November 22, 2016

RISE Act Will Drastically Impact Self-Directed IRAs

Diana Hoff
6 min

Most people are interested in saving money for retirement. They start by contributing to work-sponsored 401K plans. People purchase homes to build equity, and increase property value, for return on investment in the future.

From there, some people build a portfolio of stocks and bonds. Many more contribute to individual retirement accounts (IRAs). However, most people aren’t aware of the many IRA options, including self-directed IRAs.

With self-directed IRAs, you can enjoy tax-free or tax-deferred savings options, as with other IRAs. You also have the latitude to make decisions about investing your money. For example, you could invest in real estate, help to fund a business venture you believe in, or enter into limited partnerships.

There are many benefits gained when you contribute retirement funds to a self-directed IRA. Unfortunately, some may be impacted by the passage of the Retirement Improvement and Savings Enhancement (RISE) Act, sponsored by Ron Wyden (D-OR). In fact, this act does very little to improve or enhance the benefits of self-directed IRAs.

Here’s what you need to know.

IRA Limits

IRAs have always had limits on contributions, generally based on contributor age and income. These limitations apply to annual contributions and may vary by the type of IRA.

The RISE Act would impose a new limitation on Roth IRAs, capping these accounts at $5 million dollars. If you know anything about contribution limits, you might not be too worried.

What are the odds you’ll reach that number in your lifetime? When you make the maximum contribution from a young age, compound interest could yield more than you imagine. If this bill passes, you’ll have to distribute any amount over $5 million from your IRA.

Why does this matter to those with self-directed IRAs? Eventually, your investments could yield significant gains and your income could decrease. At this point, you may wish to roll your money over from one type of IRA to another. The RISE Act could impact your ability to do that.

IRA Conversions

Currently, there are few restrictions for converting a self-directed IRA into a self-directed Roth IRA. You might have to jump through a few hoops at first, such as setting up a Roth IRA separately, and then transferring the funds. You can complete the transaction without too much hassle.

However, under the RISE Act, a new rule would place restriction on Roth IRAs. They could only be opened and contributed to under Roth IRA contribution limits. In other words, no more conversions.

Changes to the 50% Rule

As mentioned above, self-directed IRAs allow you to invest in business opportunities, including those in which you or your family members have a stake. Are you going into business with a family member? Money from your self-directed IRA can be used as long as you, and certain family members, have less than a 50% stake in the company.

The RISE Act contains a provision that would change this number from 50% to 10%. That means you would only be able to invest in a company in which you, or specific family members, had less than 10% stake. It can further limit your ability to invest your retirement funds.

Mandatory Valuation Requirement

For those interested in self-directed IRAs, this is probably the most damaging provision under the RISE Act. Presently, you have a lot of control over how you invest funds through a self-directed IRA. The new rule would require “gifting” valuations to be made for private investment transactions. That would include investments in real estate, private companies, and notes. Valuation standards would apply to both buying and selling IRA assets.

Conducting these third-party valuations is expensive, time consuming, and unnecessary. Although the idea behind the rule is probably increased protection, the truth is that it will impact the ability of self-directed IRA owners to conduct transactions. It could even influence the pricing and value of assets to the detriment of the IRA owner.

The RISE Act may offer a handful of advantageous provisions, but by and large, the negative impacts for IRA owners far outweigh any potential gains.

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