Your financial security is our priority and the relationship you have with Quest Trust Company is very important to us. That’s why we want to make you aware that the United States House of Representatives has proposed changes to the laws governing individual retirement accounts (IRAs) as part of its $3.5 trillion reconciliation package. These changes, if enacted into law, would have a direct negative impact on you and your ability to save for a secure retirement through an individual retirement account, like the one you have today at Quest Trust Company.
This doesn’t just affect a few people; this affects everyone! Small business owners, start-ups, housing providers, local businesses, and the average investor like yourself would all be affected if this bill passes. Your retirement money is just that – yours. You should be able to continue putting your money into investments you understand and know and trust, confident that your money is helping not only you but your community, as well. Continue reading below to see how this could affect you.
How Would The Proposed Legislation Affect You?
The proposed legislation would significantly affect Self-Directed IRAs. It would prohibit IRAs from holding privately-placed equity and debt securities and other investments that require IRA owners to meet minimum financial, educational or licensing requirements. For example, the legislation would prohibit IRAs from holding unregistered investments that are offered to accredited investors, like equity or debt investments in small businesses or investments in private funds. You may very well hold investments in your IRA today that would be prohibited by the proposed legislation.
The bill would also prohibit IRA owners from investing in (1) non-publicly traded entities in which the IRA owner and related entities (including the IRA itself) own more than a 10% interest or (2) any entity in which the IRA owner is an officer or director, regardless of ownership percentage. By way of example, single-member limited liability companies or any investment in an entity in which an individual is a director or officer could no longer be held in an IRA. IRAs holding any of the above investments would lose all of the tax advantages previously available to the IRA.
If the proposed legislation is enacted, you will no longer be able to purchase any of the above investment types in your IRA. Further, you will be required to dispose of any such investments that you currently hold in your IRA by no later than December 31, 2023, which could result in significant and previously unforeseen financial and tax consequences, including taxes and penalties associated with any assets that could not be sold or liquidated and must be distributed in-kind from the IRA.
The text below is a more detailed summary of the changes written by CEO and Founder of Quest Trust Company. The following paragraphs outline the seriousness of the proposed changes.
Summary of Changes Proposed by House Reconciliation Bill
Provisions Only Affecting High-Income Taxpayers with Large Account Balances:
- Taxpayers fall into this category if they meet two tests – they must have BOTH aggregate vested balances in the combined total of all retirement accounts (including 401(k)s, 403(b)s, etc.) of over $10,000,000 and have adjusted taxable income of $400,000 for a single taxpayer, $425,000 for a head of household taxpayer, or $450,000 for a married taxpayer filing a joint return (all indexed for inflation).
- No more contributions to a traditional or Roth IRA are permitted (Section 138301).
- Employer-sponsored defined contribution plans (such as 401(k)s, 403(b)s, etc.) would have to report to the IRS and to the plan participant on aggregate account balances in excess of $2,500,000 (Section 138301).
- All qualified retirement plans and eligible deferred compensation plans are counted as one plan for purposes of determining required minimum distributions (Section 138302).
- If the combined Roth IRAs, traditional IRAs and employer defined contribution plans exceed $10,000,000 at the end of a taxable year, the required minimum distributions are increased for the following year to 100% of the amount necessary to bring all qualified retirement plans and eligible deferred compensation plans down to $20,000,000, and 50% of the remaining balance over $10,000,000 (indexed for inflation). The RMDs must be allocated first to Roth IRAs and then to designated Roth accounts under the 100% distribution rule, but taxpayers may choose how to satisfy the 50% distribution rule once the 100% distribution rule is satisfied (Section 138302).
- These provisions apply to tax years beginning after December 31, 2021.
Provisions Affecting High-Income Taxpayers (Without Regard to Balances):
No more Roth Conversions or Rollovers for High-Income Taxpayers
- If a taxpayer is a High-Income Taxpayer (defined as a taxpayer who has adjusted taxable income of $400,000 for a single taxpayer, $425,000 for a head of household taxpayer, or $450,000 for a married taxpayer filing a joint return (all indexed for inflation)), the taxpayer may only do a qualified rollover if it is made from another Roth IRA or from a designated Roth account (Section 138311).
- If a taxpayer is a High-Income Taxpayer, Roth conversions of both IRAs and employer-sponsored plans are prohibited (Section 138311).
- These provisions apply to distributions, transfers, and contributions made in taxable years beginning after December 31, 2031 (this date may be a typographical error which will be corrected) (Section 138311).
Provisions Affecting All Taxpayers Without Regard to Income or Balances:
Prohibition of Investments Requiring Certifications
- A restriction is added to the qualifications for an account to be an IRA by adding an additional paragraph (7) to Section 408(a), which states that no part of the trust funds will be invested in any security if the issuer of such security requires the individual on whose behalf the trust is maintained to make a representation to the issuer that such individual (A) has a specified minimum amount of income or assets (e.g. an accredited investor), (B) has completed a specified minimum level of education, or (C) holds a specific license or credential (Section 138312).
- If, during any taxable year of the individual for whose benefit any individual retirement account is maintained, the investment of any part of the funds of such individual retirement account does not comply with Section 408(a)(7), such account ceases to be an individual retirement account as of the first day of such taxable year (Section 138312). In other words, if an IRA holds one of these prohibited investments the entire IRA is disqualified.
- These requirements shall apply to tax years beginning after December 31, 2021. However, if an individual retirement account holds any such prohibited investment as of the date of enactment of the act, the amendments will apply to such prohibited investments for taxable years beginning after December 31, 2023. In other words, an IRA holding a prohibited investment must dispose of or distribute the asset by no later than December 31, 2023 or the IRA will cease to qualify as an IRA (Section 138312).
No More “Back Door” Roth Conversions
- To slam the door on “back-door” Roth IRA strategies, the bill prohibits all after-tax contributions in both IRAs and employer-sponsored plans from being converted to Roth accounts, regardless of income level. This section applies to distributions, transfers, and contributions made in taxable years beginning after December 31, 2021 (Section 138311).
Extension of Statute of Limitations With Respect to IRA Non-Compliance
- The bill expands the statute of limitations for IRA non-compliance from 3 years to 6 years for substantial errors in valuation-related reporting (whether willful or otherwise) and prohibited transactions Section (138313).
Prohibition of Investments in Entities in Which the IRA Owner Has a Substantial Interest
- The bill prohibits IRAs from investing in entities not tradable on an established securities market if the entity is owned 10% or more by the IRA owner, either directly or indirectly (down from 50%). Indirect ownership by the IRA owner includes the ownership interests of certain family members of the IRA owner. The bottom line is that if the IRA owner and certain family members of the IRA owner collectively own 10% or more of (1) the combined voting power of all classes of stock entitle to vote or the total value of shares of all classes of stock of such corporation, 2) the capital interest or profits interest of such partnership or enterprise, or 3) the beneficial interest of such trust or estate, then such investment is prohibited and may not be held by the IRA (Section 138314).
- The bill also prohibits IRAs from holding investments in which the IRA owner is an officer or director (or an individual having powers or responsibilities similar to officers or directors) of such corporation, partnership, or other unincorporated enterprise. In other words, a “checkbook control IRA-owned entity” is prohibited (Section 138314).
- An IRA which holds one of these prohibited investments will cease to be an IRA as of January 1 of the year in which the IRA acquires the asset. However, if an IRA holds such an investment on the date of enactment of the Act, the rules will apply to such investments for taxable years beginning after December 31, 2023 (Section 138314). In other words, the IRA may continue to hold such prohibited investments until December 31, 2023, at which point the asset must be disposed of or distributed.
Clarification That IRA Owners Are Disqualified Persons For Purposes of The Prohibited Transactions Rules
- The bill clarifies that the IRA owner is a disqualified person for purposes of the prohibited transactions rules by adding such an individual to the definition of a disqualified person in Section 4975(e)(2) of the Internal Revenue Code (Section 138315).
HERE ARE VIDEO DISCUSSIONS FROM INDUSTRY EXPERTS REGARDING PROPOSED TAX LAWS:
We’re advocating for you. We want you to know that we are working closely with our third-party advisors in Washington D.C., along with other major industry participants with the goal of having these provisions removed from the reconciliation package. Know that, as always – we will continue to be a strong advocate for investor choice. We also want you to feel secure in knowing that our company is well-positioned to continue to succeed, no matter the outcome of the proposed legislation.
Not sure how to contact your U.S. Congressional Representative?
Not sure how to contact your U.S. Senators?
- Discussion of the bill’s effects with Troy Eckard – https://www.youtube.com/watch?v=QHC4AELKx6o&t=1s
- Discussion with Tom Berry Regarding Proposed Tax Law Changes – https://www.youtube.com/watch?v=h0SXRpamg5g
- Discussion with John Hyre Regarding Proposed Tax Law Changes – https://www.youtube.com/watch?v=MucJMxNtay0
- Discussion with David Phelps Regarding Proposed Tax Law Changes – https://www.loom.com/share/b9eee7f5022d4ba2adc16a39a0a8d504
- Hands off my IRA – https://www.handsoffmyira.com/?r_done=1
- Additional Blogs about the Proposed Changes – https://www.questtrustcompany.com/2021/09/24/urgent-sdira-news-that-could-affect-you/
- National REIA Action Center – https://nationalreia.org/action-center/
- U.S. Congressional Representative- https://www.house.gov/representatives/find-your-representative
- U.S. Senators – https://www.senate.gov/senators/senators-contact.htm
- Open Your Account and Join the Cause – https://www.questtrustcompany.com/open-an-account/
Share your Questions and Concerns with an IRA Specialist – https://calendly.com/iraspecialist/newsletter-complimentary-consultation-with-an-ira-specialist?month=2021-10