Don’t Let them Ban IRA Investments in Hedge Funds

The Build Back Better Act has been causing a minor stir in the world of small private funds the past week as several committees completed marking up and approving provisions of the Act. Among these, the House Ways and Means Committee approved a plan limiting Mega-Roth, backdoor IRAs, and large retirement account balances – which mostly seems like a knee-jerk reaction to the headlines recently that Peter Thiel has $5 Billion in his Roth IRA


IRAs Investing in LLCs 


But what’s catching the eye of several self-directed IRA custodians that cater to the alternative investment space is language prohibiting IRAs from holding any asset you would have to be an accredited investor. Here’s the CEI:


Section 138312…of the draft bill issued by Committee Democrats bars IRAs from investing in virtually any company that isn’t publicly traded on an exchange such as NASDAQ or the New York Stock Exchange…


Under Section 138312, an IRA is barred from holding any asset for which the investor must have, under SEC rules, “a specified minimum amount of income or assets, … a specified minimum level of education, or … a specific license or credential.”


And here’s self-directed IRA custodian Millennium Trust in an email to customers this week:


For example, the legislation would prohibit IRAs from holding unregistered investments that are offered to accredited investors, like equity or debt investments in small businesses or investments in private funds. You may very well hold investments in your IRA today that the proposed legislation would prohibit.


None of this makes a lot of sense when we just had the JOBS Act approved less than 10 years ago to open up the world of private investment. That was intended to fund startups, mainly, but has been a welcome relief to many in the hedge fund world. And for our two cents, this would strengthen the moats of the largest hedge funds, which have an expensive mutual fund, units, and other such “public” offerings much smaller or startup hedge funds can’t afford, potentially killing jobs at many small businesses. We know – not many people think of hedge funds as small businesses – but they are indeed, with all the stress and struggle to compete with the large incumbents other small companies have.


What’s Next?


Now, this is in the very early stages of the process, where these provisions are written mainly to get feedback and, as a test, balloons to see where (and who) the most pushback comes from. The approved committee language and provisions will be sent to the House Budget Committee as part of the budget reconciliation process before moving to the full House of Representatives for consideration. But that doesn’t mean we can’t raise a voice or two in favor of allowing IRAs to continue being able to fund your favorite local hedge fund, or a friend’s business, etc. 


The Time To Act Is Now — Contact Your Rep. and Senator


To keep hedge funds investable via IRAs – use your voice and let them know what impact these changes will have on you and your future. Here’s how to contact your U.S. Congressional Representative:, and your U.S. Senators:


And here’s some language put forth by Millenium Trust to tell your representative to make sure your IRA investment choices remain:


  • You oppose limitations on IRA investment choice (Sections 138312 and 138314 of the House reconciliation bill). These under-the-radar provisions have never been publicly vetted and will have unintended and adverse impacts on you and countless other Americans who wish to save for a secure retirement through Main Street investments.


  • You are also concerned that the legislation negatively impacts the ability of small businesses that employ everyday Americans to obtain the funding necessary to operate and grow their business and create jobs. The proposed legislation eliminates the ability of suitable investors to participate in private capital-raising transactions through their IRAs, a source of funding on which many of these small businesses rely.


  • You believe the legislation will ultimately increase the wealth gap (which is in direct opposition to the legislation’s stated goals) because it would limit the ability of many Americans, whose investable funds are almost exclusively in their retirement accounts, to invest in these private investments.


  • On a personal level, the legislation:

-Negatively impacts your ability to save for a secure retirement by limiting your choice and ability to diversify your retirement savings outside of the stock market.

– Will likely cause you significant negative financial consequences by forcing you to sell or liquidate existing IRA investments at a depressed price by a publicized date certain, and may also cause significant negative tax consequences (including early distribution penalties) by forcing you to distribute in-kind from your IRA any investments that you are unable to sell or liquidate.​​​​​​​

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