The killer is the "The bill also prevents investing in an entity in which the IRA owner is an officer." which is generally how the checkbook IRA is structured (IRA owner is the Manager of the single member LLC that is wholly owned by the IRA).

Sec. 138314. Prohibition of Investment of IRA Assets in Entities in Which the Owner Has a Substantial Interest.

To prevent self-dealing, under current law prohibited transaction rules, an IRA owner cannot invest his or her IRA assets in a corporation, partnership, trust, or estate in which he or she has a 50 percent or greater interest. However, an IRA owner can invest IRA assets in a business in which he or she owns, for example, one-third of the business while also acting as the CEO. The bill adjusts the 50 percent threshold to 10 percent for investments that are not tradable on an established securities market, regardless of whether the IRA owner has a direct or indirect interest. The bill also prevents investing in an entity in which the IRA owner is an officer. Further, the bill modifies the rule to be an IRA requirement, rather than a prohibited transaction rule (i.e., in order to be an IRA, it must meet this requirement). This section generally takes effect for tax years beginning after December 31, 2021, but there is a 2-year transition period for IRAs already holding these investments

This is the killer, indeed. Checkbook IRAs are amazing retirement tools if you're interested in using some of your retirement money in high-risk, high-reward investments. My retirement fund benefited enormously from the Q3 2020 crypto market gains, which would not have been possible without my LLC. It's hard to see this as anything other than removing all the peasants from the market so that the big dogs can have it to themselves.

> removing all the peasants from the market so that the big dogs can have it to themselves.

Bingo! Wall St wants a monopoly on ALL your retirement funds. Your typical employer 401k plan offers only mutual funds run by Wall St. No investing in alternate assets such as real estate or crypto. The big boys get their cut AND make sure you are not crowding the field in lucrative investments.

> My retirement fund benefited enormously from the Q3 2020 crypto market gains, which would not have been possible without my LLC.

We probably shouldn't encourage the general public to gamble their retirement funds in a casino. I understand many believe this is an "asset class", but there is ample evidence crypto has no place in someone's retirement asset mix. Such investment in a taxable account is reasonable compromise.

I like how we are all pretending that mutual and index funds are also not a casino.

They have cash flows and intrinsic value. Crypto does not.

Oh sure, all those tech stocks that are based on PE ratios and real earnings and definitely not wild, sweaty speculation.

>We probably shouldn't encourage the general public to gamble their retirement funds in a casino.

No? Should we prohibit them from investing in mutual funds since bonds are so much safer? Or maybe mutual funds are OK but individual stocks should be illegal? Or maybe just certain, whitelisted stocks above a certain market cap that the 'professionals' decide are too big to fail?

Or maybe we should let individuals decide the correct mix of yield and risk that suits their age and risk tolerance?

Maybe you should just let people do what they want with their own money.

while your heart is in right place, Govt should not be allowed to single out a particular asset class from retirement. they should rather be in business to regulate and minimize fraud in that class. if crypto is out the so should gold etfs be.

I don't think too many "peasants" have LLCs so they can use their IRAs to invest in crypto.

I was thirty when I started making "real" retirement money. I suspect peasant is an exaggeration, but there's a good chunk of highly paid folks that are playing catch up to retirement or have reached retirement but still need to build their own safety nets and cushions as the cost to retire continues to go up, even when retired.

Trust me, compared to the people moving real money in these markets we are all peasants.

There are companies like Rocket Dollar that handle the paperwork for you for $15/month.

Not mainstream but not a secret either.

I don't think too many "peasants" would be able to make $15/month from it, much less any actual gain.

No? I think just about any dummy (myself included) with a RD LLC that put money into crypto Q3 of last year paid for centuries of RD fees in a few weeks. The whole point is that it's a casino with some rational guesstimates behind it. You take a chunk of your retirement that wouldn't sting too bad if you lose it and you invest it in something that is wildly speculative but that you think has a high upside. Either you go broke with a small chunk of your total nest egg, or you turn that small chunk into something many times the size of your "main" nest egg.

I think many could

Peasants with LLCs... Sure. And using crypto as an example only strengthens the argument that what you're doing is a tax dodge.

How so? I still have to report value of the account to the IRS by law, which is enforced by the trustee. If I get audited it's stunningly easy for the IRS to trace from dollars in IRA to crypto bought and sold, including profits taken. I think you're overestimating your understanding of the whole process.

There is literally no societal benefit whatsoever to lowering taxes in a way that incentivizes people to invest their retirement savings in crypto speculation.

The entire point of our IRA/401k laws is to give people incentives to save money for retirement in the hopes that they will have a nest egg of stable assets that will allow them to leave their jobs, making room for the next generation and reducing the burden on families and social services.

The whole system was created because penniless old people are a corrosive social problem. These reforms just illustrate how much we've lost the plot on the original idea.

> My retirement fund benefited enormously from the Q3 2020 crypto market gains, which would not have been possible without my LLC.

I have a single member LLC and a simplified employee pension plan (SEP), but don't understand how one gets crypto into a SEP without buying something like Grayscale (GBTC) through the open stock market.

rocket dollar ( or similar service ) creates a single member LLC with checkbook self-directed IRA fund access. They become your self directed IRA trustee. You then create a bank account in the name of the LLC, followed by an account with coinbase or similar under the taxID of your new LLC. You transfer money from your LLC bank account to coinbase LLC account (being careful to never comingle wallets with personal accounts) and do whatever you need with it. You can pull the crypto out of coinbase and hold it in a wallet if you want as well (as long as you bought that wallet with 401k funds)

The LLC creates an account at e.g. Gemini. Talk with your trustee about it first.

trustee? Lol, it is just me. I thought that crypto exchanges don't let business entities open accounts. If they do, if I open an account at Gemini under my LLC how then do I get that into my SEP though?

A SEP, and other retirement accounts, are trusts. The manager of your accounts is the trustee of those accounts. It can't be just you with a retirement account, there is always a trustee.

E.g. Mass Mutual Trust Company, Directed Trust Company, etc

The LLC is owned by the SEP (the trust). Anything owned by the LLC is in the SEP.

You shouldn't be so quick to jump to assuming someone doesnt know what theyre talking about. Trustee is a technical term with meaning in this context. You should look into self-directed 'checkbook' IRAs.

This effectively bans you from making a retirement investment in yourself - and takes a great deal of money off the table for innovation. So many companies are seeded with capital of a person putting 401K money into their own company. The retirement fund and the home are really what most people have to use to create businesses. Frankly, this sets the US back 250 years, and bars the middle class from starting businesses.

The traditional IRA and 401k were introduced in 1974, the Roth IRA in 1997. They were never intended for rich or poor people to speculate in risky one-off investments. How does this rule set the US back 250 years?

https://en.wikipedia.org/wiki/401(k)#History : "Congress [... enacted the ...] Internal Revenue Code Section 401(k) as part of the Revenue Act.[8] This occurred on November 6, 1978."

It doesn't ban anything at all.

It just refuses to give you a tax break when you do it.

This is an effective deterrent, and would likely be enforced with a tax penalty. edit: By not allowing me to have the tax benefit, you effectively reduce the incentive to invest in my own business. This seems like a law that is aimed at fat cats that will miss, largely because fat cats aren't going to be investing out of their own retirement. On the other had, my neighbor just used $80K of his 401K to buy three vans for a new HVAC repair company. Had that been taxed, he would have had enough for one, maybe two vans, and been on a much worse cash flow trajectory.

Deterrent from what, starting a business?

Your theory is that for 250 years America's entrepreneur class has been primarily driven by raiding their own tax-advantaged retirement accounts?

Also if your neighbor story is for real what happened there is he took a loan against his retirement account or did some kind of ROBS transaction. It's already illegal for him to interact with plan assets as part of a self-directed IRA, so he didn't use one to invest in his own business and buy vehicles. Hence this story has nothing to do with the topic at hand.

Re: revenue generated, if this [1] article about Peter Thiel's $5bn Roth is correct, that's $1bn+ in lost long term capital gains tax on him alone!

(That said, I'm guessing the intent of the provision is more about fairness/eliminating a loophole for the wealthy than strictly generating revenue).

[1] https://www.propublica.org/article/lord-of-the-roths-how-tec...

Roth IRAs are pre tax so even if this bill passes Peter Thiel won't have to pay any taxes on his $5B.

This comment is factually inaccurate.

Roth IRA's are post-tax, that's the whole point of them. You put money in after paying tax and then you're done, when you withdraw for retirement it's tax free.

If this bill passes as written he would actually be forced to divest assets out of his Roth IRA and then pay taxes on them now. It's a really substantive change, hence the discussion.

> If this bill passes as written he would actually be forced to divest assets out of his Roth IRA and then pay taxes on them now.

He would be forced to sell his current assets in the IRA, yes—but what prevents him from rolling over the proceeds into another asset? As long as all the funds remain in a Roth IRA until retirement age there shouldn't be any taxes due to the reinvestment, now or later.

Or are you implying that he would choose to take the tax hit of losing the Roth status rather than sell the assets?

You're right that I mixed up pre and post but that's exactly the point. It's post tax so he's ALREADY PAID TAXs and therefor will pay nothing when the funds are distributed.

If Peter Thiel had contributed the maximum possible with a mega backdoor Roth for every year of his life, that would total roughly $2 million, so Thiel has at least $4.998 billion in untaxed capital gains in his account.

If this passes, it wouldn't go back and make him pay taxes on those, but it would stop other people from replicating that trick and it would greatly reduce the amount of future untaxed capital gains he will get.

This seems… fine? And a lot less FUD-y than the original article. I find that talk of the “freedoms” being taken away often is propaganda by the corporate interest youre paying to exercise the supposed freedom

Well you can't deny that options are being taken away for a portion of citizens. I stopped doing more than the minimum match into my 401K a long time ago because I could no longer trust that in 30, 40, 50 years nobody wouldn't have come after it as an easy target. It's kind of like gun control (which isn't a good analogy since it's too politically charged) - you're pointing at one restriction and saying "hey, it's not the end of the world, you can still own guns, this probably doesn't even affect you personally", but then a new restriction, law, permit, tax, ruling, regulation, is passed every 6 months from that point on every year for decades on end, every time pointing to the change as just a small little thing that probably only affects a small portion of people. Every time gaining more and more precedence for more restrictions and overall adding them all up having a much more massive impact than just a small change that only affects certain people.

If any restriction is intolerable then what remains?

Liberty.

Not sure, I follow. That doesn't make any sense.

It's pretty obvious. When you don't tolerate any restrictions, liberty is what remains.

This is a common refrain but just false, restrictions and regulations are very often the only thing guaranteeing liberty. We’re often told “free market good, government bad” but the reality is somewhere in the middle (without even getting into the fact that the free market is itself created through government regulation)

I’d recommend checking out Mike Konzcal’s recent book Freedom From The Market https://thenewpress.com/books/freedom-from-market

The free market is voluntary exchange without aggression (initiation of violence)–that's the "free" part. Far from being created by government, the free market is utterly incompatible with the claim to "legitimate" initiation of violence, which is the defining characteristic of any government and how it enforces its restrictions and regulations. You can have a market economy with a government, but it won't be a free market.

People are perfectly capable of trading with each other on a voluntary basis without requiring any restrictions or regulations or any other form of violence. And if violence does occur people are perfectly entitled to respond in self-defense without depending on any government to intervene.

I see what you’re saying, but it’s just not true.

Trade takes the form of exchange of the rights of ownership, and this is a right enforced by government.

For example, if I own a house, the house doesn’t care who does what. The owner is the one with the right to call the cops if a non-owner comes in unwanted. This instantly becomes an appeal to violence and the government.

This is even more true in the modern sense of the free market, financial markets exchange very little actual physical goods, the thing being traded is rights to contracts, rights which are guaranteed by the government regulator.

The only place this isn’t quite true is with blockchain based assets.

Honestly they should close the backdoor Roth and update the Roth income rules to stop requiring the backdoor Roth. It's annoying to use it as is. Getting rid of the mega backdoor seems like a no brainer since it's a clear loophole. Or if you want to keep something similar, change the Roth contribution limits for everyone.

They should close 401k and all other tax advantaged retirement accounts, and just have regular IRA and Roth IRA for everyone, and remove employers from the equation.

This is the best idea. Having employers involved in healthcare and retirement is really crummy. These vestiges of history have been corrupted into massive handouts to the insurance and financial industries, and there is no reason they need to exist.

My #1 problem with the Affordable Care Act was that it tried to mandate universal health insurance coverage while leaving employer-sponsored insurance in place. If they were going to mandate that we urinate our money away to insurance companies (rather than assess an honest tax for single-payer healthcare), they should have prohibited employer-sponsored healthcare benefits to force everyone into the same insurance pool.

“They” tried, but insufficient politicians supported it. Everything about ACA was as that it was a compromise to even get that much. The only other option was to not have had healthcare reform at all. I think ACA will go down in history as a pretty impressive effort that at least did something to increase the number of people with access to healthcare.

Also increase the contribution limits to the hard maximum including employer contributions (e.g. $64.5k/yr) or eliminate them entirely then just cap the maximum post-tax value of your total tax advantaged accounts and require payouts above the caps.

The maximum value cap should be indexed to your age (and inflation), such that the maximum allowed is enough that if left alone can support a very well funded retirement anywhere in the country with very high probability.

They'd need to raise the limits then - the contribution limits on traditional/Roth IRAs are significantly lower than employer plans like 401ks.

I do not mind what the limits are as long as it is fair for everyone and not discriminating against those employed by an employer not offering 401k.

This is what I'm most bumed on with the mega backdoor and backdoor, but closing them and just opening them for everyone would be ideal. Because you can still contribute to Roth regardless on income level if you know about backdoor, so it makes sense just to legalize across the board.

I think you may be wrong on point 3.

> Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021.

This makes it sound like backdoor will be stopped for everyone, since after-tax contributions to a (Traditional) IRA are a necessary step.

If this happens, maybe 401k providers will lose business. People often have reasonably large traditional 401ks, which they don't roll over to traditional IRAs, because having traditional IRAs interferes with the backdoor Roth (and they don't want to do a Roth conversion, because that would be a taxable event). But if backdoor Roths went away, then there'd be no reason not to roll a traditional 401k into a traditional IRA. Brokerages like Fidelity and Schwab would win, as people brought their assets over, and 401k providers would lose, since now people would take their money out as soon as they switched jobs.

The rule of 55 (https://www.thebalance.com/what-is-the-rule-of-55-2894280) may still apply, which relies on a separate 401k balance.

The 401ks will still enjoy better legal protections in states that don't absolutely protect IRAs.

You are right, I missed that. This does mean there's an impact on folks making above the Roth income limit but below $400k. Updated the post, thanks

This just isn't true. The bill also prevents you from investing in any private company of which you are a member, AKA a startup you work at. It also prevents you from any deals requiring you to be an accredited investor which means any Reg D which is how almost all early stage tech companies raise money.

Does it restrict you from doing those things, or only restrict you from doing it in a tax-free/tax-advantaged way?

It restricts you from doing them within retirement accounts. But the purpose of retirement accounts is to effectively save for retirement. Congress is basically saying we want you not to need us but we don't actually want you doing well with your investments.

> the purpose of retirement accounts is to effectively save for retirement

Investing in the company which also pays your wages is a Texas hedge, and as such a terrible way to save for retirement, so this sounds like a good change.

> It restricts you from doing them within retirement accounts.

I'm not saying it's a good bill (no opinion, not enough info), but it isn't prima-facie crazy for congress to revisit retirement plans if they have evidence they are often being used for other purposes, or ineffectively.

> we don't actually want you doing well with your investments

No, its saying if you do well on certain types of investments you need to pay tax. If you do poorly on your investments and lose money, you'd actually want them in a taxable account (because you can count the losses against other gains).

Thank you for the succinct summary. I agree it all seems reasonable, even too modest.

Having these basic guardrails in place may be a good first step, and in the future the thresholds could be dropped below $10MM and 400K.

>and still does require a pretty high income (investing more than ~$20k/year in a 401k)

Nearing retirement, earning low income now and have a significant amount of savings in non-retirement accounts = Closing the megaBD Roth screws me.

What should really happen is that anyone with net worth < a reasonable threshold should be able to simply roth what ever the fuck they want without having to figure out these annoyingly complex tax rules.

> 3. Closes the backdoor Roth IRA (https://www.bogleheads.org/wiki/Backdoor_Roth) only for people making over $400k. Closes the mega backdoor (https://www.bogleheads.org/wiki/Mega-backdoor_Roth) for everybody.

Just a nit-pick of your analysis. The proposed legislation closes both the megabackdoor Roth (employee after-tax contributions) and backdoor Roth (prohibition on IRA contributions from being converted) regardless of income level:

"Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level"

...which, depending on what you consider a tax increase, appears to run contrary to President Biden's promise to not increase taxes for anyone making less than $400K. This gutting of IRA conversions seems like the only piece of the pie that hurts the middle class, although arguably the upper end of the middle class who have the means to set aside more than the $19K 401(k) max per year.

I'm curious why would this increase taxes if those contributions that get converted are after-tax anyway and the amount that gets taxed shouldn't change?

It admittedly depends on a rather broad definition of a tax increase. The future gains from those contributions invested today are not subject to taxes due to them being in a Roth account, but with this legislation, one would need to make those gains outside of a Roth, and thus those gains would be subject to taxes.

Yeah, you're totally right. Updated the post.

The big thing I heard about is this ends QSBS, which stinks for founders: something like 15-20%+ of your company's value. Worse, it's a retroactive tax, meaning taxing founders who started the journey with that in mind.

Talk about rich senators punching down vs encouraging company formation!

PSA: If you are starting a US company and haven't heard of QSBS.. look into it at the federal + state levels, as that's a good chunk of your potential net worth.

As a founder I'll certainly take advantage of QSBS if it's relevant to me in the future. But let's not delude ourselves -- it's wildly unfair as a tax break. The primary use of it seems to be allowing angel investors to literally pay no taxes whatsoever on millions of dollars in windfall profits.

I'm not sure why it's unfair for first-time founders. STEM founders are largely better off not innovating and instead helping FB sell ads. Tax incentivizes like QSBS for companies, especially bootstrapped co's, help. Job creation & technology invention is why the gov already has direct programs to give tax money directly to startups (SBIR, R&D tax credit, ...), and this is an extension of that encouragement. We need more, not less -- otherwise it'll push even more to the concentration of VC-funded fintech startups and FAANG.

I would agree that QSBS support for the already-rich can be less effective -- your case of angels. I'd rather see improvements on the capping structure, vs pushing incentives even more (15-30%!) to working for FAANGs.

> I can't imagine there are a ton of people with retirement balances over $10M.

Probably not a ton of people. But there might well be a ton of money in these accounts.

https://www.theatlantic.com/politics/archive/2012/09/whats-r...