October Landscape Summary- IRA Holdings in Jeopardy?

How can the “Build Back Better” Plan be in the best interest of Non-Wealthy IRA Savers who responsibly invested in small business and start up including Real Estate LLC?  

By Al DiNicola October 20, 2021

Opinions expressed by Al DiNicola are based on conversations with industry leaders during the Alternative Direct Investments Securities Association annual meetings October 2021.

There are two specific sections in the “BBB” plan that are of concern. The problematic sections, 138312 and 138314, change more than 40 years of IRA laws and practice, which have allowed IRAs to invest into publicly traded companies as well as privately held small businesses, LLCs, real estate, and startups.  The package still working its way through Congress (proposed $3.5 trillion budget-reconciliation) contains two provisions that will restrict IRA investments into startups, small business, and real estate LLCs. This is a surprise to the millions of IRA investors who already responsibly invested a portion of their IRA into these non-publicly traded assets.  In many cases these investments needed to be made by accredited investors.

There are provisions in the bill that target large accounts and the high-net-worth income earners.  These targeted problematic provisions include a $10 million cap on total retirement account balances. There is also a provision that would close out the so-called “back door Roth IRA” for high-income earners. Speaker Pelosi calls these the “Wealthy Few”.

Rather than account size or income the bill targets investment choice.

Thousands of working Americans and retirees who choose to invest a portion of their IRA accounts off Wall Street will be affected not the “Wealthy Few” if Sections 138312 and 138314 get put into law.  

There are thousands of small investors who have invested in small startup real estate ventures, and some are impact investments of likeminded investors.  These investors may be required to liquidate their investments within two (2) years.  This may cause a collapse of the investment all together requiring to the project to be sold at any cost in an attempt to simply recover any investment.  In some cases, there may be no recovery if the project has any bank financing and then the banks will own the investments and the investors will be left holding nothing. Many ventures were structured as long term investments. The other losers are small startup companies and businesses who have relied on investments from IRA holders

Here is another strange provision of Section 138312. The SEC, FINRA and other supervisory groups have established that investing into certain products may only be done by accredited investors.  Accredited investors are those making $300,000 if married ($200,000 if single) for the past few years. Alternatively, you can qualify if you have a net worth of $1MM excluding your primary residence.  This was adopted to have some level of qualification or risk level acceptance with real estate ventures. The bill would remove that requirement.  Does this mean that all investors regardless of experience or income level can place money in a venture?  As a financial advisor in the alternative real estate arena this is an unrealistic component of the section.  The very laws enacted to protect investors may now be removed. What are the people in Washington thinking about with this provision? Once again in my opinion if you are raising money for non-traded investments you should comply with securities laws.

Let me get this straight you are going to penalize me for being responsible?

There are also many investors who operate their own self-directed IRAs and prefer not to use a financial advisor to with have more flexibility or save money.  With all the online tools investors are becoming more engaged in their future retirement planning. These investors are now being penalized by having real estate investments within their IRAs.  Strange, investors who are being responsible, seeking out knowledge and planning on their future will be restricted from doing this very responsible planning. Investors may have spent decades building up the foundations of a sound retirement plan using non publicly traded assets through their IRA (rather than looking forward to the well managed Social Security Program – yes sarcastic remark) now to have this stripped away.   For the final point what exactly is the premature liquidation of a non-publicly traded asset profitability?

Will anyone invest in local small businesses that benefit local areas?

There is another type of investors who seek to better communities and include investors who are socially responsible and seek impact investing with communities.  This may become an extinct investor.

R-E-S-T-R-I-C-T that the way you spell Restrict – look to Section 138314

The formation of and utilization of an LLC structured operating company has been used in a variety of situations. One of the reasons is the limited liability nature of the structure. If an LLC is set up within the IRA, the owner of the IRA is the manger (without compensation) of the LLC.  All proceeds need to flow back to the IRA.  The LLC can fund the IRA. Custodians of the IRA, who permit the IRA to own real estate, may also require an LLC as a form of protection.

Section 138314 causes problems for IRA owners, as it states that an IRA owner cannot serve as “officer” of a company where their IRA invests into. The manager of an LLC is an officer, so anyone who has used an IRA-owned LLC will be affected. This restriction is something wealthy IRA owners can easily side-step, as they have teams of investment professionals and asset managers who already serve as managers of their LLCs, but everyday IRA investors buying single-family rentals with their IRA-owned LLC will be forced to wind down these LLCs. Many won’t find it practical to own real estate in their IRA, as the maintenance burden and fees from their IRA custodian can significantly cut into the profits and returns that they are hoping to earn.

Investments seeking high returns may be challenged with Section 138312

Private companies, venture capital funds and private equity typically deliver higher returns (along with risk).  IRA holders would no longer be able to invest in these alternatives. Much like other blanket orders there are consequences that effect the smaller investors.  Wall street will benefit, and main street will suffer.

If you have an IRA, can you own anything? Congress is attempting to restrict the types of assets someone may hold in their IRA. This restriction may have been an overreaction to isolated cases where millions of dollars, potentially billions, were accumulated.”

The restriction may be traced to Peter Theil’s billion-dollar IRA that was built by investing in founders’ shares. The real issue may be 138312 and 138314 are written so broadly they swallow up IRA accounts by the hundreds of thousands of non-wealthy IRA savers. These savers may wish to invest is a startup business, real estate, or other alternative investments.  These investors are not the Peter Theils looking for a loophole. 

Who should Congress target? Everyone or the wealthy?

From those of us outside the beltway we scratch our heads and wonder what they (Congress) are thinking. Is there a better solution?  What was intended to be a big net to “catch the wealthy” has become a net that catches everything or everyone.  This big fishing net pulls in the little investors.  Hard working investors may lose their investment for being responsible.  Another opinion on what to do may be to limit the size of the IRA tax advantages (less than $10 Million that could afford the small investors and families to invest but the mega millionaires would divest and look elsewhere.  Other advisors feel that limiting total IRA and other retirement account balances at $10 million in Section 138301 of the bill would directly target the “wealthy few” and limit the tax benefits in their accounts. This would preserve the IRA attractiveness.

Investor who has utilized their IRA to include the alternative investments in Real Estate and other non-traded assets should be contacting their representatives in Congress.  Final votes could happen by end of October. Yes, in my opinion this is part of the $3.5 trillion reconciliation package (rumored to be $5 Trillion).  There is also another rumor this package will not cost anything. Stay tuned for the update.

Al DiNicola is an Accredited Investment Fiduciary and Investment Advisor Representative with NAMCOA, a Registered Investment Advisory firm.  The opinions expressed by Mr. DiNicola come from a variety of sources and readings on the pending legislation.  Please consult your own tax and advisory professional.

About the author

Leave a Reply