On September 27, 2021, the Build Back Better budget reconciliation legislation was introduced in the House of Representatives (the Legislation), which includes numerous revenue raisers and other tax-related changes. While many of these proposals have garnered much attention (increases in individual and corporate rates, among others), limitations on investments that can be held by individual retirement accounts (IRAs) could, if enacted, have a significant impact as well.

IRA Investment Limitations Included in Legislation

Section 138312 of the Legislation would prohibit IRAs from holding any security that requires IRA owners to make certifications regarding (i) a certain minimum level of assets or income, or (ii) the completion of a minimum level of education or the holding of a specific license or credential. If enacted, this provision would go into effect January 1, 2022, and provide for a two-year transition rule for IRAs already holding these types of investments. IRAs would need to divest such holdings no later than December 31, 2023. Following such date, IRAs continuing to hold securities with these requirements would lose their tax-advantaged IRA status.

The Legislation would also expand the statute of limitations from three to six years for IRA noncompliance (Section 138313) and prohibit investment by an IRA in entities in which the owner has a substantial interest (Section 138314).

Impact

Section 138312 would essentially prohibit the investment by IRAs in private placements, which are offerings of securities that are exempt from federal securities registration requirements if they are offered only to “accredited investors” as defined by the Securities Exchange Commission. “Accredited investors” include individuals (i) with a net worth of at least $1 million (excluding the value of such individual’s principal residence), (ii) earning an income of at least $200,000 per year (or $300,000 when combined with a spouse or spousal equivalent) in each of the prior two years and reasonably expecting the same for the current year, or (iii) who are brokers or registered investment advisors.

Action Items

While the Legislation still has a long way to go before enactment (and some question whether it will be enacted at all), affected entities and individuals would be wise to keep an eye on developments regarding these provisions.

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