For the first time in the history of the United States, Congress is proposing the forced distribution of IRA accounts. Second and equally unprecedented is that they want to seriously limit what you can invest your retirement funds in. The House Ways and Means Committee Bill Modification of Rules Relating to Retirement Plans Part 3 regarding IRAs is full of mandates and limits that hurt everyday savers. Most people would likely not support what is being proposed; the issue is most people don’t even know about it because it is tucked away in 3 pages within a 645 page proposal. We need to draw attention to Part 3 by writing to our elected officials and asking them to redline this section so that these proposed changes do not slip through unnoticed.
One of the most stunning portions in Part 3 is Section 138312 of the House Ways and Means Committee Proposals which says you will be limited in the type of private asset you can invest in. To put this in perspective, private assets account for close to 40% of assets held in IRAs. Second, if you have one of these in your IRA today, you may need to sell it in two years. If you cannot sell it, you have to pay tax on that asset.
The Securities and Exchange Commission has a rule called the accredited investor rule. It defines a set of investors who the SEC says can invest in unregistered offerings for one of two reasons: they either meet income requirements so they are presumed to be able to withstand a loss OR they hold a professional designation or hold some knowledge giving them a certain sophistication to evaluate unregistered opportunities. The concept was implemented to protect investors from being taken advantage of or risking their entire savings on something they might not understand. So accredited investors are those who have the ability to evaluate these opportunities. The interesting thing is that while the SEC has put this system in place to allow people to invest in unregistered opportunities, this proposal would override it. Part 3 says accredited investors, those who are the only ones allowed to invest in certain opportunities, cannot invest their retirement funds in those specific opportunities. It’s completely counter to the entire setup of accredited investment options set forth by the SEC.
In August of 2020, the accredited investor category was actually expanded by the SEC to include more investors. Here were some of the reasons cited for increasing the accredited investor pool:
“Because a significant share of businesses that establish new funding relationships continue to experience unmet credit need, we expect that small issuers that face more challenges in raising external financing may benefit more from expanding the pool of accredited investors.”
“In particular, small businesses owned by underrepresented minorities may benefit from a larger pool of accredited investors.”
“Businesses owned by underrepresented minorities were more likely to demonstrate unmet credit needs relative to other groups, which suggests that these businesses may benefit from amendments intended to facilitate private market capital raising.”
“An increased pool of investors could bring… increased amounts of capital available to private issuers and a lower cost of capital, thus potentially increasing capital formation, primarily for issuers with limited access to capital, such as ones that are small, in early development stages, or in geographic areas or communities that currently have lower concentrations of accredited investors.”
What are unregistered offerings? They include small businesses, local shops, angel investment, crowdfunding, and minority- and women-owned opportunities. Per the SEC, “In 2019, registered offerings accounted for $1.2 trillion (30.8 percent) of new capital, compared to approximately $2.7 trillion (69.2 percent) that we estimate was raised through exempt offerings.” So while the SEC worked to be more inclusive in their definition of accredited investor, this proposal eliminates retirement funds as a source these investors can use to invest, completely reversing the intent of allowing access to more Americans to invest in people who need their capital to get their businesses off the ground.
A Typical Retirement Account Holder
One of our clients said this when they heard of this bill. “I have spent most of my life growing my IRA using Private Equities. I finally have almost $1M in my IRA which gives me peace of mind. If this bill becomes law, my IRA will be destroyed and any hope of a reasonable retirement will be gone.” This speaks for many and says it all.
95% of IRA accounts are under one million dollars and are held by average, everyday Americans. It is helpful to remember the concept of compounding when it comes to investing. If someone puts $6,000 away annually for 30 years earning 5%, they will have nearly $500,000 in their retirement account. Saving $6,000 a year over time is not something that only the uber-rich can do. These are diligent savers who have amassed savings to plan for the years when they will no longer be in the workforce.
This section of the proposal is indiscriminate to income level or age. President Biden campaigned on an exclusion not to tax individuals under $400,000. The crafters of this bill seem not to understand the implications of what it does. If you own a private asset in your IRA that must be distributed no matter what your income limit, you would be forced to pay income and possibly penalties based on your age. You hear about a wealth tax on the uber-rich. However, this is a saver’s tax, if Congress does not like your investment choices, you could be forced to pay tax.
Should the Stock Market Be the Only Choice for Retirement Funds?
Another unintended consequence of this bill is that by limiting investment choices, the stock market will really be the only investment option for IRAs. While not anti-Wall Street, many clients firmly believe in controlling their own retirement by investing in things they know and understand. Finally, it is important to note, alternative assets are typically in an IRA as part of a diversification strategy. Most of our clients do not have 100% of their assets in alternatives. Congress will mess up many well-thought retirement plans should this bill go through.
Because of the draconian nature of this bill, we are asking that you do not support Part 3 of the House Ways and Means Proposed bill to drastically affect and limit IRA accounts.
Please write your Congressperson today telling them you do not support this bill or limits on your retirement. If you would like a sample letter please feel free to reach out to us.
Thank you for taking the time to stay educated on these important issues that affect so many Americans.
Written by Dave Owens
President of Midland Trust Company