House Ways and Means Committee Propose Limits on IRA Private Investments Unclear if Solo 401k Plans Would be Impacted

Limit IRA Solo 401k Private Investmentss

High investment returns is a concern for some members of Congress, resulting in them proposing a bill that would limit IRAs from investing in investments such as private investments that have the potential to exponentially grow the retirement account holders IRA. According to an outline by the House Ways and Means Committee a proposed bill seeks to no longer allow IRAs to to be invested in private investments if the private investment sponsor requires the investor to be an accredited investor. While the proposed bill does not reference 401k plans, it is unclear if this bill, if it even passes, would apply to solo 401k plans. The passage of the proposed bill would require approval by both the house and the senate and the president’s signature.

If this rules does go into effect, under the proposed bill, it would go into effect starting on January 1, 2022 and it would allow the IRA owner to divest from the private investment over a two year period.

Video Slides: https://www.mysolo401k.net/wp-content/uploads/2021/09/IRAs-and-401k-Including-solo-401k-Plans-Under-Attack-Backdoor-Roth-Ban-Accredited-IRA-Band.pdf

It is worth noting the proposed bill by the Ways and Means Committee is one of the first of many steps in passing a bill. As such, these proposed provisions could still be amended. What is more, the Senate Finance Committee will also have its own set of proposals, which will most likely not match the House’s version.

Would the Proposed Bill Apply to Solo 401k Private Investments QUESTION:

The tax increase being proposed by the house contains a provision that would prohibit an IRA from holding investments that require accredited investor status. Does this proposal include solo 401k’s?

It is unclear if it would apply to company plan such as 401k and solo 401k plans for the self-employed as the proposed bill solely mentions IRAs which are not company plans.  Here is the section of the proposed bill, Sec. Sec. 138312.  And CLICK HERE  to view the full proposed bill.
Sec. 138312. Prohibition of IRA Investments Conditioned on Account Holder’s Status

Does Proposed Legislation Apply to Multifamily Syndication QUESTION:

The proposed bill makes it sound like it will disallow multifamily syndication investments which would include both 506B and 506C multifamily investments. I’m holding several of these in my Solo 401k now and won’t be able to exit in 2 years. Do you know if this will apply to Solo-401ks or only traditional IRAs?

The bill is still in its early stages and that is probably why it is unclear if it would only apply to IRAs or company plans like solo 401k plans as well.  On the surface, the proposed bill solely mentions IRAs at this point. We will continue to monitor. 

For more FAQs, CLICK HERE

Mega Backdoor Roth IRA & Solo 401k is under attack…Call your Senator & Representative!

While recent news reports of Peter Thiel’s $5 Billion Roth IRA may have sparked awe and envy among everyday investors (as well as maybe a call to your financial advisor), there has also been an outcry that this is another example of the ultra-rich abusing the system in that retirement accounts are not designed to serve as a tax shelter for billionaire tech moguls but instead were designed as a tool for the middle class to save for retirement.

Video Slides: https://www.mysolo401k.net/wp-content/uploads/2021/09/slides-Stop-Ban-of-Backdoor-Roth-IRA-Mega-Backdoor-Roth-Solo-401k.pdf

In a near party-line vote of 24-19, the changes were approved on September 15, 2021 by  the House Ways and Means Committee  as part of the $3.5 trillion Build Back Better Act reconciliation recommendations. The retirement proposals are included in Subtitle I titled “Responsibly Funding Our Priorities”. Of course, the bill won’t be made law unless both the house and the senate and the president ultimately signs it into law, so stay tuned.

Per the latest reports, a recent proposal in Congress to purportedly resolve this issue would unfortunately throw the proverbial “baby” (i.e. an important retirement savings tool)  out with the bath water in that it would effectively ban all Backdoor Roth IRA and Mega Backdoor Roth Solo 401k contributions effective January 1, 2022.

If the law is passed, there may be a tremendous number of taxpayers who attempt to complete Backdoor Roth IRA and/or Solo 401k transactions before the end of 2021.  Practically speaking, this could add a tremendous burden to financial institutions and advisors for whom the end of the year is already one of the most hectic times of year.

Following are the parts found in the bill that would impact retirement accounts such as IRAs and 401k Plans Including Solo 401k Plans:

  • Implementing a contribution limit for individual retirement plans for taxpayers with incomes of more than $400,000 and account balances in excess of $10 million (including an individual’s combined IRA and DC plan (e.g., solo 401k) account balances). (Sec. 138301)
  • Requiring a minimum distribution of 50% of the amount by which an individual’s prior year combined traditional IRA, Roth IRA and DC plan (e.g., solo 401k) account balances exceed $10 million.(Sec. 138302)
  • Eliminating Roth conversions for both IRAs and employer-sponsored plans (e.g. solo 401k) for single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). (Sec. 138311).
  • Prohibiting an IRA from holding any security if the issuer of the security requires the IRA owner to have certain minimum level of assets or income, or have completed a minimum level of education or obtained a specific license or credential. Note that it is not clear  yet if this rule regarding private investments would also apply to qualified plans including solo 401k plans. (Sec. 138312)
  • Expanding the statute of limitations with respect to IRA noncompliance from three years to six years.
  • Prohibiting investment of IRA assets in entities in which the owner has a substantial interest.
  • Treating IRA owners as disqualified persons for purposes of the prohibited transactions rules.

For more details on the latest proposal, this article provides a good summary: House Democrats propose new retirement plan rules for the rich, including contribution limits and a repeal of Roth conversions

While there are often many legislative proposals regarding retirement accounts that never materialize, it is prudent to give this proposal serious consideration given its dramatic impact if enacted and that the proposal is being made in the context of the Infrastructure Bill which has a reasonable likelihood of passing in some form or another in 2021 given that is a top legislative priority for the Biden Administration.

What can I do to stop this proposal to ban Backdoor Roth IRA and Solo 401k contributions?

If you wish to voice your opposition to the proposal, please call your Senators and Representative at (202) 225-3121.  Please simply provide your Zip Code and you will be connected to your representative (after speaking to the office of your Representative, you can call back and ask to be connected to your Senators).

After you are connected, you can use the script below to voice your opposition to the proposal:

Call Script

You: Hello, my name is ___(your name)__. I’m a constituent from ____(home town)____. Could I please speak to the Legislative Assistant who handles retirement legislation?

Congressional Office: Hi, this is XXXX, how can I help you?

You: Hello, this is ___(your name)__ from ___(home town) ____.

As a citizen and taxpayer, I am calling to voice my opposition to any proposal to limit my ability to save for retirement. Therefore, I’m calling to ask that the Representative (or Senator) oppose any proposal that would limit my ability to make Mega Backdoor Roth 401k and IRA contributions for the following reasons:

  • It is well-known that there is a retirement crisis in this country.
  • I am not a Billionaire.  I am a _____(taxpayer OR small business owner (as applicable))_______ and the ability to make Backdoor Roth contributions is an important tool that allows me to save for retirement.
  • I also note that these contributions are made on an “after-tax” basis so any proposal to ban this important retirement savings tool will certainly not further the supposed goal of raising money to improve the country’s infrastructure.

Congressional Office: I will let the Congressman/woman know that we talked and make sure that he/she understands your position.

You: Thank you for your time.

Backdoor & Mega Backdoor Background

The Backdoor Defined

The Mega Backdoor Roth 401k including solo 401k is the version of the “Backdoor Roth IRA.” Individuals whose income is over a  certain limit and thus don’t qualify to make Roth IRA contributions will  do so by making after-tax IRA contributions also known as non-deductible IRA contributions to their IRA and will then immediately convert those funds to a Roth IRA.

The Mega Backdoor Defined

  • This name has bee given to 401k plans that allow for voluntary after-tax contributions because the mega backdoor Roth 401k is more lucrative then the mega backdoor Roth IRA.
  • The mega backdoor Roth 401k including solo 401k is the employer plan version of the backdoor Roth IRA in that you have to be working for a company that offers a 401k that allows for voluntary after-tax contributions or have your own self-employed business (owner-only business) that sponsors a solo 401k plan that allows for voluntary after-tax contributions.
  • Similar to the backdoor Roth IRA, the mega backdoor Roth solo 401k  strategy allows for voluntary after-tax contributions to be made to a solo 401k which are then subsequently converted to the Roth solo 401k or a Roth IRA. For example, for the 2021 tax year the business owner can contribute as much as $58,000 on a voluntary after-tax basis to her solo 401k and immediately convert the funds to a Roth IRA or the Roth solo 401k. This is much higher when compared to the mega backdoor Roth IRA which only allows for a contribution amount of $6,000 or $7,000 for those age 50 or older.

The 2021-2022 IRS Priority Guidance Plan

On September 9, 2021 the Department of the Treasury released their annual Priority Guidance Plan. The 2021–2022 Priority Guidance Plan contains 193 guidance projects that are priorities for allocating Treasury Department and Service resources during the 12-month period from July 1, 2021 through June 30, 2022 (the plan year). The projects on the plan will be the focus of our efforts during the plan year. However, the plan does not
provide any deadline for completing the projects. 

Additional copies of the 2021–2022 Priority Guidance Plan can be obtained from the IRS website at http://www.irs.gov/uac/Priority-Guidance-Plan.

In Notice 2021-28, the Department of the Treasury (Treasury Department) and the Internal Revenue Service (Service) solicited recommendations for items to be included in the plan from all interested parties, including taxpayers, tax practitioners, and industry groups.

Following are some of items included in the Priority Guidance Plan as they pertain to IRAs and qualified plans including solo 401k plans.

Regulations and other guidance under §72(t) relating to the 10 percent additional tax on early distributions.

Guidance relating to certain IRS, Tax Exempt and Government Entities, Employee Plans programs, including the Pre-approved Plan Program, the Determination Letter Program, and the Employee Plans Compliance Resolution System (EPCRS).

Update to IRA regulations under §§219, 408, 408A, and 4973 for statutory
changes and additional issues.

Final regulations on the application of the normal retirement age regulations under §401(a) to governmental plans. Proposed regulations were published on January 27, 2016.

Regulations relating to SECURE Act modifications to §401(a)(9) and addressing other issues under §401(a)(9).

Regulations relating to SECURE Act modifications to certain rules governing
§401(k) plans.

Inherited Solo 401k Funds May Not be Protected in Bankruptcy

It may come down the Employee Retirement Income Security Act (ERISA) as to whether or not funds inherited from a solo 401k plan are protected from bankruptcy creditors.

A recent court case Dockins, No. 20-10119 (Bankr. W.D.N.C. June 4, 20221) involving a Wells Fargo Bank company 401k plan for Kirk Morishita the  U.S. Bankruptcy Court for the Western District of North Carolina ruled that funds inherited from a 401k are protected from bankruptcy creditors provided the 401k funds are still in the 401k plan. Apparently, Kirk’s ex girlfriend (Holly Corbell) was the name beneficiary on the Wells Fargo Bank company 401k plan for Kirk Morishita.  Because she (Holly) filed for bankruptcy before she had the inherited 401k funds paid out so they remained in the 401k, the court ruled that they were protected from bankruptcy creditors. The Bankruptcy Court pointed out that the goal of Congress when it enacted ERISA was to protect the “interests of participants
in employee benefit plans and their beneficiaries . . .” Therefore, shielding beneficiaries from creditors was just as important to Congress as shielding participants from them. The inherited 401k in this case was not an owner-only solo 401k plan but rather a full-time employer 401k which are covered by ERISA.

Therefore,  for inherited funds, don’t expect this court case to also carry over in bankruptcy to non-ERISA plans such as solo 401k plans, Thrift Savings Plans, and certain 457(b) and 403(b) plans. Reason being, the Supreme Court ruled in another court case from 2014 (Clark v. Ramker, 573 U.S. 122) that inherited IRAs which are also not subject to ERISA are not accorded protection from bankruptcy creditors.

Passive Solo 401k Investment In Private Company and Work for the Company

Solo 401k

BACKGROUND & QUESTION:

A client wants to invest in a private startup using solo 401k funds. My question is about her consulting or working with this company. What are the limitations she should be aware of?  If she invests solo 401k dollars into the company’s equity, can she not take a job with them? Can she consult with them and earn income?
She would only be a 0.3% shareholder of this company’s C-Corp if she were to invest.

ANSWER:

The IRS prohibited transaction rules identify the following as a disqualified person:
As indicated in the above IRS prohibited transaction rules in (H), you cannot be a 10% or more shareholder in business, officer, director or a highly compensated employee.
Of course, the IRS has the power to further scrutinize the investment for other factors including but  not limited to whether or not the solo 401k participant’s parents, children, self-employed business, etc. also work for the business and or own equity in the business.
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