In the proposed infrastructure bill, as well as the proposed tax increases to fund it, Congress is messing with retirement accounts.
IRA accounts will not be allowed to invest in anything based on account holder’s status.
That applies to investments that require “accredited investor” status, certain financial credentials, or a minimum net worth, such as many private investments (i.e not publicly listed companies). You have two years to get out of current investments that violate this rule.
The IRA will also be prevented from investing in anything in which the owner has 10% or larger ownership, or is an officer.
This is terrible for Self-Directed IRAs — more on these below. Fortunately, it does not currently apply to 401(k)s.
Restrictions on Roth funding and conversions
The Roth structure allows after-tax contributions to retirement plans which then grow tax free. Since you paid taxes up front, you do not owe taxes on distributions, even if the value has grown substantially from good investments.
Congress is proposing to prohibit any after-tax contributions to Roth structures in workplace plans, and ban converting after-tax money paid into a regular plan into a Roth plan (this tactic can currently help avoid Roth contribution limits).
It would also ban ALL Roth conversions for workplace plans for singles who make over $400,000 per year, and couples who make more than $450,000 — but this would not go into effect until after December 31, 2031.
Converting to Roth triggers a taxable event, meaning you pay the taxes on the account now and not on distributions. This can be preferable if you think your investments will grow enough that you would owe more taxes later on distributions than you would owe currently if the account value was taxed today.
Contribution Limits and Minimum Required Disbursements
According to the House Ways and Means summary, “the legislation prohibits further contributions to a Roth or traditional IRA for a taxable year if the total value of an individual’s IRA and defined contribution retirement accounts generally exceed $10 million as of the end of the prior taxable year.”
This applies “to single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation).”
Under those circumstances, the owner of the account would be forced to take a 50% distribution of the combined value of all applicable plans over $10 million (i.e. if the accounts have $11 million total, the minimum required distribution is $500,000).
It becomes even more restrictive if the accounts exceed $20 million in value.
What this means:
This all translates into less choice and flexibility for individuals planning their retirements.
But it does not eliminate the benefits of the two main self-directed retirement structures that can benefit the self-employed, and people with side income.
What you can do about it:
For a long time we have presented self-directed retirement accounts as a good way to plan for retirement.
A Self-Directed IRA owns one, and exactly one, asset: a limited liability company (LLC) that you manage. That’s why they are called “Self-Directed”. And through that LLC, you can invest your retirement savings in a wide array of assets — precious metals, real estate, cryptocurrency, private businesses*, and much more, in the US, or overseas.
It’s a fairly straightforward setup: you establish an account with the custodian, then establish an LLC in a zero-tax state (like Wyoming or Florida) where the IRA is the owner (member) of the LLC, but YOU are the manager.
You’ll also want to open a bank account for the LLC. Afterward, the custodian transfers your retirement funds to the LLC, putting you in the driver’s seat for determining how the funds are invested.
The contribution limits for the Self-Directed IRAs themselves are not that high, however — only $6,000 (under age 50) or $7,000 (50 and older), so the earlier you start contributing to it, the better.
*If this legislation passes in its current form, the main change to the Self-Directed IRA is that you will no longer be allowed to invest in private companies which require an investor to be accredited, hold certain credentials, or have a minimum net worth.
That is really unfortunate, but it does not entirely negate the benefits of this retirement structure.
Plus, this restriction does NOT currency apply to Solo 401(k)s.
Solo 401(k) is an option to consider if you’re self-employed, or if you generate “side hustle” income.
With a Solo 401(k), you wear BOTH the employer and the employee hats, so you contribute in both roles. A Solo 401(k) allows for contribution levels ranging from $58,000 to $64,500 per year in 2021, depending on your age — offering incredible flexibility, and the ability to significantly lower your personal income tax burden.
Just like a Self-Directed IRA, a Solo 401(k) gives you a much wider array of investment options — real estate, precious metals, private businesses, etc. — that can help maximize your return.
Of course, none of this is definite yet. This is how the legislation currently looks, but there is no guarantee that it will pass in its current form. This is a heads-up about what changes could soon be coming for your retirement accounts.
Keep in mind that we are not tax or investment professionals, and this is not tax or investment advice. You should always consult with a trusted professional, familiar with your particular situation.