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.