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Self directed IRAs under attack in proposed tax bill
- darkerside 5y agoThe whole article is predicated on the lie that low and middle income earners are buying private placements and LLCs in their IRAs. They are not. Full stop.
- czbond 5y agoThe whole deal is a 'we are spending tons of cash, so we need to take it from someone' plan. This isn't a "watching out for the average person" deal.
- belltaco 5y agoOr 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.
- czbond 5y agoI don't believe they're the same. Specifically on wars... the lack of 'outrage' is because people have been smart enough to tie "war" to nationalism, patriotism, and "watchdog for the world" which instills a sense of pride in a majority population nationwide; instead of seeing it as a drag on prosperity, nation mongering, and self interest dealing.
- lotsofpulp 5y agoIf they wanted to specifically get rid of loopholes, they would scrap The whole employer requirement of 401k and let anyone contribute to an IRA up to the same limits for everyone. But, of course, politicians want to let big businesses maintain their competitive advantage by making 401k have higher limits than IRAs. > I never saw this outrage on trillions spent on endless wars, since that benefits rich people. Tons of people have been outraged by the war, but it was politically unpopular across all income classes to be against the war in early 2000s.
- belltaco 5y ago>Tons of people have been outraged by the war I am not talking about the war itself. I am talking about the outrage over spending on wars. For example, there is barely any debate in the public sphere about 'where to get money to spend on wars', but if it helps poor or middle income people, like say increased welfare payments, or healthcare or college, suddenly there is a huge outcry over "how do we pay for it".
- lotsofpulp 5y agoI meant spending on wars. I have seen many, many editorials and popular publications talk about how we can spend $x billion in Iraq and Afghanistan but not $x billion at home for various reasons.
- frockington1 5y agoWhat is "Full stop"? I'm seeing it used more and more in political internet discussions
- crysin 5y agoIt'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.
- frockington1 5y agoAnnouncing closed mindedness.... not something I would ever want to do but I can see how its helpful in letting people know not to waste their time. Is there a reverse of this? As in, I have an opinion but am open to hearing others and their rational
- minitoar 5y agoI think “announcing closed mindedness” is pretty reasonable when it’s something that’s just a fact. 2+2=4, full stop.
- rendang 5y agoIt's the British English term for "period", as in the punctuation mark.
- darkerside 5y agoI 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.
- technick 5y agoThat's a massive flex on your part, I know a co-worker who did this and he earns less than 185k a year.
- minitoar 5y agoNot sure if this is a joke but I’m pretty sure that’s not low or middle income.
- ac29 5y ago$185k/year would be 95th percentile in income for the US.
- darkerside 5y agoThe 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?
- loourr 5y agoThat's false. I know for a fact that tens of thousands of middle class people are doing this today.
- difu_disciple 5y agodefinitions of middle class are very fluid here.
- darkerside 5y agoCare to expand on this?
- jfrunyon 5y ago> has $5 billion socked away in a tax free Roth IRA How? You can only contribute a maximum of $7,000/year to all IRAs you own.
- mrep 5y agoHe invested in paypal with it right when he started it and it was worth like nothing. After that IPO, he then doubled down and invested the paypal returns into facebook with it. It's talked about in this article. https://www.propublica.org/article/lord-of-the-roths-how-tech-mogul-peter-thiel-turned-a-retirement-account-for-the-middle-class-into-a-5-billion-dollar-tax-free-piggy-bank https://www.propublica.org/article/lord-of-the-roths-how-tec...
- mmd45 5y agoSelf directed IRAs are commonly used with a wholly owned single member LLC to invest IRA funds into real estate related investments such as rental properties or many other types of private investments. The new proposed tax bill seems to remove the ability of the IRA owner to manage that LLC and effectively end the use of checkbook control IRAs.
- Loughla 5y agoIs this really an issue for low- to middle-income earners, or is that just a scare tactic?
- WORMS_EAT_WORMS 5y agoMost 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.
- kube-system 5y agoMost low income Americans struggle to save any money for retirement at all.
- davio 5y agoI'd expect people who are actually doing this are rolling over large 401k balances to self directed IRAs rather than saving up a couple thousand a year. Entrepreneurs can put up to 58k a year into a Solo 401k
- selykg 5y agoThis 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-tech-mogul-peter-thiel-turned-a-retirement-account-for-the-middle-class-into-a-5-billion-dollar-tax-free-piggy-bank https://www.propublica.org/article/lord-of-the-roths-how-tec...
- gbronner 5y agoThey should remove the ability to invest self-directed IRAs into options. This socializes the risk (i.e. someone with little or no supplementary retirement income is going to be a burden on the rest of us) while privatizing the gains.
- tomrod 5y agoHow?
- sokoloff 5y agoIn any environment where most people have nearly indistinguishable from $0 in their private retirement accounts, I don't see the risk of someone blowing up their IRA being a material socialized risk. 1 in 4 Americans have no retirement savings: https://news.yahoo.com/1-4-americans-no-retirement-191314425.html https://news.yahoo.com/1-4-americans-no-retirement-191314425... (same study: 1 in 8 over 60 have $0.)
- SilasX 5y agoRelated, I joked that a friend of mine was having a "first world problems" moment when he complained that his broker wouldn't let him short-sell GME in his IRA.
- vmception 5y agoHey everyone: stop talking about your compliant tax strategies! It’s been nice to want to help people but now, obviously, too many people know of some and their representatives are changing the laws. It’s back to the way it’s always been: if you can afford good lawyers then you get to know of obscure tax codes. Lets leave it that way.
- sokoloff 5y agoThe modern 401(k) practices emerged from one of these then-obscure tax codes, which I view as an unabashedly good outcome.
- javert 5y agoNah, 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).
- ClumsyPilot 5y agoRepression is criminalisation of Solidarity Strikes, entrenching corporate power. Everything else is a waste of time, plastic straw ban of lawmaking. https://en.m.wikipedia.org/wiki/Solidarity_action https://en.m.wikipedia.org/wiki/Solidarity_action
- throwaway210222 5y agoThis only works if the employers don't see it coming. In many countries (like mine) organised labour has a wage negotiation-followed-by-industry-wide-strike season. Every year, come rain or shine. Industry has long responded by: a) adjusting their 'final price' to accommodate the theatre b) automating whatever they can c) scheduling plant maintenance d) learning which jobs can be eliminated and doing so. All without paying a cent in wages. Since they seldom get all this done inside 6 weeks, its takes the labourers years to recover even a 5% increase. Many (mining, paper, logging, hospitals) even budget for it.
- gootler 5y agoWhy have an IRA when you have Social Security?
- koboll 5y ago>Under these provisions, you would no longer be allowed to invest your IRA into private placements and single-member LLCs, regardless of your level of income or wealth. Huh. So under current law, you can take your IRA money and "invest" it in a single-member LLC? Wild. Does that let you circumvent the proscription against living in properties you own through your IRA? Since in that case, the "owner" would be the LLC, rather than yourself per se?
- mmd45 5y agoNo it doesn't as that would fall under the rules for prohibited transactions of which there are strict rules and penalties. See https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-prohibited-transactions https://www.irs.gov/retirement-plans/plan-participant-employ... .
- kube-system 5y agoIt 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.
- mmd45 5y agoNo, the LLC is the same as the plan in terms of rules against prohibited transactions. Apple thought experiment works, but if you are personally generating revenue that moves the needle on a IRA investment that would be a no-no.
- supperburg 5y agoHuh. Under current tax laws you can literally dodge paying taxes using a totally unintended loophole in something called 401k. Wild.
- macksd 5y ago
- the_optimist 5y agoThe income has already been taxed. The economics are identical to other qualified retirement plans. This is simply more about restricting freedoms and making excuses for targeting Peter Thiel personally.
- ejstronge 5y ago> The income has already been taxed This is not true - traditional IRA contributions are made pre-tax.
- wonderwonder 5y agoNot 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.
- colinmhayes 5y agoThis is wrong. Both 401k and Ira have roth variants which are post tax. The normal variants are pre-tax.
- nybble41 5y agoNon-Roth 401ks can have before-tax and after-tax contributions, though I'm not certain I see the point of making after-tax contributions since the gains will be taxed at ordinary income rates (not as capital gains) when distributed and you won't be able to make withdrawals without penalty until you reach "retirement age". You might as well just open a brokerage account and invest on your own. The one selling point for after-tax 401k contributions was that you could roll them over into a Roth IRA later, but that won't be an option any more if this proposal passes. Which is too bad for anyone who was counting on a Roth IRA conversion as part of their retirement strategy.
- the_optimist 5y agoYou’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.
- JohnJamesRambo 5y agoI really hope this doesn’t go away. My self directed IRA in Bitcoin has led me to prosperity. There was no other way to do it with my retirement funds really.
- jcims 5y agoI need to subscribe to your newsletter. Mine has mostly reminded me that I'm not a skilled investor.
- UncleMeat 5y agoYou've already won then. Why complain?
- boogoob 5y agoPresumably meant to address high net worth individuals completely dodging taxation on huge gains by using their IRAs for investments like exercising early-stage stock options.[1] I kind of wish they'd go with just capping the gains, but would I still say that if I wasn't planning to use mine to "fund" high-return cryptocurrency arbitrages? 1) https://www.forbes.com/sites/sarahhansen/2021/06/24/peter-thiel-has-accumulated-5-billion-in-a-tax-free-roth-ira-designed-to-help-the-middle-class-save-for-retirement-according-to-new-report/?sh=1fccbadf2627 https://www.forbes.com/sites/sarahhansen/2021/06/24/peter-th...
- mmd45 5y agoThat may be the case but they are casting a very wide net. The numbers I've seen say there are on the order of 100k-1MM self directed IRA accounts that exist. Approximately 0% of which are lucky enough to be Peter Thiel and invest in founders stock of Paypal.
- tims33 5y agoAssume this is meant to capture the Mitt Romney scenario. https://www.theatlantic.com/politics/archive/2012/09/whats-really-going-on-with-mitt-romneys-102-million-ira/261500/ https://www.theatlantic.com/politics/archive/2012/09/whats-r...
- eli 5y agoPeter Thiel has a $5 billion Roth IRA
- mikeyouse 5y agoMore 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-tech-mogul-peter-thiel-turned-a-retirement-account-for-the-middle-class-into-a-5-billion-dollar-tax-free-piggy-bank https://www.propublica.org/article/lord-of-the-roths-how-tec...
- 5y ago
- paulsutter 5y agoThis rule is directed at a single prominent individual who put founding shares of their company (Paypal) into a IRA, which then let them be an early investor in Facebook and a long list of other well known companies, so that IRA is now worth billions
- mmd45 5y agosome additional information (see page 10, part 3 for Retirement Account provisions) https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf https://waysandmeans.house.gov/sites/democrats.waysandmeans.... https://www.irafinancialgroup.com/learn-more/podcast/self-directed-ira-under-attack-episode-308/ https://www.irafinancialgroup.com/learn-more/podcast/self-di...
- harryh 5y agoOne of my more controversial opinions is that tax advantaged retirement accounts should be eliminated entirely. Almost all of the advantages of them accrue to the top decile of income earners. Why should we have exceptions in the tax code just to help richer people amass more money?
- jchanimal 5y agoI have a product idea to take roths mass market. Might help with what you’re describing.
- bandyaboot 5y agoTheir assertion that this affects low and middle income people is absurd.
- xcskier56 5y ago> Under these provisions, you would no longer be allowed to invest your IRA into private placements and single-member LLCs, regardless of your level of income or wealth. > This will result in significant tax consequences for many people, including low and middle-income investors. BS! In order to legally invest in private placements, you must be a "accredited investor" which means you earn over $200k individually or $300k jointly. If you're making over $200k, you're not middle class AT ALL. You're solidly in the top 10% of the country and likely much higher. This provision will have almost zero impact on middle class America
- gedy 5y agoThat's certainly middle class lifestyle in many states in the US if you have a family with kids and have never had a windfall from parents, inheritance, startup luck, etc. Trying to figure out retirement on top of that is a challenge.
- gbear605 5y agoThat’s not middle class, it’s in the top 5% of US families.
- gedy 5y agoI'm not talking middle percentages above, especially when you factor in that you are classified as somehow wealthy and don't get breaks for college expenses, retirement savings, etc.
- xcskier56 5y agoEarning > $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.
- cletus 5y agoSo, progressively since probably the 1980s (maybe earlier?) Australia has introduced a system called "superannuation" (or just "super" for short). There are two parts to this: 1. Mandatory contributions: currently 10% of your income; and 2. Voluntary contributions: you can contribute more and get a lower tax rate for doing so. By comparison, 401k contributions are tax free. Voluntary super contributions are not. This is intended to fund people's retirements to alleviate the upcoming strain on the Aged Pension just like the issues with Social Security. That is, in 10-20 years there'll be <3 working people per retired person. Australia's super requirements are stricter (eg currently you cannot withdraw before 65; 401k is 59.5). There are other differences. Anyway, super is generally in mutual funds and the like. But there is an option for Self-Managed Super Funds (SMSFs). This is where you can basically run your own fund. You need to get audited, pay fees, have an investment strategy, etc. Generally these are used to invest in things you can't through mutual funds. And this is abused to invest in residential real estate (because, you know, it always goes up). I generally think this system has been a disaster and shouldn't be allowed. It's to protect people from themselves, basically. For example, super investments can't be leveraged but through SMSF shenanigans I've seen balances wiped out by effective leveraging. Also, you'll see marriages where one spouse's super balance is used by another in a bad manner and then the marriage breaks down and this just adds to the financial disadvantage and stress of that spouse. I imagine this is particularly an issue in the case of psychologically abusive marriages. So I'm for any reform that restricts IRAs and 401ks from these one man shops.
- wonderwonder 5y agoseems similar in concept to an i401k in the US for self employed people. Its pretty much the only option they have though besides IRA's which are capped at an annual contribution of ~6k per year depending on your age.
- noitpmeder 5y agoRelated, but I'm a US citizen that's moving over to Australia for work shortly. If you have a superannuation balance and you leave the country you can get it all as a lump sum, minus ~30%.
- lettergram 5y agoJust so people are aware, high income individuals can’t use IRAs. This is a direct action against middle to low income individuals. https://www.irs.gov/newsroom/new-income-ranges-for-ira-eligibility-in-2021 https://www.irs.gov/newsroom/new-income-ranges-for-ira-eligi...
- matthewbauer 5y agoYou can contribute to a traditional IRA at any income. You can only take the deduction at certain income ranges though. Also, you can “use” an IRA after you contributed to it, so you could be high income now but contributed to an IRA when you weren’t.
- deleted 5y ago[deleted]
- wpietri 5y agoOh? Then how did Peter Thiel shelter billions in a Roth IRA? https://www.propublica.org/article/lord-of-the-roths-how-tech-mogul-peter-thiel-turned-a-retirement-account-for-the-middle-class-into-a-5-billion-dollar-tax-free-piggy-bank https://www.propublica.org/article/lord-of-the-roths-how-tec... This is direct action against rich people abusing a middle-class retirement account. What percentage of actual middle-class people are investing in "private placements and single-member LLCs"? I'd guess it's close to zero. And it probably should be. The whole reason governments create retirement accounts with special advantages is to make sure people are self-supporting in old age and don't need additional state support. That means they should be investing in a broad spectrum of low-risk stuff, not exotic, hard-to-value instruments.
- psanford 5y agoNo. The income phase outs only apply if you or your spouse is also eligible for a workplace 401k plan. If you don't work somewhere that offers a 401k plan, there is no income level limit for contributing to a traditional IRA.
- belltaco 5y agoNot true. >The backdoor Roth IRA conversion is a technique where investors who earn too much to contribute directly to a Roth IRA make after-tax contributions to a traditional IRA and then convert the contributed amount, and perhaps other money in the account, to a Roth IRA. https://www.thinkadvisor.com/2021/09/22/what-to-do-if-congress-locks-the-back-door-on-roth-iras/ https://www.thinkadvisor.com/2021/09/22/what-to-do-if-congre...
- sharmin123 5y agoAre There Top Signs of a Cheating Lover? What To do Then?: https://www.hackerslist.co/are-there-top-signs-of-a-cheating-lover-what-to-do-then/ https://www.hackerslist.co/are-there-top-signs-of-a-cheating...
- spamizbad 5y agoGood. Capital is under-taxed.
- BitwiseFool 5y agoOn the contrary, I think we're being taxed too much.
- mariojv 5y agoI'd recommend reading the proposed provisions themselves directly from the Ways & Means Committee instead of the main article urging action: https://www.advantaira.com/wp-content/uploads/2021/09/WM-Tax-Title-Section-by-Section-Explanation-9.13.21-002.pdf https://www.advantaira.com/wp-content/uploads/2021/09/WM-Tax... Highlights: 1. You can't add new contributions to tax-advantaged accounts if their total value exceeds $10 million and you make over $400K for single filers, amounts indexed to inflation. 2. There are required minimum distributions if you have tax-advantaged accounts over $10M and make over $400k. There's a more rapid drain if you have over $20M. 3. Closes the backdoor Roth IRA (https://www.bogleheads.org/wiki/Backdoor_Roth https://www.bogleheads.org/wiki/Backdoor_Roth) only for people making over $400k. Closes the mega backdoor (https://www.bogleheads.org/wiki/Mega-backdoor_Roth https://www.bogleheads.org/wiki/Mega-backdoor_Roth) for everybody. 4. Prohibits you from using a tax advantaged account to invest in securities that require "accredited investor" status (hedge funds, etc). You also can't use the tax advantaged account to invest in businesses where you have 50% or more of an interest. Unless you're super rich, were using a tax advantaged account to invest in your business, or were using the mega backdoor, which isn't available to everyone and still does require a pretty high income (investing more than ~$20k/year in a 401k), this doesn't really impact you. You can also still do whatever you want in a taxable account, so to me this just seems like a roundabout way of increasing taxes on wealthy people's investments. I do wonder how much revenue this will raise, though. I can't imagine there are a ton of people with retirement balances over $10M. Maybe the expectation is that revenue will compound over time as more and more assets are held in taxable accounts. EDIT: I think I was wrong about the backdoor Roth still being available to folks making under $400k (point 3) since you can't convert any after tax funds to a Roth with the proposal. So, this does affect people above the Roth ceiling ($140K single income, $208K married), if you were maxing out pretax contributions and making after-tax conversions to a Roth. I think pretax contributions to a traditional IRA for 401k can still get converted to a Roth.
- mmd45 5y agoThe killer is the "The bill also prevents investing in an entity in which the IRA owner is an officer." which is generally how the checkbook IRA is structured (IRA owner is the Manager of the single member LLC that is wholly owned by the IRA). Sec. 138314. Prohibition of Investment of IRA Assets in Entities in Which the Owner Has a Substantial Interest. To prevent self-dealing, under current law prohibited transaction rules, an IRA owner cannot invest his or her IRA assets in a corporation, partnership, trust, or estate in which he or she has a 50 percent or greater interest. However, an IRA owner can invest IRA assets in a business in which he or she owns, for example, one-third of the business while also acting as the CEO. The bill adjusts the 50 percent threshold to 10 percent for investments that are not tradable on an established securities market, regardless of whether the IRA owner has a direct or indirect interest. The bill also prevents investing in an entity in which the IRA owner is an officer. Further, the bill modifies the rule to be an IRA requirement, rather than a prohibited transaction rule (i.e., in order to be an IRA, it must meet this requirement). This section generally takes effect for tax years beginning after December 31, 2021, but there is a 2-year transition period for IRAs already holding these investments
- enterthematrix 5y agoThis change effects actually zero people who aren't millionaires many times over - this website is literally a conservative think tank.
- enterthematrix 5y agothis change effects literally zero people who aren't millionaires many times over. The change effects high net worth individuals who are trying to game the system and not pay taxes. This is not even complicated.
- say_it_as_it_is 5y agoThis is not the tax loophole that needs closing. Policymakers are still refusing to tax the ultra high net worth elites.
- PaulDavisThe1st 5y agoIt's not everything, sure. But it does (attempt to) say "you cannot avoid paying tax on gigantic capital gains by shielding it inside a Roth IRA". It is absolutely directed at ultra high net worth elites. There is an argument that simply capping the gains inside a Roth IRA that can be tax-exempt would be a more efficient way to do this.
- deleted 5y ago[deleted]
- okhuman 5y agoPeter Thiel has entered the chat.
- loourr 5y agoThis will force hundreds of thousands of people who own shares of small businesses within their retirement accounts to disgorge them. They can't sell them to themselves because that's against the rules. If they distribute them then they have to pay a 10% tax penalty in addition to any income tax. These are small thinly traded assets. What will very likely happen in practice is big wall street firms will come in and buy up thousands of American small businesses (retirees best assets) at a major discount similar to what Blackstone is currently doing with single family homes.