Those in favor of Biden’s infrastructure bill would have you believe that only the uber-wealthy will be taxed to pay for its provisions. This is simply not true. If passed in its current form, specifically sections 138312 and 138314, the bill will have a direct impact on middle-class Americans who work hard to save for retirement.
Last week, our article Urgent Action Needed to Protect Your Self-Directed IRA provided an overview and a way for you to alert your senators and congressmen to express your objections.
This follow-up article provides a clear illustration of the financial impacts sections 138312 and 138314 will levy on a broader portion of Americans—average Americans like you and me—who are not the Warren Buffets and Peter Theils of the world.
Top 3 Ways Sections 138312 and 138314 Impact Retirement Savings
1. Restrictions of IRA Investment Options for Average Americans
The Provision: “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.” [Section 138312]
- This section would prevent the average American from investing their retirement funds into most private placements and limits them to investing in Wall Street vs. Main Street. Self-directed IRAs allow middle-class America—not just the wealthy—the freedom to invest their retirement funds into assets they understand and can control, like real estate, private placements, start-up companies, and much more.
- Self-directed IRA investors are average Americans who have diligently saved and have reached an accredited investor status based on their diligence. They are counting on these funds for their retirement.
- Advanta IRA has over 8,500 active accounts and the average account size is around $125K. Nationally, 3.8 million people have self-directed IRAs that hold over $118B in assets. These are NOT millionaires and billionaires exploiting a tax loophole. These are average Joes and Janes (retired teachers, firefighters, etc.) trying to make investments in their community, and they do not want to be forced solely into Wall Street investments.
- This section undoes strides made under The JOBS Act of 2012—which made it easier for the average American to invest in these assets off Wall Street—and the August 2020 changes to the definition of “accredited investor” which also opened these investments to more people. Many people will lose the ability to take advantage of these investments as the bulk of their available investment funds lie in IRAs and old 401(k)s.
2. Forced Divesting/Distribution of Assets
The Provision: “IRAs holding such investments would lose their IRA status. This section generally takes effect for tax years beginning after December 31, 2021, but there is a 2-year transition period for IRAs already holding these investments.” [Section 138312]
- IRA accounts that currently hold private placements will be forced to divest their funds from the private placement within two years.
- The best-case scenario is these investors will have to sell their investments off to other parties at a discount of what they originally invested, resulting in a sizable loss inside of their retirement accounts, which may take them years to earn back. Depending on the age of the retirement plan owner, this could be a real problem.
- At worst, this will cause an unwanted 5 to 6-figure taxable distribution of assets for tens of thousands of Americans that will devastate their retirement savings.
3. Restricts Investments in Single-Member LLCs
The Provision: “…an IRA owner cannot invest his or her IRA assets in a corporation, partnership, trust, or estate in which he or she has a 50 percent or greater interest. The bill adjusts the 50 percent threshold to 10 percent for investments that are not tradable on an established securities market, regardless of whether the IRA owner has a direct or indirect interest.” [Section 138314]
- This provision would prevent average Americans from investing in real estate (and other assets) as a single-member LLC, which is an investment strategy that allows hundreds of thousands of Americans to use their retirement funds to invest in real estate in their local communities and beyond.
- It would also prevent a group of investors and friends from pooling their personal and IRA funds into a common structure to invest in real estate and other alternative assets. For example, five friends could not invest funds together inside any type of structure for any purpose if one of them is using their IRA funds.
The passage of these sections will create the loss of millions in financing dollars for small businesses and innovation. Thousands of small business and start-ups (the backbone of the American economy) rely on self-directed IRAs for funding. These provisions would remove a tremendous source of funding, without which these companies could not get off the ground. Many of these companies are innovative start-ups, private funds that support local businesses, and apartment/multifamily developers who use investor funds to remodel existing buildings to beautify their communities.
Americans will also lose the ability to utilize single-member LLCs to invest in alternative assets like real estate. These structures make it easy for the average American to invest in real estate with their retirement savings to build additional wealth for their futures. The majority of these individuals are not uber-wealthy. They are savvy, average Americans who want to use their knowledge and expertise to invest in assets they understand, rather than being forced to solely invest their retirement funds into stocks and mutual funds.
You can find a summary of provisions 138312 and 138314 here.
Contact your senators and representatives to demand these provisions be removed from any proposed legislation. Use this sample letter to draft your own letter or email to your representatives in Congress and the US Senate. Add “Sections 138312/138314 of $3.5T Infrastructure Bill” to the subject line of any correspondence to make it easier for congressional aides to track a collective rise against these proposals.
We encourage you to do everything in your power to be heard on this subject. As you can see, these provisions do not just target the ultra-rich, but regular middle-class Americans like you and me.
If you have any questions, please contact Advanta IRA today.