Checkbook IRAs and Some Syndication Investments at Risk

13 Replies

I visit BP infrequently and am surprised that nothing seems to have been posted about changes the House Ways and Means Committee are introducing to help reconcile the $3.5 trillion spending bill. Two sections in particular (Sec. 138312 and 138314), if enacted into legislation, will have significant and, for some, devastating impact on their IRA accounts.

Sec. 138312 prohibits an IRA from investing in a private offering that requires accreditation.

Sec. 138314 prohibits an IRA from investing in an entity in which the account holder is an officer. This effectively prohibits checkbook IRAs.

If such investments are held beyond December 31, 2023, then the entire IRA account will be deemed to have been distributed.

See https://waysandmeans.house.gov..., then follow the link at the bottom of the page for specific language for each section above.

Many SDIRA custodians are encouraging their clients to write to their representatives on this issue.  Some offer assistance in the way of example letters and templates.

At the least, I suggest that those of you that would be impacted by these changes contact your custodian to see what actions, if any, they are taking and recommending.

Thank you for bringing this to our attention. Ultimately this would drive an enormous number of investment liquidations. It sounds like the first one does not keep an IRA out of a 506(b) syndication? Since they do not require accreditation and can accept non accredited investors.

I fully expect the Feds to eventually raid 401(k)s if the eventual debt crisis gets bad enough. They have no qualms about changing rules at whim.

@Taylor L. Yes, this would not apply to investors in 506(b) syndications (at least at the moment; who knows what may come down the road). So if you are deemed knowledgeable (i.e., accredited), you cannot make the investment in a 506(c) with your IRA. But you can invest in a 506(b) along with other IRA investors that may lack the knowledge to perform adequate due diligence.

To me, this is starting to look like black market investing for your retirement. You'll have to go underground or down back alleys to find syndication opportunities for your IRA because of the advertising prohibitions (and funding/number of allowable investor limitations) that come with 506(b) exemptions.

But, please, everyone.  Rather than spending 3 minutes writing comments here, use the 3 minutes instead to comment to your representatives.  Make it simple in language they can understand.  Namely, 138312 and 138314 if enacted will jeopardize your ability to fund your retirement.

Originally posted by @Alan Johnson :

@Taylor L. Yes, this would not apply to investors in 506(b) syndications (at least at the moment; who knows what may come down the road). So if you are deemed knowledgeable (i.e., accredited), you cannot make the investment in a 506(c) with your IRA. But you can invest in a 506(b) along with other IRA investors that may lack the knowledge to perform adequate due diligence.

To me, this is starting to look like black market investing for your retirement. You'll have to go underground or down back alleys to find syndication opportunities for your IRA because of the advertising prohibitions (and funding/number of allowable investor limitations) that come with 506(b) exemptions.

But, please, everyone.  Rather than spending 3 minutes writing comments here, use the 3 minutes instead to comment to your representatives.  Make it simple in language they can understand.  Namely, 138312 and 138314 if enacted will jeopardize your ability to fund your retirement.

 I've only ever done 506(b)s. I promise you we don't all hang out in dark alleys :)

506(b)s can accept an unlimited number of accredited and up to 35 sophisticated investors. There are newer ways to meet accreditation through securities exams, but most accredited investors qualify based on either income or net worth. 

I have emailed my rep. I know for a fact that is a waste of time (I've known a number of staffers and these types of emails just go into the recycle bin), but it's worth a shot.

Many of the proposed changes make sense but two of the changes are simply a disaster and an example of throwing the baby out with the bath water. The legislation is intended (among other objectives) to prevent insiders and in the know investors from purchasing lots of near worthless start up shares in an IRA and having some of them grow tax free into tens or hundreds of millions (like Peter Thiel did with 1.7 million PayPal shares purchased in his IRA for only $1,700). The way the proposal is written, it will limit the average investor instead and the type of investment (i.e. no alternative investments), reduce diversification, increase risk, and limit hard working savers ability to save for retirement. It's absurd. And having to liquidate illiquid alternative investments within two years is even more absurd.

@Taylor L. The ease with which email can be deleted is the reason why all communications with representatives should also be submitted on paper.  Yes, this means printing a document, signing it by hand, addressing an envelope, buying a stamp, and taking it to the post office for mailing.  This is a lot of work and most people won't bother.  Which is tantamount to acknowledging that the issue isn't really that important to them.

Also, put an action item in the communication to try to extend the engagement with the staffer.  Something like "Please let me know your views on these proposed changes, and why they are in the nation's best interest."  This allows you to keep sending follow-up emails every few days asking why the representative hasn't gotten back to you.  When they send you a generic "the representative is deeply concerned about (topic)" email, send them another one asking why they are avoiding a direct answer to your question.

The Animal Welfare Institute has an excellent post on How to Communicate Effectively with Legislators that may give readers additional ideas.

Also, sorry about my 'dark alley' comment. Having worked for SDIRA custodians in the past, I've seen far too many "do this legally" workarounds to IRA regulations that end up causing problems for the account holder. The point I was trying to make is that I expect to see "grow your IRA to hundreds of millions legally!" adverts should the revisions be enacted.

Originally posted by @Mike Dymski :

Many of the proposed changes make sense but two of the changes are simply a disaster and an example of throwing the baby out with the bath water. The legislation is intended (among other objectives) to prevent insiders and in the know investors from purchasing lots of near worthless start up shares in an IRA and having some of them grow tax free into tens or hundreds of millions (like Peter Thiel did with 1.7 million PayPal shares purchased in his IRA for only $1,700). The way the proposal is written, it will limit the average investor instead and the type of investment (i.e. no alternative investments), reduce diversification, increase risk, and limit hard working savers ability to save for retirement. It's absurd. And having to liquidate illiquid alternative investments within two years is even more absurd.

Another classic failure to look at trade offs and instead focus on a pathos argument: "look at what this one person did to get around the system, the rule is terrible and we need to get rid of it". In reality there are no perfect rules and sure Peter Thiel use the system to his advantage [and arguable broke the law because there is already a rule that prohibits stuffing your IRA with grossly under valued securities and no one seems to ask why the IRS didn't go after him for that] but is the societal cost of this happening one or two time greater than the benefit of the thousands of others who use their IRAs to invest in non public securities? IDK because no one in Congress has done the work to figure it out.

Originally posted by @Alan Johnson :

@Taylor L. The ease with which email can be deleted is the reason why all communications with representatives should also be submitted on paper.  Yes, this means printing a document, signing it by hand, addressing an envelope, buying a stamp, and taking it to the post office for mailing.  This is a lot of work and most people won't bother.  Which is tantamount to acknowledging that the issue isn't really that important to them.

Also, put an action item in the communication to try to extend the engagement with the staffer.  Something like "Please let me know your views on these proposed changes, and why they are in the nation's best interest."  This allows you to keep sending follow-up emails every few days asking why the representative hasn't gotten back to you.  When they send you a generic "the representative is deeply concerned about (topic)" email, send them another one asking why they are avoiding a direct answer to your question.

The Animal Welfare Institute has an excellent post on How to Communicate Effectively with Legislators that may give readers additional ideas.

Also, sorry about my 'dark alley' comment. Having worked for SDIRA custodians in the past, I've seen far too many "do this legally" workarounds to IRA regulations that end up causing problems for the account holder. The point I was trying to make is that I expect to see "grow your IRA to hundreds of millions legally!" adverts should the revisions be enacted.

 No need to be sorry! I thought it was funny :)

I will read more from that article and see what they have to say about communicating with legislators. I am also an animal rights nut too, so double bonus.

@Mike Dymski well some think most changes make no sense. Take 1202 for example. Pres Obama made a rule in which hundreds of thousands used to make investment decisions. Now, they are planning to pull the rug out from under them, retro. How does that make sense? Retroactive tax policy is terrible and shakes confidence in the system.

The Roth strategy has been around forever. Its a pretty common planning tool. Did Congress not know until the WSJ published an article? Its kind of comical.

In any event, this new bill already has tax opportunities so planning will just shift!

Originally posted by @Greg O'Brien :

@Mike Dymski well some think most changes make no sense. 

Thinking that most changes make no sense is the heart of the problem - it has led to inaction that then leads to overreach. Having hundreds of millions and even billions in IRA accounts does not make sense...that kind of wealth does not need a tax shelter. Retirement accounts were intended to help and incentivize middle class savings, not provide tax shelters for the uberwealthy. Us conservatives should eliminate these bad loopholes to avoid absurd overreach from non-conservatives during regime changes (after us conservatives did not fix the real problem).

@Mike Dymski i think thats a good way to look at it.

I just find it interesting there was no outrage since 2010 when this really starter. 1202 makes no sense tho. Silicon valley will likely lobby that right out of the bill.

IRA piece is interesting but some of the biggest overreach comes in the new account reporting rules proposed. Compliance nightmare

@Mike Dymski @Greg O'Brien the answer to that one is the cap they are considering. I think it is something like over $10 million in IRAs then no more contributions, something like that anyway.

Going by Mike's theory it makes more sense to put a cap on the total amount that can be sheltered that it does to limit the choice investment options. A cap alleviates the need for limiting the choices. 

Of course the cap should be indexed for inflation. 10 or 20 years from now a 10million cap may not seem like much.