Self directed IRAs under attack in proposed tax bill

https://www.advantaira.com/blog/urgent-action-needed-to-protect-your-self-directed-ira/

by mmd45 • 5 years ago

136 299 5 years ago

mmd457• 5 years ago

Self directed IRAs are commonly used with a wholly owned single member LLC to invest IRA funds into real estate related investments such as rental properties or many other types of private investments. The new proposed tax bill seems to remove the ability of the IRA owner to manage that LLC and effectively end the use of checkbook control IRAs.

Loughla• 5 years ago

Is this really an issue for low- to middle-income earners, or is that just a scare tactic?

WORMS_EAT_WORMS• 5 years ago

Most low to middle income earners struggle to hit their 5k or so maximum of a regular IRA versus operate a self-directed or have the additional funds to make it worth it.

selykg4• 5 years ago

This has no impact on the average person in the low to middle class income range. This is just a loophole allowing the rich to put a bunch of money into their IRAs and watch it grow in a tax advantaged way.

The average person that's putting the max of $6k (or less) into their IRA is not impacted by this and it's business as usual for them.

I believe this is in response to people like Peter Thiel

https://www.propublica.org/article/lord-of-the-roths-how-tec...

mistrial92• 5 years ago

high-appreciation residential real-estate of all kinds is attracting "investment" like flies on the beach; its not fake.. if a financial law intended to help low- to middle-income earners is being abused by a few with many multiples of common money amounts, why is that a "scare tactic" ?

sonotathrowaway• 5 years ago

It’s a scare tactic. These rules are really aimed at people Peter Thiel, in response to the pro public’s investigation - they don’t even hit other famous IRA (ab)users like Mitt Romney.

But getting you angry enough to defend his wealth is much more difficult than obscuring the fact that you won’t be affected by them, so we instead get vague and scary warnings about the bill.

koboll2• 5 years ago

It's an issue insofar as there are companies that have productized the ability to dodge some taxes and rules with a self-directed single-member LLC you invest in via your IRA. This would severely harm those companies, who presumably have low- and middle-income customers.

One example: https://www.choiceapp.io/

boogoob4• 5 years ago

Given the relatively low cap on IRA contributions, it's not directly an issue of income, but rather your access to high-return investments like early-stage stock options.

Of course, someone with lots of investments will have the luxury of just making the highest-payoff ones with their IRA funds.

Independently, in the rest of the bill [1] there are lots of reasonable things like a $10 million IRA cutoff limit.

1) https://www.advantaira.com/wp-content/uploads/2021/09/WM-Tax...

gbronner• 5 years ago

They should remove the ability to invest self-directed IRAs into options. This socializes the risk (i.e. someone with little or no supplementary retirement income is going to be a burden on the rest of us) while privatizing the gains.

tomrod• 5 years ago

How?

sokoloff6• 5 years ago

In any environment where most people have nearly indistinguishable from $0 in their private retirement accounts, I don't see the risk of someone blowing up their IRA being a material socialized risk.

1 in 4 Americans have no retirement savings: https://news.yahoo.com/1-4-americans-no-retirement-191314425... (same study: 1 in 8 over 60 have $0.)

SilasX• 5 years ago

Related, I joked that a friend of mine was having a "first world problems" moment when he complained that his broker wouldn't let him short-sell GME in his IRA.

vmception2• 5 years ago

Hey everyone: stop talking about your compliant tax strategies!

It’s been nice to want to help people but now, obviously, too many people know of some and their representatives are changing the laws.

It’s back to the way it’s always been: if you can afford good lawyers then you get to know of obscure tax codes. Lets leave it that way.

sokoloff6• 5 years ago

The modern 401(k) practices emerged from one of these then-obscure tax codes, which I view as an unabashedly good outcome.

javert• 5 years ago

Nah, the 401(k) system is a mechanism of wealth extraction for white collar government-adjacent workers. It's a form of repression.

I'd rather be building something than dealing with tax, but I'm very much incentivized to do the latter (though your situation may differ).

the_optimist15• 5 years ago

The modern 401k laws are a giveaway to the financial industry. They stipulate extraordinary restrictions on what investors can/must _invest_ in and fundamentally transfer tremendous economic power and influence to “advisors” and the financiers attached to them.

ghaff5• 5 years ago

I view as an unabashedly good outcome

Possibly. I can't complain personally, The shift from defined benefit to defined contribution retirement savings has probably been generally positive for those with the ability/discipline to take full advantage of 401(k)/IRA. The flipside is that relatively few people (mostly public sector) in the US now get a more or less automatic defined retirement payout from a pension.

Of course, the shift isn't just tax code changes. Traditional pensions also largely encoded long-term employment with a single organization.

wahern6• 5 years ago

401(k)'s started to became popular in the 1970s because they allowed management to increase their tax-advantaged compensation relative to labor, whereas defined-benefit plans had stricter and more effective rules regarding management/labor compensation disparities.

Then during the 1980s as corporate accounting schemes became more sophisticated preference for 401(k)'s and other defined-contribution plans exploded because of how liabilities are calculated.

In every conceivable measure pensions are theoretically better for workers and society as a whole. I say theoretically because that's predicated on employers and pension funds (if employer managed) obeying good (translation: dead simple) accounting practices rather than spending all their time and effort figuring out how to subvert them in order to cook their balance sheets to increase their yearly bonuses. Many corporate merger waves since the 1980s have been driven by schemes to drain pension funds (cost "synergies"), and of course states are notorious for failing to fully fund pensions on a YtoY basis (states, unlike corporations, aren't actually required to fully fund pensions[1]).

All of these downsides to pensions can be easily remedied. But corporate interests have succeeded in selling the narrative that pensions are unreliable and inequitable, while 401(k)'s are more reliable and equitable. In fact pensions are categorically more equitable, and any less reliability (which is a dubious claim, notwithstanding the many high profile pension failures over the years--nobody reports on someone's 401(k) fund vanishing during a recession) is a consequence of lobbyists phenomenal success in killing legislation and enforcement efforts responsive to corporate financial accounting schemes. Overall reliability of private retirement systems has fallen over the past 40 years, but the decline for pensions was more precipitous simply because they were so damned good before CFO offices became profit centers.

Life insurance markets were once dens of fraud and outright thievery, the mortgage backed securities and CDOs of the late 19th and early 20th century. Relatively simple reforms restored the market to nearly unassailable reliability. Though, I suspect the necessary legislation only succeeded after life insurance stopped being the center of growth and profit for financial markets. Legislation regarding private retirement plans likely will only ever make substantial reform once corporations have finished exploiting all opportunities for subverting employee income disparity and asset protections, finally shifting their attention elsewhere.

[1] "Fully fund" does not mean paying in the entirety of a worker's expected retirement disbursements. Rather, it means ensuring that each and every year you pay the full fractional share of expected liabilities. Basically the same thing an individual is expected to do when managing their 401(k) contributions.

vmception2• 5 years ago

The modern 401(k) practices emerged from one of these then-obscure tax codes, which I view as an unabashedly good outcome.

That's exhibit A of what I'm talking about!

This is an article about IRAs being heavily restricted, 401k's are in the same 400-section of the tax code. IRAs are subsection 408, 401k's are subsection 401(k).

Literally just stop talking about it, stop trying to get a personal finance blog going, stop trying to get youtube views funnelled over to a personal finance discord server, just let unaware people run around like chickens with their heads cut off because when you tell them whatsup they try to get the laws changed when they fail to take advantage of it adequately

Ignorance is bliss and convenient, this is where we are. Just get the tax breaks you have because of your superior reading comprehension skills and eventually your ability to outsource and augment those skills to experienced lawyers and accountants with the same skills.

koboll2• 5 years ago

Under these provisions, you would no longer be allowed to invest your IRA into private placements and single-member LLCs, regardless of your level of income or wealth.

Huh. So under current law, you can take your IRA money and "invest" it in a single-member LLC? Wild. Does that let you circumvent the proscription against living in properties you own through your IRA? Since in that case, the "owner" would be the LLC, rather than yourself per se?

sokoloff6• 5 years ago

The tax code (as written) doesn't even let you personally make repairs to property owned in a self-directed IRA. (Otherwise, you'd be able to work tax-free to improve an asset in your IRA.)

TedDoesntTalk• 5 years ago

I’ve never known anyone to own a property as an IRA holding. Is that possible??

davio2• 5 years ago

People definitely own rental properties in self directed IRAs. You have to be completely hands off - must hire property management, can't fix anything, etc.

I think you can get non-recourse mortgages, but it's more like 50% down instead of 20% like most non-owner occupied mortgages.

loourr9• 5 years ago

Absolutely. You can own almost all kinds of assets in your IRA today excluding collectibles.

mmd457• 5 years ago

No it doesn't as that would fall under the rules for prohibited transactions of which there are strict rules and penalties. See https://www.irs.gov/retirement-plans/plan-participant-employ... .

kube-system2• 5 years ago

It says that those types of transactions are prohibited between the plan and a disqualified person.

Does it prohibit those same transactions between an investment within the plan (like an LLC) and a disqualified person?

I mean, if I own Apple stock, I can buy things in the Apple store.

supperburg• 5 years ago

Huh. Under current tax laws you can literally dodge paying taxes using a totally unintended loophole in something called 401k. Wild.

macksd• 5 years ago

Same as with an IRA, though, it's intended for retirement savings and there are penalties for early withdrawal. The issue here (right or wrong) is self-directed IRAs being effectively usable for things other than growth investments.

the_optimist15• 5 years ago

The income has already been taxed. The economics are identical to other qualified retirement plans. This is simply more about restricting freedoms and making excuses for targeting Peter Thiel personally.

colinmhayes4• 5 years ago

Restricting the freedom to dodge taxes...

benmw3333• 5 years ago

... taxation is theft.

the_optimist15• 5 years ago

Same exact $ amount as in a 401(k). This is only about power and control.

ejstronge2• 5 years ago

The income has already been taxed

This is not true - traditional IRA contributions are made pre-tax.

wonderwonder3• 5 years ago

Not in the US. IRA contributions are post tax. 401k contributions are pre-tax. Depending on where you live this may be semantics as they may be the same program with different names.

the_optimist15• 5 years ago

You’re wrong and confusing people here. Roth’s are post-tax at investment, not taxed later. Traditional and 401k are pre-tax at investment, taxed on distribution. Economically equivalent.

midasuni• 5 years ago

I’ve never understood why we tax income rather than wealth. Taxes pay for a stable society (army, police force, etc), which has more value for the wealthy.

Taxing tends to remove incentive to do something by increasing the cost. We want people to be productive (get paid an income)

Taxing wealth rather than capital gains and income seems far better, once you set aside the enforcement part of the conversation.

Once you bring that part in, you’re basically arguing we should o what’s easy, not what’s right.

wpietri3• 5 years ago

This simple answer is it's easier. Income is mostly cash-denominated, so it's very easy to value. Wealth is often illiquid, so it's hard to know how much to tax.

Look at property tax, for example. It's a wealth tax and it requires a very complicated apparatus to generate ok-ish numbers every year. But that mostly works because houses are a moderately liquid market, so appraisers can mark to the existing market. And even then there's a lot of dubious stuff around the margins, like the way Trump was giving different valuation numbers depending on whether he wanted a loan or to brag (high valuation number) versus paying taxes (low valuation number).

PaulDavisThe1st10• 5 years ago

The income has not been taxed. Thiel purchased securities inside the Roth IRA, and they gained value. Being inside a Roth protects those gains from being taxed. Roth IRAs were not intended to allow unlimited (or even "huge") gains to remain untaxed, which is why they had a low contribution limit.

What Thiel did was (and is) not illegal, but it is viewed as an abuse of the intent of a Roth IRA that (some in) Congress want to restrict in the future.

the_optimist15• 5 years ago

This is just flat wrong. The income contributed to a Roth IRA is post-tax. It is a retirement account that is economically equivalent to a 401k. The only differences are 1) timing on when the gains are taxed and 2) whether you can self-direct it or not. Saying “not intended to allow” is simply nonsense that covers for the abusive 401k system that fleeces individuals at the benefit of the finance industry.

belltaco6• 5 years ago

The income has already been taxed

Uhh... have you heard of capital gains tax? (And capital loss deductions).

the_optimist15• 5 years ago

The income contributed to a Roth is post-tax. This is economically equivalent to a 401k. Equivalent.

JohnJamesRambo2• 5 years ago

I really hope this doesn’t go away. My self directed IRA in Bitcoin has led me to prosperity. There was no other way to do it with my retirement funds really.

jcims• 5 years ago

I need to subscribe to your newsletter. Mine has mostly reminded me that I'm not a skilled investor.

UncleMeat6• 5 years ago

You've already won then. Why complain?

streblo5• 5 years ago

What's wrong with winning? Why not let people keep winning?

bpodgursky• 5 years ago

You know that some people care about how policies affect people other than themselves, right? They may even care about society as a whole.

seabird2• 5 years ago

Because he feels that it's wrong that he made a lot of money doing something that other middle income earners could reasonably do, but now the ladder is getting pulled up behind him?

This is no skin off the back of the wealthy. They'll find another trick and life will go on. For those of them that actually care about "normal" Americans being able to do the same thing they did, it feels a little wrong that it requires an ever increasing amount moving parts and money to do what they did.

JohnJamesRambo2• 5 years ago

I’d like others to win.

cortesoft• 5 years ago

Why shouldn't you pay taxes on profits made speculating?

wonderwonder3• 5 years ago

Is not all investment speculating? Very few investment classes provide 100% guaranteed returns.

notyourday• 5 years ago

The taxes are paid during the distribution. No distribution means no tax liability.

boogoob4• 5 years ago

Presumably meant to address high net worth individuals completely dodging taxation on huge gains by using their IRAs for investments like exercising early-stage stock options.[1]

I kind of wish they'd go with just capping the gains, but would I still say that if I wasn't planning to use mine to "fund" high-return cryptocurrency arbitrages?

1) https://www.forbes.com/sites/sarahhansen/2021/06/24/peter-th...

mmd457• 5 years ago

That may be the case but they are casting a very wide net. The numbers I've seen say there are on the order of 100k-1MM self directed IRA accounts that exist. Approximately 0% of which are lucky enough to be Peter Thiel and invest in founders stock of Paypal.

tims33• 5 years ago

Assume this is meant to capture the Mitt Romney scenario.

https://www.theatlantic.com/politics/archive/2012/09/whats-r...

eli2• 5 years ago

Peter Thiel has a $5 billion Roth IRA

mikeyouse2• 5 years ago

More recently, ProPublica showed that Peter Thiel (and others) did the same thing. Thiel amassed $5 Billion into an IRA that's nominally capped at $6k/year in contributions.

https://www.propublica.org/article/lord-of-the-roths-how-tec...

czbond7• 5 years ago

What I like about Congress - is instead of saying "this provision can allow you to do well for retirement by investing in private companies self directed with an IRA and you might not need social security". Instead they act: "we're not rich, we're mad at the few who are - so instead of teaching you how to do this, we're going to make it illegal"

bdcravens• 5 years ago

we're not rich

Yes they are.

xapata• 5 years ago

Both statements are false.

ralph84• 5 years ago

More like: “we’re paid very well to represent the interests of the elite. The elite don’t like upstarts trying to join them via wealth accumulation so we design a tax code that makes accumulating significant wealth via working and saving impossible.”

300bps2• 5 years ago

I'm actually pretty fiscally conservative but I think it's ridiculous that someone abused the intent of a Roth IRA by accumulating $5 billion into it.

The whole purpose of IRAs is to encourage regular people to save for retirement. It was not meant to provide billionaires tax loopholes to avoid paying millions or even billions of dollars in taxes.

It's kind of like playing a game with someone. 99% of the people are following the rules and then some weisenheimer comes up with an idea that while technically not breaking a rule goes against the spirit of everything that the game stands for. What happens in that instance is the other players of the game will say, "Nice try, but no." This is what Congress is doing.

loourr9• 5 years ago

Congress is preventing all people from investing in private companies within retirement accounts, not just rich people. Adding the cap is fine but preventing private company investment is asinine.

refurb3• 5 years ago

Making a lucky investment is “abusing the intent”?

jcranberry• 5 years ago

I think you should be able to invest in your IRA however you like, but there really should have been a limit on how much is tax advantaged. Or perhaps just a limit in terms of how large disbursements can be while still being tax advantaged?

boogoob4• 5 years ago

Oh actually, if you go and read the bill text they link, there is in fact a cap at $10m along with other measures to close up loopholes. Starting at section 138301.

https://www.advantaira.com/wp-content/uploads/2021/09/WM-Tax...

darkerside4• 5 years ago

The whole article is predicated on the lie that low and middle income earners are buying private placements and LLCs in their IRAs. They are not. Full stop.

czbond7• 5 years ago

The whole deal is a 'we are spending tons of cash, so we need to take it from someone' plan. This isn't a "watching out for the average person" deal.

belltaco6• 5 years ago

Or maybe it's trying to close loopholes around having to pay taxes.

The whole deal is a 'we are spending tons of cash, so we need to take it from someone' plan

Funny how spending tons of cash is a problem only if it benefits poor and middle class people. I never saw this outrage on trillions spent on endless wars, since that benefits rich people. But if something helps poor or middle class and hurts rich people a little, there is a big outrage.

frockington13• 5 years ago

What is "Full stop"? I'm seeing it used more and more in political internet discussions

crysin• 5 years ago

It's a way to end a statement that you feel so strongly about that you're indicating to others no amount of arguing or talking with change your opinion on it. Your mind's made up and you believe in that statement so strongly that you believe it to be unequivocally universally true.

rendang• 5 years ago

It's the British English term for "period", as in the punctuation mark.

darkerside4• 5 years ago

I don't mean it to indicate closemindedness. I do mean it to indicate that there aren't a whole bunch of exceptions and clauses to come. Take it as a contrast to an article that spent a lot of time and words on an argument that was based on what I believe to be a very flawed assumption. IMO so flawed as to be intentionally deceitful.

technick2• 5 years ago

That's a massive flex on your part, I know a co-worker who did this and he earns less than 185k a year.

minitoar2• 5 years ago

Not sure if this is a joke but I’m pretty sure that’s not low or middle income.

ac294• 5 years ago

$185k/year would be 95th percentile in income for the US.

darkerside4• 5 years ago

The median income in the US was $67,251 in 2020 per the US Census Bureau. Low income would be much less than that, and middle income would approximate it. How many people making $70k/year do you think are investing in a private placement in their IRA?

loourr9• 5 years ago

That's false. I know for a fact that tens of thousands of middle class people are doing this today.

difu_disciple• 5 years ago

definitions of middle class are very fluid here.

darkerside4• 5 years ago

Care to expand on this?

paulsutter• 5 years ago

This rule is directed at a single prominent individual who put founding shares of their company (Paypal) into a IRA, which then let them be an early investor in Facebook and a long list of other well known companies, so that IRA is now worth billions

mmd457• 5 years ago

some additional information

(see page 10, part 3 for Retirement Account provisions) https://waysandmeans.house.gov/sites/democrats.waysandmeans....

https://www.irafinancialgroup.com/learn-more/podcast/self-di...

harryh• 5 years ago

One of my more controversial opinions is that tax advantaged retirement accounts should be eliminated entirely.

Almost all of the advantages of them accrue to the top decile of income earners. Why should we have exceptions in the tax code just to help richer people amass more money?

jchanimal• 5 years ago

I have a product idea to take roths mass market. Might help with what you’re describing.

bandyaboot• 5 years ago

Their assertion that this affects low and middle income people is absurd.

xcskier562• 5 years ago

Under these provisions, you would no longer be allowed to invest your IRA into private placements and single-member LLCs, regardless of your level of income or wealth.
This will result in significant tax consequences for many people, including low and middle-income investors.

BS! In order to legally invest in private placements, you must be a "accredited investor" which means you earn over $200k individually or $300k jointly. If you're making over $200k, you're not middle class AT ALL. You're solidly in the top 10% of the country and likely much higher. This provision will have almost zero impact on middle class America

gedy2• 5 years ago

That's certainly middle class lifestyle in many states in the US if you have a family with kids and have never had a windfall from parents, inheritance, startup luck, etc. Trying to figure out retirement on top of that is a challenge.

gbear605• 5 years ago

That’s not middle class, it’s in the top 5% of US families.

xcskier562• 5 years ago

Earning > $300k when married filling jointly is very much not a middle class income & lifestyle. I certainly won’t disagree that figuring out money and retirement at that income level is hard, but 95% of America has it harder.

So I’ll say that then saying this impacts the middle class is disingenuous at best. On top of that, private placements usually require bare minimum investments of $50k and realistically $100k min investment is not uncommon. If you have that sort of cash to put into higher risk deals, middle class you are not.

cletus• 5 years ago

So, progressively since probably the 1980s (maybe earlier?) Australia has introduced a system called "superannuation" (or just "super" for short). There are two parts to this:

1. Mandatory contributions: currently 10% of your income; and

2. Voluntary contributions: you can contribute more and get a lower tax rate for doing so. By comparison, 401k contributions are tax free. Voluntary super contributions are not.

This is intended to fund people's retirements to alleviate the upcoming strain on the Aged Pension just like the issues with Social Security. That is, in 10-20 years there'll be <3 working people per retired person.

Australia's super requirements are stricter (eg currently you cannot withdraw before 65; 401k is 59.5). There are other differences.

Anyway, super is generally in mutual funds and the like. But there is an option for Self-Managed Super Funds (SMSFs).

This is where you can basically run your own fund. You need to get audited, pay fees, have an investment strategy, etc. Generally these are used to invest in things you can't through mutual funds. And this is abused to invest in residential real estate (because, you know, it always goes up).

I generally think this system has been a disaster and shouldn't be allowed. It's to protect people from themselves, basically.

For example, super investments can't be leveraged but through SMSF shenanigans I've seen balances wiped out by effective leveraging.

Also, you'll see marriages where one spouse's super balance is used by another in a bad manner and then the marriage breaks down and this just adds to the financial disadvantage and stress of that spouse. I imagine this is particularly an issue in the case of psychologically abusive marriages.

So I'm for any reform that restricts IRAs and 401ks from these one man shops.

wonderwonder3• 5 years ago

seems similar in concept to an i401k in the US for self employed people. Its pretty much the only option they have though besides IRA's which are capped at an annual contribution of ~6k per year depending on your age.

noitpmeder2• 5 years ago

Related, but I'm a US citizen that's moving over to Australia for work shortly. If you have a superannuation balance and you leave the country you can get it all as a lump sum, minus ~30%.

lettergram• 5 years ago

Just so people are aware, high income individuals can’t use IRAs. This is a direct action against middle to low income individuals.

https://www.irs.gov/newsroom/new-income-ranges-for-ira-eligi...

matthewbauer• 5 years ago

You can contribute to a traditional IRA at any income. You can only take the deduction at certain income ranges though.

Also, you can “use” an IRA after you contributed to it, so you could be high income now but contributed to an IRA when you weren’t.

wpietri3• 5 years ago

Oh? Then how did Peter Thiel shelter billions in a Roth IRA?

https://www.propublica.org/article/lord-of-the-roths-how-tec...

This is direct action against rich people abusing a middle-class retirement account. What percentage of actual middle-class people are investing in "private placements and single-member LLCs"? I'd guess it's close to zero. And it probably should be. The whole reason governments create retirement accounts with special advantages is to make sure people are self-supporting in old age and don't need additional state support. That means they should be investing in a broad spectrum of low-risk stuff, not exotic, hard-to-value instruments.

psanford• 5 years ago

No. The income phase outs only apply if you or your spouse is also eligible for a workplace 401k plan. If you don't work somewhere that offers a 401k plan, there is no income level limit for contributing to a traditional IRA.

belltaco6• 5 years ago

Not true.

The backdoor Roth IRA conversion is a technique where investors who earn too much to contribute directly to a Roth IRA make after-tax contributions to a traditional IRA and then convert the contributed amount, and perhaps other money in the account, to a Roth IRA.

https://www.thinkadvisor.com/2021/09/22/what-to-do-if-congre...

fxleach• 5 years ago

Then why do Warren Buffet and Peter Thiel have billions in them?

f3d46600-b66e• 5 years ago

More complicated: they can contribute to IRA and pay taxes on it, and then they can convert to Roth IRA and have tax free appreciation of the assets, and tax-free withdrawals.

IANAL, IANA tax lawyer, TINALA

boogoob4• 5 years ago

They can't contribute to a Roth IRA, but they can contribute to a Traditional IRA, just without a deduction.

https://www.irs.gov/retirement-plans/plan-participant-employ...

itsananderson• 5 years ago

Untrue in practice. High income individuals have several loopholes they can use to make Roth IRA contributions.

https://www.nerdwallet.com/article/investing/backdoor-roth-i...

https://www.forbes.com/advisor/retirement/mega-backdoor-roth...

noitpmeder2• 5 years ago

This is such a blatant misrepresentation of the facts it's scary.

spamizbad• 5 years ago

Good. Capital is under-taxed.

BitwiseFool• 5 years ago

On the contrary, I think we're being taxed too much.

mariojv3• 5 years ago

I'd recommend reading the proposed provisions themselves directly from the Ways & Means Committee instead of the main article urging action: https://www.advantaira.com/wp-content/uploads/2021/09/WM-Tax...

Highlights:

1. You can't add new contributions to tax-advantaged accounts if their total value exceeds $10 million and you make over $400K for single filers, amounts indexed to inflation.

2. There are required minimum distributions if you have tax-advantaged accounts over $10M and make over $400k. There's a more rapid drain if you have over $20M.

3. Closes the backdoor Roth IRA (https://www.bogleheads.org/wiki/Backdoor_Roth) only for people making over $400k. Closes the mega backdoor (https://www.bogleheads.org/wiki/Mega-backdoor_Roth) for everybody.

4. Prohibits you from using a tax advantaged account to invest in securities that require "accredited investor" status (hedge funds, etc). You also can't use the tax advantaged account to invest in businesses where you have 50% or more of an interest.

Unless you're super rich, were using a tax advantaged account to invest in your business, or were using the mega backdoor, which isn't available to everyone and still does require a pretty high income (investing more than ~$20k/year in a 401k), this doesn't really impact you. You can also still do whatever you want in a taxable account, so to me this just seems like a roundabout way of increasing taxes on wealthy people's investments.

I do wonder how much revenue this will raise, though. I can't imagine there are a ton of people with retirement balances over $10M. Maybe the expectation is that revenue will compound over time as more and more assets are held in taxable accounts.

EDIT: I think I was wrong about the backdoor Roth still being available to folks making under $400k (point 3) since you can't convert any after tax funds to a Roth with the proposal. So, this does affect people above the Roth ceiling ($140K single income, $208K married), if you were maxing out pretax contributions and making after-tax conversions to a Roth. I think pretax contributions to a traditional IRA for 401k can still get converted to a Roth.

mmd457• 5 years ago

The killer is the "The bill also prevents investing in an entity in which the IRA owner is an officer." which is generally how the checkbook IRA is structured (IRA owner is the Manager of the single member LLC that is wholly owned by the IRA).

Sec. 138314. Prohibition of Investment of IRA Assets in Entities in Which the Owner Has a Substantial Interest.

To prevent self-dealing, under current law prohibited transaction rules, 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. However, an IRA owner can invest IRA assets in a business in which he or she owns, for example, one-third of the business while also acting as the CEO. 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. The bill also prevents investing in an entity in which the IRA owner is an officer. Further, the bill modifies the rule to be an IRA requirement, rather than a prohibited transaction rule (i.e., in order to be an IRA, it must meet this requirement). 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

idiotsecant8• 5 years ago

This is the killer, indeed. Checkbook IRAs are amazing retirement tools if you're interested in using some of your retirement money in high-risk, high-reward investments. My retirement fund benefited enormously from the Q3 2020 crypto market gains, which would not have been possible without my LLC. It's hard to see this as anything other than removing all the peasants from the market so that the big dogs can have it to themselves.

joshgachnang• 5 years ago

Honestly they should close the backdoor Roth and update the Roth income rules to stop requiring the backdoor Roth. It's annoying to use it as is. Getting rid of the mega backdoor seems like a no brainer since it's a clear loophole. Or if you want to keep something similar, change the Roth contribution limits for everyone.

majora2007• 5 years ago

This is what I'm most bumed on with the mega backdoor and backdoor, but closing them and just opening them for everyone would be ideal. Because you can still contribute to Roth regardless on income level if you know about backdoor, so it makes sense just to legalize across the board.

lotsofpulp10• 5 years ago

They should close 401k and all other tax advantaged retirement accounts, and just have regular IRA and Roth IRA for everyone, and remove employers from the equation.

c543• 5 years ago

This seems… fine? And a lot less FUD-y than the original article. I find that talk of the “freedoms” being taken away often is propaganda by the corporate interest youre paying to exercise the supposed freedom

Grim-444• 5 years ago

Well you can't deny that options are being taken away for a portion of citizens. I stopped doing more than the minimum match into my 401K a long time ago because I could no longer trust that in 30, 40, 50 years nobody wouldn't have come after it as an easy target. It's kind of like gun control (which isn't a good analogy since it's too politically charged) - you're pointing at one restriction and saying "hey, it's not the end of the world, you can still own guns, this probably doesn't even affect you personally", but then a new restriction, law, permit, tax, ruling, regulation, is passed every 6 months from that point on every year for decades on end, every time pointing to the change as just a small little thing that probably only affects a small portion of people. Every time gaining more and more precedence for more restrictions and overall adding them all up having a much more massive impact than just a small change that only affects certain people.

2arrs2ells• 5 years ago

Re: revenue generated, if this [1] article about Peter Thiel's $5bn Roth is correct, that's $1bn+ in lost long term capital gains tax on him alone!

(That said, I'm guessing the intent of the provision is more about fairness/eliminating a loophole for the wealthy than strictly generating revenue).

[1] https://www.propublica.org/article/lord-of-the-roths-how-tec...

loourr9• 5 years ago

Roth IRAs are pre tax so even if this bill passes Peter Thiel won't have to pay any taxes on his $5B.

wanderingstan• 5 years ago

Thank you for the succinct summary. I agree it all seems reasonable, even too modest.

Having these basic guardrails in place may be a good first step, and in the future the thresholds could be dropped below $10MM and 400K.

CincinnatiMan• 5 years ago

I think you may be wrong on point 3.

Furthermore, this section prohibits all employee after-tax contributions in qualified plans and 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.

This makes it sound like backdoor will be stopped for everyone, since after-tax contributions to a (Traditional) IRA are a necessary step.

FooBarBizBazz2• 5 years ago

If this happens, maybe 401k providers will lose business. People often have reasonably large traditional 401ks, which they don't roll over to traditional IRAs, because having traditional IRAs interferes with the backdoor Roth (and they don't want to do a Roth conversion, because that would be a taxable event). But if backdoor Roths went away, then there'd be no reason not to roll a traditional 401k into a traditional IRA. Brokerages like Fidelity and Schwab would win, as people brought their assets over, and 401k providers would lose, since now people would take their money out as soon as they switched jobs.

mariojv3• 5 years ago

You are right, I missed that. This does mean there's an impact on folks making above the Roth income limit but below $400k. Updated the post, thanks

ryandrake2• 5 years ago

3. Closes the backdoor Roth IRA (https://www.bogleheads.org/wiki/Backdoor_Roth) only for people making over $400k. Closes the mega backdoor (https://www.bogleheads.org/wiki/Mega-backdoor_Roth) for everybody.

Just a nit-pick of your analysis. The proposed legislation closes both the megabackdoor Roth (employee after-tax contributions) and backdoor Roth (prohibition on IRA contributions from being converted) regardless of income level:

"Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level"

...which, depending on what you consider a tax increase, appears to run contrary to President Biden's promise to not increase taxes for anyone making less than $400K. This gutting of IRA conversions seems like the only piece of the pie that hurts the middle class, although arguably the upper end of the middle class who have the means to set aside more than the $19K 401(k) max per year.

mariojv3• 5 years ago

Yeah, you're totally right. Updated the post.

paulclinger2• 5 years ago

I'm curious why would this increase taxes if those contributions that get converted are after-tax anyway and the amount that gets taxed shouldn't change?

CPLX6• 5 years ago

I can't imagine there are a ton of people with retirement balances over $10M.

Probably not a ton of people. But there might well be a ton of money in these accounts.

https://www.theatlantic.com/politics/archive/2012/09/whats-r...

loourr9• 5 years ago

This just isn't true. The bill also prevents you from investing in any private company of which you are a member, AKA a startup you work at. It also prevents you from any deals requiring you to be an accredited investor which means any Reg D which is how almost all early stage tech companies raise money.

ska2• 5 years ago

Does it restrict you from doing those things, or only restrict you from doing it in a tax-free/tax-advantaged way?

wintermutestwin• 5 years ago

and still does require a pretty high income (investing more than ~$20k/year in a 401k)

Nearing retirement, earning low income now and have a significant amount of savings in non-retirement accounts = Closing the megaBD Roth screws me.

What should really happen is that anyone with net worth < a reasonable threshold should be able to simply roth what ever the fuck they want without having to figure out these annoyingly complex tax rules.

lmeyerov2• 5 years ago

The big thing I heard about is this ends QSBS, which stinks for founders: something like 15-20%+ of your company's value. Worse, it's a retroactive tax, meaning taxing founders who started the journey with that in mind.

Talk about rich senators punching down vs encouraging company formation!

PSA: If you are starting a US company and haven't heard of QSBS.. look into it at the federal + state levels, as that's a good chunk of your potential net worth.

CPLX6• 5 years ago

As a founder I'll certainly take advantage of QSBS if it's relevant to me in the future. But let's not delude ourselves -- it's wildly unfair as a tax break. The primary use of it seems to be allowing angel investors to literally pay no taxes whatsoever on millions of dollars in windfall profits.

enterthematrix2• 5 years ago

This change effects actually zero people who aren't millionaires many times over - this website is literally a conservative think tank.

enterthematrix2• 5 years ago

this change effects literally zero people who aren't millionaires many times over. The change effects high net worth individuals who are trying to game the system and not pay taxes. This is not even complicated.

say_it_as_it_is• 5 years ago

This is not the tax loophole that needs closing. Policymakers are still refusing to tax the ultra high net worth elites.

PaulDavisThe1st10• 5 years ago

It's not everything, sure.

But it does (attempt to) say "you cannot avoid paying tax on gigantic capital gains by shielding it inside a Roth IRA". It is absolutely directed at ultra high net worth elites.

There is an argument that simply capping the gains inside a Roth IRA that can be tax-exempt would be a more efficient way to do this.

okhuman• 5 years ago

Peter Thiel has entered the chat.

loourr9• 5 years ago

This will force hundreds of thousands of people who own shares of small businesses within their retirement accounts to disgorge them.

They can't sell them to themselves because that's against the rules. If they distribute them then they have to pay a 10% tax penalty in addition to any income tax.

These are small thinly traded assets. What will very likely happen in practice is big wall street firms will come in and buy up thousands of American small businesses (retirees best assets) at a major discount similar to what Blackstone is currently doing with single family homes.

jfrunyon2• 5 years ago

has $5 billion socked away in a tax free Roth IRA

How? You can only contribute a maximum of $7,000/year to all IRAs you own.

mrep• 5 years ago

He invested in paypal with it right when he started it and it was worth like nothing. After that IPO, he then doubled down and invested the paypal returns into facebook with it. It's talked about in this article.

https://www.propublica.org/article/lord-of-the-roths-how-tec...

Self directed IRAs under attack in proposed tax bill

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