Congress’ Proposed IRA Changes Causing Confusion for Clients

Congress' Proposed IRA Changes Causing Confusion

In the last four weeks, Congress has proposed legislation that would dramatically affect the retirement accounts of millions of Americans. Numerous sections will severely affect and limit IRA savers in the current House Ways and Means Committee proposal. Most notably is section 138312, which regulates what a retirement account can invest in. Never has the government changed the rules midway through the retirement process. These changes are directed at thousands of individuals who have planned and followed the rules, only to have them unfairly altered by a small group of Representatives.

Section 138312 explicitly states that an investor may not use their IRA in an investment that requires the IRA owner to be an accredited investor. The purpose of a self-directed IRA is to allow Americans to diversify their retirements, providing the best return for their retirement. This section explicitly limits what Americans can invest in. I think it’s important to note that this section was put in the house bill on a Saturday morning and voted on a Sunday without any vetting by the American public or small businesses.

If you’d like to read the entire Bill, we have a webpage with all the details.

Confusion and Fear Ensue

Confusion and fear by investors have been rampant since the release of this Bill. The Bill’s provisions say that if you have a particular alternative investment in your IRA that requires you to be an accredited investor, you will be forced to sell it within the next two years. If you cannot sell it, you will be forced to distribute the asset to yourself and pay taxes (and potentially early withdrawal penalties) on it. This applies to everyone; there is no income limit on this provision. This section alone would affect hundreds of thousands if not millions of IRA owners, including a large percentage who are not wealthy. If you’ve heard the slogan that the proposed bill “won’t cost anyone anything,” I can introduce you to about 10,000 clients of ours alone who would be affected. And we’re a medium-size company in this space.

Clients Are Taking Action Prematurely, Affecting Their Investments Unnecessarily

This week I had a call with a client who did not understand the Bill in its current state. The client currently owns stock in a local community bank in his retirement account. He said that he’s ready to sell the stock to himself right now and pay cash with his own money to get the stock out of his account. Several things are wrong with this scenario, including that the Bill has not been put into law. First, this Bank stock was only sold to local investors and did not require individuals to be accredited; the stock would not have to be liquidated. The differentiation on which assets already held in his retirement accounts caused massive confusion. If this was a qualifying asset, there are also valuation and timing issues, and can you even liquidate the stock? This client would not have to sell his stock in the proposed Bill, but the fact that they have caused confusion for individuals is incredibly unfair.

In this example, the client thinks that he can just buy the stock from his Ira, which is a prohibited transaction. If he did have to liquidate, he would be forced to sell it to a third party (at firesale value) and lose the quarterly dividend he currently receives in his retirement account. Again, this is penalizing retired Americans without understanding the consequences. Finally, not all assets are easily liquidated. We’re using Bank stock in this example, but most alternative assets can require years to liquidate and can’t be done in two years. Some assets may need 10 to 20 years to retire or liquidate.

Save Your Self Directed IRA

The provisions Congress is proposing are incredibly unfair and definitely not thought out. Please go to our website to learn more about the current proposed law. We ask that you write your Congressperson and tell them the consequences and/or how it might affect you. We have a sample letter for you to use to send to your Congressperson. This provision was not properly vetted and has deep and wide ramifications for anyone with a retirement account. Thank you for all you do and for your support.

Dave Owens, President of Midland Trust Company

Written by Dave Owens

President of Midland Trust Company