in this podcast have been removed from the bill.
President Biden has repeatedly said this tax bill will not raise taxes for the average American. However, there were two provisions included in the original draft submitted by the Ways and Means Committee that could impact taxes. These provisions were not limited to just the wealthy. As a result, they would have tax implication for every American who had certain investments in an IRA.
Because these provisions are no longer in the bill, we will keep this short and to the point. Please listen to the episode of you want to learn more about them, just in case they are added in the future.
IRA Provisions in the Tax Bill
Among the many retirement-related provisions in the tax bill were two that specifically prohibited certain investments from being held in an IRA. These two were Section 138312 and Section 138314.
The first provision would prohibit one from investing in any type of investment that required accredited investor status. These include hedge funds, private placements, and debt investments in small businesses. Essentially, these sophisticated investments would be disallowed in an IRA. Of course, to be accredited, you must earn $200,000 annually, or have a net worth of at least $1 million.
Secondly, 138314 would prohibit investments into a private entity in which you own more than a 10% interest. Previously, the threshold is 50%. Further, if you are an officer or director, the investment would not be allowable; even if you do not have an ownership stake.
Any of these investments currently held in an IRA would have to be distributed within two years.
What’s the Big Deal?
That last statement is the crux of the tax bill and the Biden promise. Any asset distributed from an IRA is treated as a taxable event. Therefore, regardless of your income, you would get hit with a higher tax bill. There is nothing in the tax bill that limits this to high income earners.
Proposed tax provisions 138312 & 138314 seeks to radically impact the ability of all American to save for a secure retirement by limiting choice as well as the ability to diversify ones retirement savings outside of the stock market. Furthermore, with an estimated $12 trillion or so in IRA funds, these provisions adversely impact the ability of millions of small businesses that employ everyday Americans to raise capital they need to operate and grow their business and create jobs.
In the case of non-publicly traded investments, such as private business or private investment funds, those type of investments are often illiquid and hard to sell. Moreover, in some cases, private fund investments include a lock-up period that prevents a sale or liquidation of the investment. As a result, due to proposed tax bill provisions 138312 & 138314, IRA owners, in many instances, making under $400,000 of income, that have held these illiquid assets in their IRAs, as they were legally entitled to under applicable law, would be forced to either sell these assets at a depressed price by a publicized due date or mandated to take a taxable distribution of the asset causing an increase in income tax.
Millions of Americans seek to invest their IRA in off-Wall Street assets as a source of investment diversification. The IRA is the largest source of savings for most low- and middle-class Americans. Nevertheless, proposed tax bill provisions 138312 & 138314, which are estimated to raise just $1.7 billion in revenues over 10 years, will harm average, middle-income retirement savers. These provisions strip them of investment choices and at the same time dramatically limit the ability of millions of American businesses to raise capital from the over $12 trillion dollars of IRA funds.
Any restriction of capital to small business is a restriction of capital to the greatest creator of jobs in the US. Moreover, these provisions directly contradict President Biden’s campaign promise that no taxpayer making $400,000 or less will pay more in taxes.