ATTENTION IRA HOLDERS


Destroying Self-Directed IRAs (and maybe 401(k)s):

Forcing Main Street to Invest in Wall Street


JOHN HYRE

From the desk of John Hyre.

San Juan, PR

Dear Friends,

 

The Democratic House is looking to gut self-directed retirement accounts (especially IRAs, possibly 401(k)s and Solo 401(k)s), and they are attempting to do it very quietly and very quickly.

 

You can stand by and do nothing…and pay the price, literally.  Or you can fight.  To protect your retirement (or the funds that feed your business if you raise money from SDIRAs/401(k)s), you will need to fight promptly and loudly.  Procrastinators are useless in this fight.  More on “how to fight it” below, see the Table of Contents for a link.

 

Like the proposed laws, this website has been thrown together in haste.  It is a work in progress.  All errors are mine.  Constructive suggestions for improvements are welcome.

The Mainstream Narrative:

Much of this legislation is ostensibly driven by “we cannot have a Peter Thiel repeat” (e.g., $2,000 grown to $5 billion inside of a Roth IRA, tax-free, via means that were highly aggressive at best).

   

The reality?

It’s about forcing your retirement funds out of Main Street and into Wall Street (the latter has far better lobbyists than the former).  Helping out certain billionaires is evidently just fine.

   

My proof of the reality?

One portion of the proposed law essentially limits your combined retirement accounts to $10 million per person.  Let’s do some math.  $10M is one-fifth of one percent (0.2%) of $5 Billion.  That means that the $10M cap solves 99.98% of the Peter Thiel Problem.  Which for legislation, is a pretty darned good batting average.

So why all the extra law in addition to the $10M cap?

The extra law isn’t about raising revenue.  The amount raised by the extra law is estimated at about $180 million per year for 10 years (and given Congress’ history of “estimating” revenue, that number is probably optimistic).  Such a number is absolutely trivial in the shadow of trillions.

 

What that extra law does do is absolutely gut self-directed IRA investing and is quite harmful to 401(k)s as well (indeed, 401(k)s will be next if they get away with destroying SDIRA investing). The extra law is not directed at Thiel or other billionaires. It is directed at ALL SDIRA/401(k) pension plans.  

 

 

Why cripple the ability of comparatively normal people to choose alternative investments?  Why force your retirement money from Main Street to Wall Street?

 

I shall leave the reader to answer that question for himself.

 

In the meantime, you may want to do something about it.

1.

The Proposed Laws

1)  No more investing in many PPMs, private investments, certain crowdfunding, certain crypto deals, etc.  Investments open only to accredited or sophisticated investors (among others) are banned for IRAs, upon pain of death to the IRA. 

 

More specifically, if the issuer of a security (e.g., shares in an LLC, corporation, trust, partnership, etc.) requires that the IRA owner represent that (s)he has a minimum amount of assets or income OR has completed a certain level of education OR holds a specific license or credential, then the investment is banned.  If the IRA makes such an investment, it ceases to be an IRA, period.  All of its funds become taxable as if distributed (creating a 50% to 60% tax hit on the IRA’s many assets) and are no longer tax-sheltered.

 

Such a ban would cut IRAs out of many, many private investments – most PPMs, some loans, many private deals, certain crypto arrangements, you name it.  The idea is to force IRAs into tiny deals (e.g., buying a rental property without an LLC, at least until they ban that as well) or into Wall Street.  Passive investment of IRA funds into private deals would become far, far less common.  Your IRA would have far fewer investment options.  And those who raise money from IRAs would have to seek funds elsewhere.

 

Your IRA has two (2) years to exit such investments – or face destruction.  There is no grandfather clause.  There is no penalty or tax abatement if “exiting the investment” involves an early distribution from your IRA.  You may need to sell the once-legal investment at a fire sale price to meet the two-year deadline. 

 

Why ban most private investment by IRAs?  Why these harsh restrictions with draconian penalties?  Why reduce retirement options in an uncertain world?  Why cut an important source of funds for Main Street?  Why force Main Street into Wall Street?  It’s not because of Peter Thiel and it’s not to raise revenue.  Why?

 

This section presently only applies to IRAs.  It would take a stroke of a pen, now or in the future, for it to apply to 401(k)s, Solo 401(k)s, and other accounts.  First, they came for the IRAs, and I did nothing since I did not have an IRA…. later on, they came for my 401(k) and who-knows-what-else. Even if you do not presently have an IRA, you have a dog in this fight.

 

 

2)  Banning ownership by your IRA of more than 10% in ANYTHING.  No more “Checkbook LLCs”, or IRA’s use of land trusts, or of personal property trusts.  No more owning 10% or more of any entity by your IRA, including JVs (even handshake deals, which are considered “partnerships” under tax law), trusts, LLCs, blocker corporations, etc.  In addition:  Any personal ownership (direct or indirect) “counts” towards your IRA’s ownership.  For example, if you (or your spouse, or other related persons) own 6% of an LLC, your IRA can own no more than 4%. 

 

If your IRA, for example, wishes to own a rental property, that property must be owned directly by the IRA.  LLCs for asset-protection would be banned.  Similarly, if your IRA lends money, then it must do so directly in its name and not via a trust or LLC to preserve anonymity or provide asset protection.

 

Your IRA will no longer be permitted to do 50/50 JV deals (or any deal where the IRA owns more than 10% of the deal) with private persons.

 

Similar to Section 1: Your IRA has two (2) years to exit such investments – or face destruction.  There is no grandfather clause.  There is no penalty or tax abatement if “exiting the investment” involves an early distribution from your IRA.  You may need to sell the once-legal investment at a fire sale price to meet the two-year deadline. 

 

Why ban most private investment by IRAs?  Why these harsh restrictions with draconian penalties?  Why reduce retirement options in an uncertain world?  Why cut an important source of funds for Main Street?  Why force Main Street into Wall Street?  It’s not because of Peter Thiel and it’s not to raise revenue.  Why?

 

This section presently only applies to IRAs.  It would take a stroke of a pen, now or in the future, for it to apply to 401(k)s, Solo 401(k)s, and other accounts.  First, they came for the IRAs, and I did nothing since I did not have an IRA…. later on, they came for my 401(k) and who-knows-what-else. Even if you do not presently have an IRA, you have a dog in this fight.

 

 

3)  No more IRA investing in any entity (e.g. even a “handshake JV”) in which you (or certain related persons) are directly or indirectly an officer or director.  That would include a ban on Checkbook LLC’s/trusts and other entities (even if the IRA owns less than 10%) that you manage directly or indirectly (e.g. – through a nominee, figurehead, strawman, “financial friend”, etc.). 

 

Similar to 2 & 3, above, you have two (2) years to exit the investment or your IRA dies.

 

Similar to 2 & 3 above, this proposed law would only apply to IRAs... for now.

 

Similar to 2 & 3 above, this harsh proposed law has nothing to do with solving The Peter Thiel Problem.

 

 

4)  Roth Conversions Limited.  This section certainly applies to IRAs.  It may also apply to 401(k)s; the 401(k) language is very opaque & makes for very hard reading. I have not yet been able to get my arms completely around it.

 

This Section disallows conversions of After-Tax Traditional accounts to Roth.  In other words, only pre-tax Traditional accounts may be converted to Roth, resulting in taxation of the conversion.  Tax-free conversions to Roth from After-Tax accounts are banned.  This effectively kills the “Back-Door Roth IRA” and possibly the “401(k) Mega Roth” techniques.

 

I’d get those Back-Door Roth IRA and “401(k) Mega Roth” conversions done before year-end, just in case.  This part of the law takes effect in 2022.

 

 

5)  $10M+ Retirement Plans Required to RMD Excess.  To the extent an individual’s combined “Defined Contribution” Plans (IRAs, 401(k)s, etc., but not Defined Benefit Plans) exceed $10 million, that individual is required to distribute 50% of the excess.  This requirement only applies in years where the individual’s income is greater than $400K (filing single) or $450K (filing joint).   

 

For example, if one’s combined retirement plans (excluding defined benefit plans) equaled $11 million, then a distribution of $500,000 would be required if one made over $400K/$450K that year.  The proposed law does waive the 10% early-distribution penalty.

 

Without going into details, when an individual’s combined retirement accounts (excluding defined-benefit plans) exceed $20 million, the required distributions would have to come from Roth accounts (at least to the extent needed to get the account balances under $20M).

 

Individuals whose account balances are $10M or more would not be permitted to contribute to IRAs. 

 

It is adjusted for inflation (e.g. – the $10M will increase each year).  The adjustment is probably based on the CPI which understates inflation.  That’s not good if we arrive at a Zimbabwe-like day where $10M USD doesn’t mean much.  As time permits, I will research and propose a better inflation index.  Information as to how Congressional pensions are indexed would be useful; please send only definitive links and not guesses, as I lack the time to screen the latter.

 

This is the part of the proposed law that solves 99.98% of the Peter Thiel Problem.  The complex & extensive existing rules (e.g.- Prohibited Transactions, UBIT, Excess Contributions, etc.) are more than sufficient to prevent widespread abuse of the $10M in permitted accumulation.  That is especially true if the IRS gets a massive amount of money thrown at it, as proposed elsewhere in the bill.  The IRS needs to do its job instead of lobbying to ban self-directed investing (which it has done since 2009 to make its task easier instead of completing its task).

 

I think this part of the law is going to pass no matter what; indeed, I rather “get it”.  The key is two-fold:  To get rid of the extra, very harmful & unnecessary provisions and to get this $10M cap properly indexed for inflation.

 

 

6)  Existing Statute of Limitations Codified.  Quoted directly from the Congressional “summary”:

 

“Sec. 138313. Statute of Limitations with Respect to IRA Noncompliance.  The bill expands the statute of limitations for IRA noncompliance related to valuation-related misreporting and prohibited transactions from 3 years to 6 years to help IRS pursue these violations that may have originated outside the current statute’s 3-year window. This provision applies to taxes to which the current 3-year period ends after December 31, 2021.”

 

This portion of the Congressional summary was actually pretty accurate.  It merely formalizes the statute of limitations already found in the case law.  Be aware of the “valuation” language.  Best to keep your valuations (and anything else you report to the IRS) honest, and promptly file the tax returns that start the statute of limitations (e.g., Form 1040 for IRAs, including children’s’ IRAs), Form 5500 for 401(k)s, and Form 990-T for UBIT).  I have no major objection to this provision.  Note:  Most IRA prohibited transactions already had a 6-year statute of limitations attached to them.  The valuation portion is new – and understandable given that negligence & abuse are pretty common in that regard.

 

 

7)  Codification of IRA Owners Being Treated as Disqualified Persons for Prohibited Transaction Purposes.  Quoted directly from the Congressional summary: “Sec. 138315. IRA Owners Treated as Disqualified Persons for Purposes of Prohibited Transactions Rules.  The bill clarifies that, for purposes of applying the prohibited transaction rules with respect to an IRA, the IRA owner (including an individual who inherits an IRA as beneficiary after the IRA owner’s death) is always a disqualified person. This section applies to transactions occurring after December 31, 2021.”

 

Just a codification of existing case law.  No objection here.

2.

What To Do

Communicate with Congress.  Repeatedly and loudly.  Do not let them do this in darkness and haste.  What I recommend to protect yourself and others:

 

  1. Email, write, call, and fax. Make some noise. See below for details.
  2. In addition to letters, faxes, emails, and calls, please sign the petition below.
  3. Do all of the above repeatedly. There will be several inflection points when it matters. I will update the website to reflect when a new communication would be useful (e.g. – when it’s up for a vote, when it goes to the Senate Finance Committee, etc.).
  4. Spread the word. There are a lot of us. We need to stand up, together.

Specific Steps:

 

A)  Download the letter below. (We shall add more letters)

 

B)  See the talking points for calling your rep (leave a voicemail if you have to). (coming soon)

 

C)  If at all possible, please add some personal details to the letters and talking points.  “I am providing for my retirement through vehicles you are looking to ban.  I want to keep investing in Main Street, not Wall Street.  My IRA lends to people who improve low-income neighborhoods.  My 401(k)s rent quality properties.  My 401(k) invests in private startups that make the US competitive in tech and create jobs.” Just a paragraph personalizing it matters.  People, even congressional staff, relate to stories.  And some of the recipients of your letters actually do care and truly do not want to harm you.  They know not what they do (though their staffers who wrote the law certainly do).

 

D)  Feel free to edit the heck out of the letters and talking points.  They are just templates.  Make them your own.

 

E)  Email, fax, call, and write (please do all 4 – flood them) the following:

Contact this important 8 first:

Georgia - Carolyn Bourdeaux (GA-07, Suwanee, R+2)

Maine Jared Golden (ME-02, Lewiston, R+6)

New Jersey Josh Gottheimer (NJ-5, Wyckoff, R+1)

Texas Henry Cuellar (TX-28, Laredo, D+5)

Texas Vicente Gonzalez (TX-15, McAllen, D+3)

Virginia Abigail Spanberger (VA-07, Glen Allen, R+3)

Florida Stephanie Murphy (FL-07, Winter Park, D+3)

Illinois Brad Schneider (IL-10, Deerfield, D+14)

Others to Contact:

Arizona Tom O’Halleran (AZ-1, Sedona, R+2)

California Lou Correa (CA-46, Santa Ana, D+16)

California Jim Costa (CA-16, Fresno, D+9)

California Mike Thomson (CA-5, St. Helena, D+22)

Florida Charlie Crist (FL-13, St. Petersburg, EVEN)

Georgia Sanford Bishop (GA-02, Albany, D+4)

Georgia David Scott (GA-13, Atlanta, D+23)

Hawaii Ed Case (HI-01, Honolulu, D+14)

New Jersey Mikie Sherrill (NJ-11, Montclair, EVEN)

Oregon Kurt Schrader (OR-05, Canby, D+2)

Tennessee Jim Cooper (TN-05, Nashville, D+9)

I know that’s a good-sized list of people.  But the only way to stop this attack on our pension plans is to appeal to the dwindling number of moderate Democrats.  The Republicans have no say in this law; the Democrats can pass it without any of their votes.  The progressive Democrats (by far the majority of the party at this point) are not open to changing their minds.  We must target the few moderates.  Given how small the Democrats' majority is in the House and the tied Senate, we only have to sway a few of them.  Make Some Noise!

 

If you live in one of the districts (for House Reps) mentioned above, please, please, please get as many locals on board as you can.  Communications from actual constituents of course count more than those from non-constituents. 

 

F)  In addition to those listed above, please email, fax, call, and write your own representatives.  Here’s an easy link that will provide you with their contact info:

 

https://www.house.gov/representatives/find-your-representative

 

G)  Send a link to this website far & wide.  Again & again.  Talk to people.  Persuade (and when needed, cajole) them to follow up.  If all we do is “bitch & vote”, we are lost.  This doesn’t take that much effort.  It can go a long way towards preserving our economic freedom.  We should be allowed to grow our retirement accounts in ethical, honest, and advantageous ways.

Letter Templates

Option 1

Takes Time

Most Effective

This letter will require some time but will also be more effective. We hope you'll take the time to fight and fight well​

Option 2

Easy & Fast

Less Effective

Easy Letter - click below, add the Congress critter's email, and "send". Ideally, you'll please bcc all the Congress critters we mentioned, plus your own representatives. It is critical that all representatives who might be swayed hear from you....especially since we made it EASY.​

Sign Online Petition

In addition to letters, faxes, emails, and calls, please sign the petition below.

3.

Updates

Any future updates will be posted here and emailed over.

Sign up below if you want to be notified.

Note: The "Updates" sign-up is for this law only. People who sign up for the Updates will not be added to my general "list" unless they ask us to be added to it as well. The website and time that went into it are not about my making a buck, just killing this monstrosity of a law.​

September 30th, 2021

Q&A Starts at minute 34:29

4.

Link to Text of Proposed Laws

Where to find IRA Provisions in the 800+ Pages:

  • $10M Limit on Combined Retirement Accounts. Page 665, Section 138301 (Limit on Contributions) and Page 674, Section 138302 (Requirement to Distribute at Combined $10M Retirement Account Balance)
  • Eliminating Roth Conversions. Page 686, Section 138311
  • Prohibition on Accredited Investors/Investments Based on IRA Owner Income/Assets/Education/Credentials. Page 689, 138312
  • IRA Statute of Limitations. Page 692, 138313
  • 10% Ownership Limit/ No Officer rule. Page 693, 138314
  • IRA Owner is a Disqualified Person. Page 696, 138315​

5.

Who Am I?

My name is John Hyre.  I am a tax attorney and have worked in the SDIRA space for years.  In addition to my tiny law practice (just me and a VA), I frequently speak on the topic of SDIRAs, legal & ethical tax reduction, and taxation of real estate.

John Hyre

301 Calle del Recinto S, Ste. 703-04 Cond. Gallardo, San Juan PR 00901

No attorney-client relationship created by use of this website. Neither your receipt of information from this website, not your use of this website to contact Hyre Legal Group, LP creates an attorney-client relationship between you and Hyre Legal Group, LP. No legal advice intended. This website includes general information about legal issues and developments in the law. Such materials are for informational purposes only, and may not reflect the most current legal developments. These informational materials are not intended, and must not be taken, as legal advice on any particular set of facts or circumstances.

 

© Copyright - IRALawyer LLC. All Rights Reserved.