The 3.5 trillion reconciliation pkg changes our SD-IRA options?

16 Replies

I was notified by my Self Directed IRA Custodian about the changes in the 3.5 trillion reconciliation package:

Dear Valued IRA Financial Client,

Your financial security is our priority and the relationship you have with IRA Financial is very important to us.

That’s why we want to make you aware that the House Ways & Means Committee has proposed changes to the laws governing individual retirement accounts (IRAs) as part of their $3.5 trillion reconciliation package.

These changes, if enacted into law, could have a direct negative impact on you and your ability to save for a secure retirement through a Self-Directed IRA.

How would the proposed legislation affect me?

Bill Section 138312: The proposed legislation would prohibit IRAs from holding privately-placed equity and debt securities and other investments that require the IRA owner to meet certain minimum financial, educational or licensing requirements. For example, the legislation would prohibit IRAs from holding unregistered investments that are offered to accredited investors, like equity or debt investments in small businesses or investments in private funds.

Bill Section 138314: The bill would also prohibit IRA owners from investing in (1) non-publicly traded entities in which the IRA owner and related entities (including the IRA itself) own more than a 10% interest or (2) any entity in which the IRA owner is an officer or director, regardless of ownership percentage. By way of example, single-member limited liability companies or any investment in an entity in which an individual is a director or officer could no longer be held in an IRA. IRAs holding any of the above investments would lose all of the tax advantages previously available to the IRA.

If the proposed legislation is enacted, you will no longer be able to purchase any of the above investment types in your IRA. Further, you will be required to dispose of any such investments that you currently hold in your IRA by no later than December 31, 2023, which could result in significant and previously unforeseen financial and tax consequences, including taxes and penalties associated with any assets that could not be sold and must be distributed from the IRA.

What can you do? Take Action Today!

Make your voice be heard. Contact your elected officials in the United States House of Representatives and Senate, and tell them:

  • You oppose limitations on IRA investment choice (Sections 138312 and 138314 of the House reconciliation bill). These under-the-radar provisions have never been publicly vetted and will have unintended and adverse impacts on you and countless other Americans who wish to save for a secure retirement through Main Street investments.
  • Specifically, the legislation:
    • negatively impacts your ability to save for a secure retirement by limiting your choice and ability to diversify your retirement savings outside of the stock market.
    • will likely cause you significant negative financial consequences by forcing you to sell existing IRA investments at a depressed price by a publicized date certain and may also cause significant negative tax consequences (including early distribution penalties) by forcing you to distribute from your IRA any investments that you are unable to sell.

You are also concerned that the legislation negatively impacts the ability of small businesses that employ everyday Americans to obtain the funding necessary to operate and grow their business and create jobs. The proposed legislation eliminates the ability of suitable investors to participate in private capital-raising transactions through.

QUESTION: I already own a multifamily property in my ROTH SDIRA. Does this new legistation direction affect me?

Hopefully the SDIRA crowd will rise up and help kill big portions of this bill.

I'm not a fan of investing through SDIRA, but believe people should have a right to do so.  The government set up the draconian rules for SDIRAs and changing the rules after your money is locked into that structure just hurts a lot of honest people trying hard to better their lives.

I don't read anything there that would prohibit your MFR property from continuing to be help in your IRA. Unless it was a syndication which it would no longer qualify for under these new rules?

@Matt Devincenzo There is nothing that would prohibit your IRA from direct ownership of MFR property. However, if the property was purchased using a "Checkbook IRA" (single-member LLC with IRA as the member and you as the manager) it would no longer be able to be held commencing December 31, 2023.

Also, if your IRA invested in the MFR via a 506(c) syndication, it would also no longer be able to be held.

You might also check out my other recent BP posts on this topic.

Hope this helps.

 

Frankly, I do not see anything in the description of the HR bills that specifies that the bills only apply to 'checkbook' LLCs, or Syndications. 

This seems pretty awful - -> example, single-member limited liability companies or any investment in an entity in which an individual is a director or officer could no longer be held in an IRA. IRAs holding any of the above investments would lose all of the tax advantages previously available to the IRA.

In my case, I was frustrated with the big Mutual fund companies and the limited IRA investing options. Buying the Multi-family rental with my ROTH SDIRA would provide the benefits of real estate investing, as well as ROTH tax free earnings.

I have already contacted  my elected Reps  & Senators,  and because I live in a blue state, none of them care about the constituents concerns, its all about party line.

@Steve Sayler agreed that it doesn't 'only' apply to checkbook IRAs it would apply to all IRAs. But like @Alan Johnson mentioned the investments that would trigger the provisions in this bill and be affected by it would be the single member LLC associated with the checkbook IRA. Applying to all and impacting all IRAs is not the same thing.

Maybe a better way to ask this is, what in the text from your original posting indicates to you that your MFR holding would be in jeopardy if this passed? It is clearly targeted at certain types of holdings or ownership structures, which it doesn't sound like your investment runs afoul of. I'm not in agreement with the legislation, but it doesn't prohibit self direction just certain investment options and ownership structures.

Originally posted by @Matt Devincenzo :

I don't read anything there that would prohibit your MFR property from continuing to be help in your IRA. Unless it was a syndication which it would no longer qualify for under these new rules?

this would have a major impact on syndicators  is my thought.. 

Sure would be nice to hear from some of the SDIRA guru's that are on this site. It would be terrible to have to liquidate my SDIRA LLC that owns rental properties by the end of 2023. Contrary to what some believe, investing in real estate inside your SDIRA can be very profitable if you have bought properties in the right places around the US.

@Mike Kirby Do you qualify (e.g., have a side business) for a solo 401(k)? The proposed restriction on SDIRA LLCs does not apply to solo 401(k)s. You could therefore rollover the LLC holdings into your solo 401(k) and avoid the need to liquidate. See this chart prepared by the IRS to learn more about the portability of various retirement accounts. 

@Alan Johnson Thanks Alan, I am working with my CPA to figure out the best course of action. I appreciate you bringing this topic up. One way or the other my family will be just fine. 

@Mike Kirby Yes, you really will be just fine. In the worst case you would "only" have to re-register the investments held in the LLC into the name of the custodian fbo your IRA. While straightforward, this will be a pain for you, the custodian, and the investment sponsor.

@Mike Kirby Oops, sorry. Just re-read your post and see that your LLC holds rental properties. So you wouldn't be re-registering with an investment sponsor. Instead, you would be changing the real estate title from being owned by your LLC to being owned by your custodian FBO your IRA.

@Steve Sayler

It seems like a bad idea to inject the uncertainty that the government might retroactively change the tax status of any investment at anytime.

Seems like a great way to get people hoarding cash or investing in other countries.

As for only listed investments in an SDIRA that can make sense but not sure how to make it work for real estate. They could also just cap the tax free value at something like $10M and the rest is taxed when you sell just like capital gains instead of income like a 401k.

They are watching people like peter thiel and mitt Romney abuse the SDIRA and want to find a way to make it less advantageous for the super wealthy to hide hundreds of millions from taxes.

Also for budget reconciliation they only get to count tax revenues in the next 10 years which is why some want to tax unrealized gains so they have enough money to reconcile a massive spend on infrastructure and the social safety net

@Brian Eastman is right on the money - each and every member of the investment community needs to reach out to their representatives in both the Senate and the House TODAY to let them know how this will hurt them.  It is important that you be heard.  We just got finished working on preventing the changes to Section 1031, and now it is time to do the same for SDIRAs.