Significant and Proposed Limitations on IRA Investments Included in Domestic Legislation | Eversheds Sutherland (United States) LLP

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On September 27, 2021, the Build Back Better budget reconciliation legislation was introduced to the House of Representatives (the Legislation), which includes numerous revenue increases and other tax-related changes. While many of these proposals have garnered a lot of attention (increasing personal and business rates, among others), limitations on investments that can be held by Individual Retirement Accounts (IRAs) could, if enacted, also have a significant impact.

IRA investment limits included in the legislation

Article 138312 of the Legislation would prohibit IRAs from holding any collateral that requires IRA owners to make certifications regarding (i) a certain minimum level of assets or income, or (ii) completion of an education level minimum or the possession of a specific license or proof of identity. If enacted, this provision would come into effect on January 1, 2022 and provide a two-year transition rule for IRAs already holding these types of investments. IRAs are expected to dispose of these holdings no later than December 31, 2023. After that date, IRAs continuing to hold securities with these requirements would lose their tax-advantaged IRA status.

The legislation would also extend the limitation period from three to six years for non-compliance with the IRA (Article 138313) and prohibit investment by an IRA in entities in which the owner has a substantial interest (Article 138314).

Impact

Section 138312 would essentially prohibit the investment of IRAs in private placements, which are offerings of securities that are exempt from federal securities registration requirements if offered only to “accredited investors” such as defined by the Securities Exchange Commission. “Accredited investors” include persons (i) with a net worth of at least $ 1 million (excluding the value of that person’s primary residence), (ii) earning an income of at least $ 200,000 per year (or $ 300,000 when combined with a spouse or spouse equivalent) in each of the preceding two years and reasonably expecting the same for the current year, or (iii) who are registered dealers or investment advisers.

Action items

Although the legislation still has a long way to go before it is enacted (and some wonder if it will be enacted), the entities and individuals concerned would be wise to keep an eye on developments regarding these provisions.

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