Self directed IRAs under attack in proposed tax bill (opens in new tab)

This is the killer, indeed. Checkbook IRAs are amazing retirement tools if you're interested in using some of your retirement money in high-risk, high-reward investments. My retirement fund benefited enormously from the Q3 2020 crypto market gains, which would not have been possible without my LLC. It's hard to see this as anything other than removing all the peasants from the market so that the big dogs can have it to themselves.

Roth IRAs are pre tax so even if this bill passes Peter Thiel won't have to pay any taxes on his $5B.

Well you can't deny that options are being taken away for a portion of citizens. I stopped doing more than the minimum match into my 401K a long time ago because I could no longer trust that in 30, 40, 50 years nobody wouldn't have come after it as an easy target. It's kind of like gun control (which isn't a good analogy since it's too politically charged) - you're pointing at one restriction and saying "hey, it's not the end of the world, you can still own guns, this probably doesn't even affect you personally", but then a new restriction, law, permit, tax, ruling, regulation, is passed every 6 months from that point on every year for decades on end, every time pointing to the change as just a small little thing that probably only affects a small portion of people. Every time gaining more and more precedence for more restrictions and overall adding them all up having a much more massive impact than just a small change that only affects certain people.

They should close 401k and all other tax advantaged retirement accounts, and just have regular IRA and Roth IRA for everyone, and remove employers from the equation.

This is what I'm most bumed on with the mega backdoor and backdoor, but closing them and just opening them for everyone would be ideal. Because you can still contribute to Roth regardless on income level if you know about backdoor, so it makes sense just to legalize across the board.

If this happens, maybe 401k providers will lose business. People often have reasonably large traditional 401ks, which they don't roll over to traditional IRAs, because having traditional IRAs interferes with the backdoor Roth (and they don't want to do a Roth conversion, because that would be a taxable event). But if backdoor Roths went away, then there'd be no reason not to roll a traditional 401k into a traditional IRA. Brokerages like Fidelity and Schwab would win, as people brought their assets over, and 401k providers would lose, since now people would take their money out as soon as they switched jobs.

You are right, I missed that. This does mean there's an impact on folks making above the Roth income limit but below $400k. Updated the post, thanks

Does it restrict you from doing those things, or only restrict you from doing it in a tax-free/tax-advantaged way?

I'm curious why would this increase taxes if those contributions that get converted are after-tax anyway and the amount that gets taxed shouldn't change?

Yeah, you're totally right. Updated the post.

As a founder I'll certainly take advantage of QSBS if it's relevant to me in the future. But let's not delude ourselves -- it's wildly unfair as a tax break. The primary use of it seems to be allowing angel investors to literally pay no taxes whatsoever on millions of dollars in windfall profits.

More recently, ProPublica showed that Peter Thiel (and others) did the same thing. Thiel amassed $5 Billion into an IRA that's nominally capped at $6k/year in contributions.

https://www.propublica.org/article/lord-of-the-roths-how-tec...

Peter Thiel has a $5 billion Roth IRA

Making a lucky investment is “abusing the intent”?

I think you should be able to invest in your IRA however you like, but there really should have been a limit on how much is tax advantaged. Or perhaps just a limit in terms of how large disbursements can be while still being tax advantaged?

Congress is preventing all people from investing in private companies within retirement accounts, not just rich people. Adding the cap is fine but preventing private company investment is asinine.

> we're not rich

Yes they are.

More like: “we’re paid very well to represent the interests of the elite. The elite don’t like upstarts trying to join them via wealth accumulation so we design a tax code that makes accumulating significant wealth via working and saving impossible.”

Both statements are false.

Or maybe it's trying to close loopholes around having to pay taxes.

>The whole deal is a 'we are spending tons of cash, so we need to take it from someone' plan

Funny how spending tons of cash is a problem only if it benefits poor and middle class people. I never saw this outrage on trillions spent on endless wars, since that benefits rich people. But if something helps poor or middle class and hurts rich people a little, there is a big outrage.

definitions of middle class are very fluid here.

Care to expand on this?

Not sure if this is a joke but I’m pretty sure that’s not low or middle income.

The median income in the US was $67,251 in 2020 per the US Census Bureau. Low income would be much less than that, and middle income would approximate it. How many people making $70k/year do you think are investing in a private placement in their IRA?

$185k/year would be 95th percentile in income for the US.

It's the British English term for "period", as in the punctuation mark.

I don't mean it to indicate closemindedness. I do mean it to indicate that there aren't a whole bunch of exceptions and clauses to come. Take it as a contrast to an article that spent a lot of time and words on an argument that was based on what I believe to be a very flawed assumption. IMO so flawed as to be intentionally deceitful.

It's a way to end a statement that you feel so strongly about that you're indicating to others no amount of arguing or talking with change your opinion on it. Your mind's made up and you believe in that statement so strongly that you believe it to be unequivocally universally true.

This is just flat wrong. The income contributed to a Roth IRA is post-tax. It is a retirement account that is economically equivalent to a 401k. The only differences are 1) timing on when the gains are taxed and 2) whether you can self-direct it or not. Saying “not intended to allow” is simply nonsense that covers for the abusive 401k system that fleeces individuals at the benefit of the finance industry.

Not in the US. IRA contributions are post tax. 401k contributions are pre-tax. Depending on where you live this may be semantics as they may be the same program with different names.

You’re wrong and confusing people here. Roth’s are post-tax at investment, not taxed later. Traditional and 401k are pre-tax at investment, taxed on distribution. Economically equivalent.

This simple answer is it's easier. Income is mostly cash-denominated, so it's very easy to value. Wealth is often illiquid, so it's hard to know how much to tax.

Look at property tax, for example. It's a wealth tax and it requires a very complicated apparatus to generate ok-ish numbers every year. But that mostly works because houses are a moderately liquid market, so appraisers can mark to the existing market. And even then there's a lot of dubious stuff around the margins, like the way Trump was giving different valuation numbers depending on whether he wanted a loan or to brag (high valuation number) versus paying taxes (low valuation number).

The income contributed to a Roth is post-tax. This is economically equivalent to a 401k. Equivalent.

Same exact $ amount as in a 401(k). This is only about power and control.

... taxation is theft.

What's wrong with winning? Why not let people keep winning?

Because he feels that it's wrong that he made a lot of money doing something that other middle income earners could reasonably do, but now the ladder is getting pulled up behind him?

This is no skin off the back of the wealthy. They'll find another trick and life will go on. For those of them that actually care about "normal" Americans being able to do the same thing they did, it feels a little wrong that it requires an ever increasing amount moving parts and money to do what they did.

I’d like others to win.

You know that some people care about how policies affect people other than themselves, right? They may even care about society as a whole.

Is not all investment speculating? Very few investment classes provide 100% guaranteed returns.

The taxes are paid during the distribution. No distribution means no tax liability.

It says that those types of transactions are prohibited between the plan and a disqualified person.

Does it prohibit those same transactions between an investment within the plan (like an LLC) and a disqualified person?

I mean, if I own Apple stock, I can buy things in the Apple store.

People definitely own rental properties in self directed IRAs. You have to be completely hands off - must hire property management, can't fix anything, etc.

I think you can get non-recourse mortgages, but it's more like 50% down instead of 20% like most non-owner occupied mortgages.

Absolutely. You can own almost all kinds of assets in your IRA today excluding collectibles.

Same as with an IRA, though, it's intended for retirement savings and there are penalties for early withdrawal. The issue here (right or wrong) is self-directed IRAs being effectively usable for things other than growth investments.

This has no impact on the average person in the low to middle class income range. This is just a loophole allowing the rich to put a bunch of money into their IRAs and watch it grow in a tax advantaged way.

The average person that's putting the max of $6k (or less) into their IRA is not impacted by this and it's business as usual for them.

I believe this is in response to people like Peter Thiel

https://www.propublica.org/article/lord-of-the-roths-how-tec...

Given the relatively low cap on IRA contributions, it's not directly an issue of income, but rather your access to high-return investments like early-stage stock options.

Of course, someone with lots of investments will have the luxury of just making the highest-payoff ones with their IRA funds.

Independently, in the rest of the bill [1] there are lots of reasonable things like a $10 million IRA cutoff limit.

1) https://www.advantaira.com/wp-content/uploads/2021/09/WM-Tax...

Most low to middle income earners struggle to hit their 5k or so maximum of a regular IRA versus operate a self-directed or have the additional funds to make it worth it.

It's an issue insofar as there are companies that have productized the ability to dodge some taxes and rules with a self-directed single-member LLC you invest in via your IRA. This would severely harm those companies, who presumably have low- and middle-income customers.

One example: https://www.choiceapp.io/

high-appreciation residential real-estate of all kinds is attracting "investment" like flies on the beach; its not fake.. if a financial law intended to help low- to middle-income earners is being abused by a few with many multiples of common money amounts, why is that a "scare tactic" ?

It’s a scare tactic. These rules are really aimed at people Peter Thiel, in response to the pro public’s investigation - they don’t even hit other famous IRA (ab)users like Mitt Romney.

But getting you angry enough to defend his wealth is much more difficult than obscuring the fact that you won’t be affected by them, so we instead get vague and scary warnings about the bill.

401(k)'s started to became popular in the 1970s because they allowed management to increase their tax-advantaged compensation relative to labor, whereas defined-benefit plans had stricter and more effective rules regarding management/labor compensation disparities.

Then during the 1980s as corporate accounting schemes became more sophisticated preference for 401(k)'s and other defined-contribution plans exploded because of how liabilities are calculated.

In every conceivable measure pensions are theoretically better for workers and society as a whole. I say theoretically because that's predicated on employers and pension funds (if employer managed) obeying good (translation: dead simple) accounting practices rather than spending all their time and effort figuring out how to subvert them in order to cook their balance sheets to increase their yearly bonuses. Many corporate merger waves since the 1980s have been driven by schemes to drain pension funds (cost "synergies"), and of course states are notorious for failing to fully fund pensions on a YtoY basis (states, unlike corporations, aren't actually required to fully fund pensions[1]).

All of these downsides to pensions can be easily remedied. But corporate interests have succeeded in selling the narrative that pensions are unreliable and inequitable, while 401(k)'s are more reliable and equitable. In fact pensions are categorically more equitable, and any less reliability (which is a dubious claim, notwithstanding the many high profile pension failures over the years--nobody reports on someone's 401(k) fund vanishing during a recession) is a consequence of lobbyists phenomenal success in killing legislation and enforcement efforts responsive to corporate financial accounting schemes. Overall reliability of private retirement systems has fallen over the past 40 years, but the decline for pensions was more precipitous simply because they were so damned good before CFO offices became profit centers.

Life insurance markets were once dens of fraud and outright thievery, the mortgage backed securities and CDOs of the late 19th and early 20th century. Relatively simple reforms restored the market to nearly unassailable reliability. Though, I suspect the necessary legislation only succeeded after life insurance stopped being the center of growth and profit for financial markets. Legislation regarding private retirement plans likely will only ever make substantial reform once corporations have finished exploiting all opportunities for subverting employee income disparity and asset protections, finally shifting their attention elsewhere.

[1] "Fully fund" does not mean paying in the entirety of a worker's expected retirement disbursements. Rather, it means ensuring that each and every year you pay the full fractional share of expected liabilities. Basically the same thing an individual is expected to do when managing their 401(k) contributions.

The modern 401k laws are a giveaway to the financial industry. They stipulate extraordinary restrictions on what investors can/must _invest_ in and fundamentally transfer tremendous economic power and influence to “advisors” and the financiers attached to them.

>I view as an unabashedly good outcome

Possibly. I can't complain personally, The shift from defined benefit to defined contribution retirement savings has probably been generally positive for those with the ability/discipline to take full advantage of 401(k)/IRA. The flipside is that relatively few people (mostly public sector) in the US now get a more or less automatic defined retirement payout from a pension.

Of course, the shift isn't just tax code changes. Traditional pensions also largely encoded long-term employment with a single organization.

> The modern 401(k) practices emerged from one of these then-obscure tax codes, which I view as an unabashedly good outcome.

That's exhibit A of what I'm talking about!

This is an article about IRAs being heavily restricted, 401k's are in the same 400-section of the tax code. IRAs are subsection 408, 401k's are subsection 401(k).

Literally just stop talking about it, stop trying to get a personal finance blog going, stop trying to get youtube views funnelled over to a personal finance discord server, just let unaware people run around like chickens with their heads cut off because when you tell them whatsup they try to get the laws changed when they fail to take advantage of it adequately

Ignorance is bliss and convenient, this is where we are. Just get the tax breaks you have because of your superior reading comprehension skills and eventually your ability to outsource and augment those skills to experienced lawyers and accountants with the same skills.

Nah, the 401(k) system is a mechanism of wealth extraction for white collar government-adjacent workers. It's a form of repression.

I'd rather be building something than dealing with tax, but I'm very much incentivized to do the latter (though your situation may differ).

Earning > $300k when married filling jointly is very much not a middle class income & lifestyle. I certainly won’t disagree that figuring out money and retirement at that income level is hard, but 95% of America has it harder.

So I’ll say that then saying this impacts the middle class is disingenuous at best. On top of that, private placements usually require bare minimum investments of $50k and realistically $100k min investment is not uncommon. If you have that sort of cash to put into higher risk deals, middle class you are not.

That’s not middle class, it’s in the top 5% of US families.