House Democrats plan to ban private equity and hedge funds in IRAs

House Democrats plan to ban private equity and hedge funds in IRAs

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A tax package unveiled by House Democrats would bar individual retirement accounts from holding certain private investments typically reserved for the wealthy.

While supporters believe the proposal will increase investor protection and reduce the use of IRAs as a tax shelter for the rich, critics believe it could spell a major financial blow for some investors. Is even a few daily savers.

House legislation, unveiled last week, would prevent IRAs from holding investments made to “accredited investors.”

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This position is for investors who hit certain benchmarks, such as $ 200,000 in annual income or $ 1 million equity (excluding a home). This allows them to invest in securities such as private equity, hedge funds and venture capital; Unlike mutual funds and stocks available on a public stock exchange, they are not publicly traded.

If passed, the rule would apply to all retirement savers. Current owners are expected to forfeit those IRA holdings by the end of 2023 or lose the tax benefits of the account, which could put them on a hefty tax bill.

The measure roughly aligns with the broader goals of the tax package of making the tax code fair and raising funds from wealthy Americans to extend the U.S. safety net and make investments in climate mitigation.

According to Steve Rosenthal, senior researcher at the Urban-Brookings Tax Policy Center, “IRAs should be about investments that are accessible to everyone, not potentially profitable foreign investments.” “If you want to hold [these] Prasad, keep them in your taxable accounts.

Current owners can sell holdings within their IRA and use the proceeds to purchase government investments without tax penalties.

However, experts say it can be difficult to sell private equity within the required two-year period. There may not be a ready market for such investments, possibly leading homeowners to sell at an undesirable price – a potentially unfair outcome for some investors, especially those with modest income and who have so far adopted all regulations. followed, he said.

I’m not the guy with a $ 5 billion IRA. I’m a guy with a million dollar IRA.

“It’s like a fishing net,” said Ed Slott, accountant and IRA specialist in Rockville Center, New York, of the proposal. “The net picks up a lot of small fish which are unintentional targets.”

William Barry is one example. The 52-year-old accountant, a resident of Clearwater, Florida, has taxable income of around $ 75,000, well below the White House’s $ 400,000 income cap and what Democrats in Congress have generally considered as a dividing line for the rich.

Barry has raised over $ 1 million through diligent savings making him an “Accredited Investor.” He has tied up about $ 500,000 of private investment in his traditional Pratex IRA and has an additional $ 100,000 in the works.

If they fail to open their operations within two years, they fear it will cost them thousands of dollars in additional taxes.

“[Democrats] Keep talking about the mega-rich, ”Barry said. “I’m not the guy with a $ 5 billion IRA. I’m the guy with a million dollar IRA.

qualified investor

The Securities and Exchange Commission considers accredited investors to be financially sound and able to bear the risk of loss associated with the offering of private securities.

For example, publicly traded investments do not require as much financial disclosure as publicly traded stocks, bonds, and mutual funds.

Fraudsters also regularly target private markets, according to Joe Wojciechowski, managing partner of the Stoltman Law Office in Chicago, which represents investors in fraud cases.

“They are often the targets of Ponzi schemes,” Wojciechowski said of private investments held in IRAs. “If you do not allow [them], I think this will have real benefits in terms of investor protection. “

More and more investors have acquired the “accredited” label over time.

The respective income and wealth limits have not changed since the 1980s, even after accounting for inflation. According to the SEC, about 1.6% of US households qualified as accredited investors in 1983. About 13% of households qualified in 2019.

The legislation of the House cannot become law. Even if the Democrats’ tax program is ultimately successful, the policy regarding accredited investors could be removed or changed.

For example, according to Rosenthal, lawmakers can allow existing IRA investors to keep private holdings without penalty or allow a transition period of more than two years to reduce any burden on retired investors. can give.

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