Retirement Plan Changes: Proposals & Dodging Bullets

We can all probably agree that we don’t want to work forever. Planning for retirement is a common goal among many people at various stages in their careers. One of the tools available to aid in saving for retirement is an individual retirement account (IRA). 

Recent changes that have impacted saving for retirement most recently (and notably) came with the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) and SECURE Act 2.0.

There were more proposed changes that could have further impact within the retirement landscape. Some provisions have fallen off previous versions of proposed legislature but were resurrected in The Administration’s 2024 fiscal year budget.

I wanted to highlight some of the provisions that are still included and some more damaging items that have since fallen off which could have had a large negative impact on SDIRA investors and some related industries.

What Was Removed

The initially proposed Build Back Better Bill contained some provisions that would have had a monetary and restrictive impact on SDIRAs. They were considered by the Ways and Means Committee but were dropped along the way to the Inflation Reduction Act. 

It is no guarantee that these are permanently laid to rest, but they are not currently included in the Inflation Reduction Act or the FY 2024 budget. The self-directed retirement industry and IRA investors collaborated in order to articulate these concerns to Congress. We were able to get some provisions removed but there is no guarantee that these are permanently laid to rest. Currently they are not included in the Inflation Reduction Act or the fiscal year 2024 budget.

Private Placement/Equity Investments

This section would have restricted IRAs from investing in private companies, private funds, and start-ups. If these were currently held in SDIRAs, savers would have been forced to distribute or sell the private company and start-up assets from all existing retirement accounts and would have further prevented investors from acquiring these assets. 

This was developed to target the uber-wealthy. However, by forcing distributions of assets, it would have created a taxable event which would immediately impact average citizens.

IRA Owners that have Substantial Interest or Control

An investment strategy that provides even more control over retirement funds to SDIRA owners is the checkbook control LLC. This option allows the LLC to be created and owned/managed by the SDIRA granting access to cash via checking account to make purchasing assets like real estate at auction much easier. 

Checkbook control LLCs are not the only assets that would have been affected. Included were investments in corporations, partnerships, or trusts where the IRA account holder has 10% or greater ownership stake— directly or indirectly. Additionally, entity investments would also be prohibited if the IRA owner holds a position as a director, officer, or equivalent with the entity. 

This proposed section would have prohibited that level of asset holding and any current holdings would need to be sold or distributed similarly to the private placements described above. This would have also prevented the acquisition of these assets following enactment as well.

What’s Still Included

The below provisions are currently being included in the 2024 fiscal year budget and would impact the entire retirement account industry and won’t be isolated to just SDIRAs.

$10m Cap on IRA and Defined Contribution Plan Accumulations

This proposal would impose special distribution rules on high-income taxpayers with aggregate vested account balances under tax-favored retirement accounts in excess of $10 million. A minimum distribution of 50% of the excess would be required for the preceding calendar year. Included arrangements would be:

• Defined contribution plans to which Internal Revenue Code (IRC) Section 401(a) or 403(b) applies;
• Annuity contracts under IRC Section 403(b);
• Eligible deferred compensation plans described in IRC Section 457(b); and IRAs.

Eliminating Roth Conversions – Including “Backdoor” Roth Contributions

Under current law, some individuals are precluded from making Roth IRA contributions due to income limits. This can be circumvented by making an after-tax contribution to a traditional IRA and then converting that traditional IRA to a Roth IRA. If this is done quickly enough (and if no additional assets are held in the IRA) this conversion can be done without any tax consequences.

On the plan side, an individual who has already made the maximum permitted 401(k) contributions (Roth and/or pre-tax) may effectively exceed that limit by making after-tax contributions to the plan and then converting those contributions to Roth. 

Under the Build Back Better bills, high-income taxpayers would be prohibited from performing Roth conversions – this would extend preclusion to both types of backdoor Roth contributions by prohibiting rollovers of after-tax amounts to Roth IRAs or Roth plan accounts.

You are a high-income taxpayer if your modified adjusted gross income is over $450,000 if married and filing jointly (or filing as a surviving spouse); over $425,000 if you are head-of-household; or over $400,000 in other cases.

Disqualified Persons Clarification

This proposal would assert that the individual for whom an IRA is maintained (the owner and the beneficiaries if the owner has died) would always be treated as a disqualified person for purposes of prohibited transaction rules.

Foreign Securities Corporations (FSC) / Domestic International Sales Corporation (DISC) Proposal

For the sake of brevity, generally, these two entities are tax-advantaged corporations involved in exporting US-made goods. This proposal would prohibit an IRA from holding an interest in a DISC/FSC that receives a payment from an entity owned by the IRA owner. 

Whether an entity is owned by the IRA owner would be determined by substituting 10% for 50% in the constructive ownership rules. If found to be in violation, the IRA owner would be considered to have engaged in a prohibited transaction compromising the status of the IRA.

Statute of Limitations Extension

This proposal would extend the statute of limitations from three years to six years in the cases of:

• A substantial error relating to the valuation of assets with respect to an IRA
• A prohibited transaction’s excise tax

While we can enjoy a sigh of relief from dodging some damaging bullets. These items mentioned may not be finalized yet, but they are still proposed for the 2024 fiscal year budget. We will continue to advocate on behalf of self-directed investors and publish updates as new information becomes available.

How IRAR Helps

Bookmark this page if you are interested in learning more about these proposed retirement plan changes. You can also express your opposition and have your voice heard here.