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Proposed Legislation Affecting IRAs and 401ks

Proposed Legislation Affecting IRAs and 401ks



There is proposed legislation in the US House of Representatives that, if passed, would negatively affect self-directed IRAs and (to a lesser extent) Solo 401k plans.

The House Ways and Means Committee appears to be reacting to some highly publicized stories of what they consider abuse of these structures, specifically Peter Thiel’s $5 Billion Roth IRA.

The legislation at this point is only proposed and has quite a path in front of it to be become law. The self-directed IRA and 401k industry is actively fighting the most troublesome portions of the legislation. As a result, much of this is subject to change, but below is a very brief summary of the sections that would most affect self-directed IRAs or 401ks.

$10 Million limit on traditional and Roth IRAs

There would be a $10 Million limit on retirement account balances as well as additional minimum distribution requirements for taxpayers earning above $400,000 ($450,000 for married couples).

Disallowed Backdoor Roth conversions

Roth conversions of after-tax contributions to an IRA or a 401k would be disallowed. This effectively kills the Backdoor Roth and Mega Backdoor Roth strategies.

IRA investment limitations

IRAs would no longer be allowed to invest into any securities that would require accredited investor status or investments that carry certain other investor restrictions. This would limit or prevent most IRA investments into syndications, private placements, crowdfunding arrangements, and the like.

No “Grandfathering” for existing assets

Existing IRA assets in violation of the proposed legislation would need to be restructured or sold to comply with the rules within two years. Notably, there is no grandfather clause. A grandfather clause would allow existing investments while only applying the rules to investments that take place after the proposed rules take effect. Instead, this rule would apply regardless of when the affected investment was made.

Checkbook IRAs on the chopping block 

IRA investments into any entity in which the IRA account holder is an officer would be disallowed. The “IRA LLC” strategy used to create a checkbook IRA is threatened by this legislation. If these rules take effect, investors will likely not be able to obtain (or retain) checkbook control of IRA funds.

Checkbook Solo 401k plans allowed for now

Checkbook control via a Solo 401k is not currently addressed in the documentation, but this proposal puts an ominous spotlight on the Democrats’ legislative agenda.

What’s Next?

If you are concerned about this proposed legislation (and we think everyone who enjoys investment freedom should be), you can help! The sections that cause the most concern for the self-directed IRA industry are hidden in almost 900 pages of text. Based on talks with some members of Congress, it seems that they simply did not know about certain provisions or were unaware of the effects they can have on regular people saving and investing for retirement. The most effective approach is to bombard specific members of Congress with communication opposing these misguided provisions. We recommend that you mail letters, send emails, make phone calls, send faxes AND encourage those you know to do the same. Attorney John Hyre has compiled excellent resources including contact information that you can access by clicking here.