The (proposed) Death of your SDIRA
Atlanta, GA · Member since 2018 · 93 posts · 33 votes
The (proposed) Death of your SDIRA
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Accountant / Attorney · San Juan, PR · Member since 2017 · 67 posts · 171 votes
5yUnder the bill, an IRA cannot own 10% or more of a corporation, partnership, trust, estate, or "other unincorporated enterprise". That probably means Single Member LLCs as well. Now, one can gamble and say "I think unincorporated enterprise does not mean SMLLC's". Of course, if you are wrong (likely), your IRA dies. Who wants to roll those dice?
PS: It certainly kills 50/50 JV's between an IRA and a "sweat equity guy", to name just one example of the many, many deals this legislation would ban. The IRA cannot own 10% or more of ANYTHING. And is banned from PPM's, etc. that require accredited investors, etc.
Also banned: Anything in which the owner is an officer or director, which includes CBLLC's. Note: Putting a "strawman" as the officer or director (or manager or trustee, same thing) does not "get around" the problem. The IRS looks at the substance and would ask "do you exercise the power of officer or director"; if one exercises such power, they are an "officer or director", regardless of what the paperwork says.
That this is "just in the House and has not passed yet" is no reason for complacency. It'll be harder to stop the further down the line it gets. It would ban better than half of SDIRA investing. And you better believe that if they get away with it 401k's will be next.
It's time Make Some Noise and not just let it happen.
16 Replies
- 5yJohn UnderwoodPro MemberInvestor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
I already got the email from John Hyre.
I don't see this is SDIRA killing.
It is certainly limiting for high earners.
Did I miss something?
- Atlanta, GA · Member since 2018 · 93 posts · 33 votes5y
@John Underwood These are my thoughts and commentary based on the proposals in the tax bill. Feel free to correct me where I’m mistaken and challenge me where you don’t agree. If these proposals don’t affect you personally (yet), they will have a great impact on someone you know, someone you partner with or the future you that hasn’t been realized yet.
A quick recap on the proposals in the bill:• Banning your IRA from investing in most Private Placements, Crypto arrangements, many private deals.
o Many IRA's are allowed to participate in investments that are only opened to "Accredited Investors" , and with the new law that is put to an end.
o The kicker is that, you only have 2 YEARS to unwind any deals that your IRA has already invested in or the entire account becomes taxable and you’ve lost all the benefits of having an IRA.
o You might need to sell your existing positions (at a DEEP discount) to get out of a deal before time runs out.• Banning ownership of your IRA of more then 10% of ANYTHING
o If you wanted to own a rental house in your IRA, only the IRA itself could own it; you wouldn't be able to use the statutory protection of an LLC.
o No more use of Land Trust or PPT
o No more Checkbook IRAs
o No more Joint Ventures in which your IRA owns 10% of a deal or an entity• A proposed limit on Roth Conversion
o Only Pre-Tax traditional accounts may be converted to a Roth IRA
o For you business owners, this will effectively mean that only your Employee Elective deferrals ($19,500 in 2021) and Pre-Tax Employer matching will be eligible for Roth Conversions.• Forced Required Minimum Distributions on Retirement Plans Exceeding $10M
o If your “defined contribution” plans (IRAs, 401Ks, etc) exceed $10M (combined) in balance, you will be required to take an RMD (taxable event) on the excess. This would only apply to individuals whose income exceeds $400K (filing single) or $450K (filing jointly)
o My account balance is nowhere near this now; why are we all investing? Is a $10M total on our retirement account balances an obtainable goal for a savvy investor with the ability to choose to participate in great deals?
o What will $1 buy you when you retire? $10M might seem like a lot of money now, but it 20, 30 or 50 years?? - 5yJohn UnderwoodPro MemberInvestor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
Where does it say no more checkbook IRA'S? I have not seen this. One of my sf directed IRA'S is a checkbook IRA.
I did not see where it bans LLC'S. Maybe I missed it.
Also these are proposed changes, far from any approved version yet.
- 5yJustin WindhamPro MemberBanker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
Hey John. You are right, this is proposed legislation and our industry is actively fighting against the sections that would most negatively affect self-directed retirement account investing. The proposed legislation would disallow an IRA to own the LLC that is required to give the IRA account holder checkbook control. While your Solo 401k would still be able to provide checkbook control, your IRA would not under those proposed rules.
- 5yJohn UnderwoodPro MemberInvestor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
Originally posted by @Justin Windham:
Hey John. You are right, this is proposed legislation and our industry is actively fighting against the sections that would most negatively affect self-directed retirement account investing. The proposed legislation would disallow an IRA to own the LLC that is required to give the IRA account holder checkbook control. While your Solo 401k would still be able to provide checkbook control, your IRA would not under those proposed rules.
So if this were to happen what would happen to a ROTH checkbook IRA? Could I transfer my houses that are owned in it to my Roth Solo 401k or would I have to liquidate these properties? Or I could I just move them out of the checkbook IRA and keep them?
Keep in mind that there are members of congress that have self directed IRA'S also.
- 5yJustin WindhamPro MemberBanker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
For Roth IRA assets, a transfer to your Roth Solo 401k is not an option. Unfortunately, the IRS restricts Roth IRAs so that they cannot be transferred to anything except another Roth IRA. This is the biggest downside to a Roth IRA in my opinion. You would not however, have to distribute the assets from your Roth IRA. You would need to distribute the assets from your LLC and have those held by the Roth IRA custodian directly.
Absolutely, there are members of congress with self-directed accounts, and the proposed legislation is certainly not universally supported. This is a huge over reaction to some highly publicized news stories about a very small number of people with huge Roth IRAs. There is actually just one instance that I can think of that seems to have some politicians on a warpath.
- Atlanta, GA · Member since 2018 · 93 posts · 33 votes5y
here's the language from the proposed bill (pg. 693)
17 SEC. 138314. PROHIBITION OF INVESTMENT OF IRA ASSETS
18 IN ENTITIES IN WHICH THE OWNER HAS A
19 SUBSTANTIAL INTEREST.
20 (a) IN GENERAL.—Subsection (a) of section 408, as
21 amended by the preceding provisions of this Act, is amend
22 ed by adding at the end the following new paragraph:
23 ‘‘(8) No part of the trust funds will be invested
24 in a corporation, partnership or other unincor
25 porated enterprise, or trust or estate if—
Pg. 694
1 ‘‘(A) in the case of an entity with respect
2 to which interests described in clause (i), (ii), or
3 (iii) are not readily tradable on an securities
4 market, 10 percent or more of—
5 ‘‘(i) the combined voting power of all
6 classes of stock entitled to vote or the total
7 value of shares of all classes of stock of
8 such corporation,
9 ‘‘(ii) the capital interest or profits in
10 terest of such partnership or enterprise, or
11 ‘‘(iii) the beneficial interest of such
12 trust or estate,
13 is owned (directly or indirectly) or held by the
14 individual on whose behalf the trust is main
15 tained, or
16 ‘‘(B) the individual on whose behalf the
17 trust is maintained is an officer or director (or
18 an individual having powers or responsibilities
19 similar to officers or directors) of such corpora
20 tion, partnership, or other unincorporated en
21 terprise.
22 For purposes of subparagraph (A), the constructive
23 ownership rules of paragraphs (4) and (5) of section
24 4975(e) shall apply, and any asset or interest held
Page 695
1 by the trust shall be treated as held by the indi
2 vidual described in such subparagraph.’’. - Santa Rosa, CA · Member since 2017 · 325 posts · 701 votes5y
As bad as everything above is, the worst part is that existing investments are not grandfathered in. Because they want to "reclaim" the tax revenue the current bill gives a date of December 2023 to divest any offending investment. So either you have to move the item out of the IRA, paying taxes and penalties, or somehow sell it before the due date.
In my case I own 2 real estate syndications with 2 and 10 year time frames. Best case scenario is that I would scrape up non-IRA money (150k) and convince the sponsors to let me sell my IRA owned shares to myself (non-IRA money). They then refund my IRA money back and I can invest it in approved items. This is not normally allowed as in syndications they don't normally allow people to buy out other limited partners.
Worst case it gets kicked out of the IRA (divested) and I lose 150k of tax free money out of my IRA. I dont lose the investment, but obviously 150k in a tax free account is way more valuable than 150k regular money.
All of this to go after 500 accounts that have more than 5 million in them. I get it, everyone is mad that Peter Thiel has 5 billion in his IRA. He did not steal it and followed the rules, but they want to punish him and anyone else they think is clever at investing. It is really just sad.
- Accountant / Attorney · San Juan, PR · Member since 2017 · 67 posts · 171 votes5y
Under the bill, an IRA cannot own 10% or more of a corporation, partnership, trust, estate, or "other unincorporated enterprise". That probably means Single Member LLCs as well. Now, one can gamble and say "I think unincorporated enterprise does not mean SMLLC's". Of course, if you are wrong (likely), your IRA dies. Who wants to roll those dice?
PS: It certainly kills 50/50 JV's between an IRA and a "sweat equity guy", to name just one example of the many, many deals this legislation would ban. The IRA cannot own 10% or more of ANYTHING. And is banned from PPM's, etc. that require accredited investors, etc.
Also banned: Anything in which the owner is an officer or director, which includes CBLLC's. Note: Putting a "strawman" as the officer or director (or manager or trustee, same thing) does not "get around" the problem. The IRS looks at the substance and would ask "do you exercise the power of officer or director"; if one exercises such power, they are an "officer or director", regardless of what the paperwork says.
That this is "just in the House and has not passed yet" is no reason for complacency. It'll be harder to stop the further down the line it gets. It would ban better than half of SDIRA investing. And you better believe that if they get away with it 401k's will be next.
It's time Make Some Noise and not just let it happen. - 5yBill ExeterBusiness Member1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
What we are finding as we speak with members of Congress and their aids is they are not aware of these provisions in the House Ways & Means Committee mark-up. It is critical that everyone reach out to their own local election representatives TODAY to let them know that you are opposed to these changes, that it would devastating to investors (especially those that have already made these investments), and would significantly limit the ability of sponsors to raise funds, etc. It is imperative that investors not sit back and hope that others fight the fight. Everyone needs to get involved.
Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews - Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
@Ari Newman this comes down to two agendas in congress:
1. They want to get paid, sooner rather than later. The government is literally running out of money as we speak. They need new sources of tax revenue to pay for their spending agenda. There is only two ways to fund the government, more tax revenue (tax money) or more debt. These tax protected and tax deferred retirement accounts can lock up tax revenue for many years.
2. They are trying to protect people from bad decisions. Private investments and crypto are more risky in general terms. I have mixed feelings on this. I am a big supporter of letting people make their own decisions, but as a society we no longer force accountability on people. If crypto went to zero tomorrow, there would be thousands of people demanding action (bail out, hand out or demanding blood). Unfortunately we no longer make people suffer the consequences of their decisions, so that means we need to protect them. The mentality is "Ban the 46 OZ soda at the convenience store because people can't control themselves and they are too fat."
Like it or not, the majority of voters in America want more taxes (to fund more government programs like health care) and they want safety and security of Uncle Sam protecting them from the worlds harms. At the human core people want to feel safe and protected. What used to be great about America was the American frontier spirit. Too many generations have passed and we are loosing that self sufficiency that made this country great.
Another thing to consider is that politicians in both parties are in the pockets of big money and Wall street. If you think I am wrong, look at their donor lists. Wall street wants you to buy and trade their investments, not out doing your own deal and making your own choices. You are fighting something bigger than a couple misguided politicians.
Thank you for brining attention to the issue. I agree people need to push back.
- 5yMichael K GallagherBusiness MemberReal Estate Agent · Columbus OH · Member since 2018 · 1k+ posts · 1k+ votes
@Ari Newman I’m apparently sleeping under a rock, but thank you for this thread and all the responses. Much appreciate the info! Fascinating stuff!
- 5yBill ExeterBusiness Member1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
The House Ways & Means Committee Mark-up was just released last week, so the information is just starting to get out.
@John Hyre is absolutely right. "It's time Make Some Noise and not just let it happen."
These bills can fly right through or they can take forever, but once it is in bill format it is much more difficult to get changes made. Everyone needs to call their representatives and make their opposition heard.
Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews - 4yBill ExeterBusiness Member1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
Hello everyone,
As a follow-up to this post, here are some websites that have been rolled out to help you raise your objection:
https://www.ipa.com/section138...
Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews - Atlanta, GA · Member since 2018 · 93 posts · 33 votes4y
Great News! The IRA & 401k provisions have been dropped from the bill.
- Rental Property Investor · Ann Arbor, MI · Member since 2019 · 71 posts · 67 votes4y
@Ari Newman
Definitely a relief for the time being.
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