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The IRA may soon see changes

Updated: Dec 6, 2021

IRAs were created in 1974 under the Employee Retirement Income Security Act (ERISA) that set minimum standards for company pension plans. They were conceived as a way for individuals not covered by those plans to access tax-advantaged retirement savings. They’ve changed over the decades, and usually for the better. Roth IRAs and the ability for folks who already have a 401(K) to access them are just two examples.

The proposed Build Back Better Act, with its ambitious goals for infrastructure and bolstering the social safety net, must find a way to pay for them – and is setting its sights on IRAs. The changes may not seem to affect that many people saving for retirement, but as the details become clearer the impact becomes greater.

We break down the details.

An Asset Level Limit for Contributions

One of the legislation’s goals is to reset these tax-advantaged accounts so that they primarily benefit middle-income retirement savers. The proposal is to prohibit contributions to IRA accounts if the aggregate value of all IRAs and defined contribution retirement plans is above $10 million. The income limit here is the same as other provisions included in the Act: taxable income exceeding $450,000 in the case of a married couple filing jointly or $400,000 in the case of single or married taxpayers filing separately.

The legislation proposes that all accounts be added together for the $10 million threshold figure. For example, if you have a 401(k) with your employer, and you inherited an IRA from your parents, and the total value of both those accounts combined is over $10 million, you cannot contribute to an additional IRA account in that year. SEP or SIMPLE IRA accounts are not included in this proposal – you can still make contributions to those accounts.

There are also some changes to required minimum distributions (RMDs) for high-value accounts. The new RMD would be 50% of the portion of the account over $10 million and $100% of any amount exceeding $20 million. If passed, this is effective for tax years beginning after Dec. 31, 2021.

Prohibitions on Investments

The Act would prohibit IRAs from investing in a security whose issuer requires a specified minimum of income or assets or requires specific levels of education, licensing, or credentialing. The stated purpose is to prevent IRA investments in assets that are not broadly available to the general public. However, this would have two potential impacts.

Many investors seeking yield in this low-rate environment or who want access to non-correlated investments have turned to alternative investments, which have become mainstream. They are, however, often still limited to accredited investors. The accredited investor standard is $200,000 in income or $1 million in assets – which many people close to or in retirement meet easily.

The second potential problem is that the provision could be interpreted to apply to lower-fee share classes that are predicated on higher investment amounts, which could eliminate a way to lower fees in certain investment accounts.

Source of Real Estate Funding Could Be Eliminated

Currently, IRAs are not permitted to be invested in any asset where the IRA owner holds 50% or more of the entity or is an officer or director. The bill would change this to a 10% limit. This would impose significant limits on the funding of small businesses, private placements and LLC structures that make real estate investing more efficient.

The Bottom Line

Planning for tax efficiency, whether you’re retired or still working, is complex in any year. With so many changes being proposed and the pandemic’s effects still being worked through, this year may impact your financial plan for years to come. Reviewing your plan while there is still time to make changes can pay off.

Stay tuned for more tax updates, John Piershale, CFP®, AEP®

John Piershale Wealth Management, LLC is an Investment Adviser registered with the State of IL and in other jurisdictions where exempt from registration. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events.The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation. This work is powered by Seven Group under the Terms of Service and may be a derivative original. More information can be found here.


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