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Government’s Proposed “Build Back Better” Tax Legislation is Bad for Small Business

At Localvest, we take an interest in current events and how they might affect your investments.  Today, we want to inform you about some proposed changes to individual retirement accounts (IRAs) drafted in the U.S. government’s $3.5 trillion reconciliation package that will directly influence your ability to hold private equity in a self-directed IRA.

Why should I care about the $3.5 trillion reconciliation package?

In September, The Ways and Means Committee released the first draft of a major tax bill as part of the U.S. Government’s $3.5 trillion Build Back Better reconciliation package.

While proposed tax increases intended to target the ultra-wealthy are aimed at funding important social policies and government infrastructure initiatives, it’s very important to look beyond popular messaging of phrases like “tax the rich” and “build back better.” The U.S. government claims its proposed tax legislation is “responsibly funding our priorities,” but is it?

Tax reforms are needed and important, but, regardless of politics, proposed IRA changes–specifically changes to self-directed IRAs–if passed, will negatively impact millions of ordinary investors, businesses, and jobs while suffocating the progress of entrepreneurship in America.

Wealth is primarily created in private markets. Self-directed IRAs help issuers raise capital, the lifeblood of most start-up ventures. It’s estimated that between $800 billion and $1 trillion per year in America gets invested in early-stage companies and real estate projects; a significant percentage through self-directed IRAs. Additionally, almost half of the money we’ve seen invested in military-veteran-owned companies, real estate projects, and funds comes from self-directed IRAs.

If enacted, proposed changes will devastate

  • businesses who administer and advise investors on self-directed IRAs
  • individuals who invest in private securities through their self-directed IRA
  • the livelihoods of entrepreneurs who rely on self-directed IRAs to raise capital, including a significant number of military-veterans

How will the proposed changes directly impact my self-directed IRA?

There are a couple important changes we want you to know about. The proposed legislation would:

  1. Prohibit IRAs from holding private equity and debt securities
  2. Prohibit IRA owners from investing in non-publicly traded entities in which the IRA owner and related entities (including the IRA itself)
        –   own more than a 10% interest or
        –   any entity in which the IRA owner is an officer or director, regardless of ownership percentage

IRAs holding any of the investments outlined above would lose all tax advantages previously available to the IRA. Investors will be prohibited from purchasing any of the investment types outlined above in their IRA. Additionally, investors will be required to dispose of any such investments currently held in their IRA by no later than December 31, 2023.

The changes outlined above will take immediate effect if enacted, disqualifying certain investments that will force investors to sell or distribute before they are eligible for withdrawal, resulting in huge out-of-pocket tax penalties that most cannot afford.

Regardless of your political views, these proposed changes will take away your freedom to invest outside of the stock market, strengthen Wall Street, weaken small businesses, jeopardize job growth and eliminate diversification that is essential to a thriving economy.


What can I do about this?

The vote on this new tax legislation is due to take place in November. We are hopeful that the sections proposing the above changes (Section 13812 & Section 138314) will not pass. 

In the meantime, we encourage you to make your voice heard. Contact your U.S. Congressional representatives in the Senate and House of Representatives. Many Congressmen and women do not realize that proposed changes to IRAs will have such widespread impacts on everyday Americans and appreciate being alerted to the facts. 

If you’re unsure about how to do this or what to say, take a look at this helpful form created by our partner, Vantage.

Join the Self-Directed IRA Group 
 on Localvest!

If you have questions about the proposed tax legislation or want to learn more about self-directed IRAs, join the Self-Directed IRA Investment Group on Localvest! Run by one of our trusted partners, Vantageprofessional experts in alternative investment optionsit’s an excellent place to learn more about how to control your retirement funds. Login into the platform and reach out to Group Manager, Daniel Ortega to learn more.

If you are still not part of the Localvest community click here to join and connect with thousands of entrepreneurs, business leaders, and investors who have served our country in all branches of the military.