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Bill would restrict SDIRA investment in closely held companies, part 1

On Behalf of | Dec 30, 2021 | Private Placements, Representing Investors, Securities Fraud, Securities Law And Litigation |

On Nov. 19, 2021, the U.S. House of Representatives passed the Build Back Better Act using the budget reconciliation process. Reconciliation rules would allow the Senate to follow suit with a simple majority, which would require every Democrat to say yes to create a 50-50 split. Then, the vice-president would need to break the tie.

It’s not surprising that Senate passage of the voluminous bill is therefore up in the air. More amendments are expected due to the delicate balance of power needed to reach agreement. While the legislation is mainly known for its proposed social safety net, it also contains significant changes to tax laws and other financial rules – including some that would impact individual retirement accounts (IRAs), specifically self-directed IRAs (SDIRAs).

What is an SDIRA?

To put this into context, let’s look at SDIRAs. Traditional IRAs and ROTH IRAs generally hold mainstream, regulated investments like stocks, bonds, certificates of deposit (CDs), cash, mutual funds and annuities. They are administered by approved, custodial institutions like banks or other financial entities that not only maintain custody of the IRAs for their owners, but also may provide financial advice and facilitate the purchase of IRA investments.

Either a standard or a ROTH IRA can be designated as self-directed – meaning that the SDIRA owner can invest its funds into different kinds of investment vehicles than those in traditional IRAs. The owner must use a custodial entity to administer an SDIRA, but the custodian does not provide investment or valuation advice.

Investments are entirely analyzed, valued and planned by the owner without regulatory or custodial oversight. They may have independent investment expertise or choose to consult an advisor, but they alone make ultimate investment decisions.

SDIRAs may hold more unregulated and potentially risky kinds of investments like real estate (often through a limited liability company (LLC) held by the SDIRA), certain precious metals, cryptocurrency, private placements, private family businesses, joint ventures, startups, franchises, tax liens, partnerships, livestock, mortgages and others.

Because of the lack of government oversight, the difficulty of getting information and the investment inexperience of some SDIRA owners, they have sometimes been targeted to invest in fraudulent schemes and may face serious risk of loss. Such assets may not be readily liquid due to a small market or skepticism about their validity or profitability.

An SDIRA (like a traditional or ROTH IRA) may not invest in life insurance, S corporations or most collectibles, nor may the investor engage in a related “prohibited transaction.”

More to come

In part 2 of this post, we will talk about the proposed change in the Build Back Better Act that would increase limits on SDIRA investment in closely held businesses as well as reactions to this proposal.


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