‘People are upset.’ Will proposed IRA tax changes targeting the rich hurt smaller nest egg?


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Months after a story broke that revealed the $ 5 billion that could come tax-free from Peter Thiel’s retirement account, new tax proposals aim to put an end to the practice of very wealthy investors using favorable tax laws for IRA- Use accounts.

The changes proposed by Congress Democrats on the Pathways and Means Committee would require super-rich households to tap into some of their money and end their ability to switch to tax-free accounts.

The proposal would also lock individual retirement accounts from certain types of investments normally reserved for more experienced investors, including holdings in private companies or real estate businesses.

To retain the IRA’s tax benefits, anyone who already has this type of investment must have a two-year window of time to take them off their account, the proposal says. In its current version, the proposal does not specify whether the regulations restricting these types of investments only apply to people above a certain income limit.

The regulations target financial giants who are alleged to be sapping more and more wealth unfairly with pension tax schemes – but could they hit the little guy’s nest egg instead?

This is what critics say when it comes to rule changes on what types of investments are allowed within IRAs. Others who support the changes have their doubts. The question now is how far the proposals will go.

“People want investment opportunities, and it’s a shame that it could deter people from investing in great American companies.

– Adam Bergman, Founder and CEO of IRA Financial Technologies

“People are upset. You played a game a certain way, and after so many years, ‘No, no, we’re going to change the game on you,’ ”said Adam Bergman, founder and CEO of IRA Financial Technologies, a trust company that operates the way of “self-directed” IRAs who are suddenly in the limelight with the proposals. “People want investment opportunities, and it’s a shame that it could deter people from investing in great American companies.”

Bergman’s company has more than 28,000 accounts with approximately $ 4 billion in assets under management. These assets include pre-IPO stocks, real estate, cryptocurrency, precious metals, and private placements. The average account balance is $ 125,000, he noted.

However, Steven Rosenthal, a senior fellow at the Tax Policy Center, says non-public investments don’t belong in retirement accounts. From his point of view, it is a question of fairness, tax compliance and investor protection when it comes to pension tax regulations that have benefited wealthy households for too long.

If Congress restricts this type of investment in IRAs, “what bad things are going to happen? I don’t think bad things will happen. There will be a mix in the portfolios, ”said Rosenthal.

But will there be changes in the law? Rosenthal is not sure. “The Ways and Means Committee takes on a huge industry. We’ll see how successful they are. It’s a big hurdle. “

“Leveling the playing field for low-income investors”

“The intent of these regulations is to level the playing field for low and middle income investors,” said a spokeswoman for the Ways and Means Committee, chaired by MP Richard Neal, a Massachusetts Democrat. “The Chairman wants as many Americans as possible to achieve long-term financial security. He and the political staff are open to changes to ensure we get these suggestions right. “

Here is some context on the dust-up.

The typical way to build wealth with a retirement account is to get exposure to the stock market and its range of publicly traded stocks, bonds, and their associated mutual funds and exchange-traded funds.

Thiel, co-founder of PayPal PYPL, +1.06%,
He reportedly turned a Roth IRA of about $ 2,000 into an astronomical fortune of $ 5 billion when he used the account to buy 1.7 million shares in the company three years before going public, according to ProPublica. Since Roth IRAs are funded with dollars after taxes, distributions can remain untaxed.

A spokesman for Thiel did not return a request for comment.

Self-managed IRA accounts and who is allowed to open them

Thiel’s account grew as the shares rose in value. However, experts point out that Thiel accomplished this feat on a technical level with what is known as a “self-directed” IRA, an account that is able to invest in a variety of assets that go beyond the public markets.

And if people go beyond public markets and invest in “unregistered securities,” the SEC says they can only do so if they are an “accredited investor.” An accredited investor is defined as someone with an income of at least $ 200,000, net worth in excess of $ 1 million, or a recognized finance license, says the SEC.

The thought is that people with the resources and investment experience will be better equipped to deal with investment failures at companies that don’t have required SEC disclosures, the regulator said.

But investments aimed at seasoned investors can give them access to opportunities that others are missing out on. The Ways and Means Committee’s proposal is that the bill “prohibits an IRA from holding any securities if the issuer of the security requires the IRA owner to have a certain minimum wealth or income, or have completed a minimum education or obtained a certain license” . or ID. “

The bill prohibits IRAs from “holding investments that are offered to accredited investors because those investments are securities that have not been registered under federal securities laws,” it says in a summary.

“The government shouldn’t pick and choose”

“These accounts belong to the retirees. They know the investments they are most comfortable with. We don’t think the government should make choices, ”said Michael Hadley, partner at Davis & Harman.

Hadley is a registered lobbyist on behalf of the Retirement Industry Trust Association, a trade association for the self-directed retirement provision industry. The group’s members have 3.8 million IRA accounts valued at $ 118 billion, and just over 80% of the assets are holdings other than stocks, mutual funds and cash equivalents, Hadley said.

The provision should be removed from the proposal entirely, along with a separate proposal limiting the IRA’s stake in non-tradable assets to 10%, Hadley said.

“By cutting off this one source of capital, you are not preventing the super-rich from getting access to private placements. All you are doing is stopping people who have a good source or fixed asset in an IRA from doing so, ”he said.

People don’t even necessarily have to be an accredited investor to participate in certain private deals, so the scope of the proposal could be wider than it appears, Hadley said.

Nobody is trying to prevent money from flowing into private investments, said Rosenthal, who doubts the proposed changes would stifle capital. In his opinion, instead of a retirement account, investors can buy into a company through a brokerage account.

Rosenthal noted that he would give people more than two years to get targeted investments out of the IRAs if they are already there. “I sympathize with someone trying to sell their property,” he said.

One problem, Bergman said, is that investing in something like a private company could be illiquid and contain lock-up periods that prevent sell-offs before a certain date.

“Who wants a 3% stake in a private company? Not everyone, ”he said.

Bergman recalled speaking to an Account Owner after the news of the Ways and Means proposal broke out. The person did not know how to proceed with an upcoming investment. “That already causes a capital bottleneck. Some people aren’t sure what to do, ”he said.

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