Congress Takes Aim at Retirement Saving

Rather suddenly and without warning, a proposal to limit and control IRA accounts has been added in the House Ways and Mean Committee SAS X 1 part 3, specifically Sections 138312 and 138314. This proposal has several components that include limiting your IRA investment choices, capping the maximum value of an IRA, eliminating certain Roth Conversions, limiting IRA ownership in LLCs, and even forcing distributions for some taxpayers. These proposals caught most people off guard and seem to be completely reactionary to some high-profile investors who had incredible growth in their retirement accounts. Copy of proposed changes.

If you have an IRA, please review the following. Further, I ask that you write an email to your legislators.

Limitations to IRA Choices

Included in the proposal is a $10M cap on IRA accounts. This is clearly intended to punish IRA holders who successfully grew their accounts to large values. In our business, 98% of the IRA accounts are under $1M, and we can count on one hand the number of $10M accounts. The $10M cap spurred this overcorrection aimed at a tiny fraction of investors. For every target of over $10M, thousands and thousands of IRA account holders get caught in the net of this sweeping legislation.

Limiting your Investment Choices

The other major part of the Ways and Means Committee proposal limits the types of investments you can make. “The bill prohibits an IRA from holding any security if the issuer of the security requires the IRA owner to have a certain minimum level of assets or income, or have completed a minimum level of education or obtained a specific license or credential.” The committee believes that you cannot determine the suitability of these investments for your entire portfolio. In particular, this includes “accredited investors.”

What Is an Accredited Investor?

In their April bulletin, the IRS posted the following definition of an accredited investor includes anyone who:

  • earned income that exceeded $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years, and reasonably expects the same for the current year, OR
  • has a net worth over $1 million, either alone or together with a spouse or spousal equivalent (excluding the value of the person’s primary residence).

That same article goes on to explain why this designation exists: “One reason these offerings are limited to accredited investors is to ensure that all participating investors are financially sophisticated and able to fend for themselves or sustain the risk of loss, thus rendering unnecessary the protections that come from a registered offering.” By their own definition, these are sophisticated investors who have access to a subset of investments, but as such, they are not allowed to invest their retirement funds in assets that require that. The contradiction is exceptional.

Secondly, and possibly the most stunning proposal, they are mandating you remove all assets that meet their new definition of prohibited from your IRA by December 31, 2023. This would be a logistical nightmare and a potentially taxable event for many Americans regardless of party affiliation.

Overall, the elimination of these types of investments means retirement accounts could be limited to brokerage accounts. And while the stock market is doing fine now, what if that changes?

Elimination of Roth Conversions

As it stands now, you can convert a Traditional IRA, after paying the tax, to a Roth IRA. This bill proposes the elimination of Roth conversions for both IRAs and employer-sponsored plans meeting income requirements.

Furthermore, this section prohibits all employee after-tax contributions in qualified plans. It prohibits after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021.

Forced Distributions

This bill directly contradicts the President’s pledge not to raise taxes on individuals making under $400,000. Section 138312 of this proposal forces liquidation of certain assets held in a retirement account no matter who you are or how old you are. A forced liquidation or distribution can cause a taxable event.

The Ripple Effect

In addition to what this legislation could do to your IRA, its implementation puts small businesses in peril.

We’ve seen IRA’s invest in a host of local ventures. We’ve seen community banks get started, women-owned businesses emerge, Angel investing opportunities fulfilled. And those small businesses employ people and fill a niche in their communities. We’ve seen these businesses launch through people using IRA funds to help them get started. This is all at risk with this legislation.

What Is Next?

At Midland Trust, we have tens of thousands of average everyday Americans with these types of assets in their portfolios and need to express our dismay over this potential legislation.

If you oppose these changes, please write the House Ways and Means Committee and all your Congressional Representatives, no matter which party affiliation, to stop this major change that only hurts the average investor.

Not sure how to contact your U.S. Congressional Representative?
Go here.

Not sure how to contact your U.S. Senators?
Go here.

Dave Owens, President of Midland Trust Company

Written by Dave Owens

President of Midland Trust Company

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