Some in Congress are looking at some retirement reforms that, if enacted, could affect Self-Directed IRA and 401(K) investors.
First, there is a proposal to increase the maximum contribution age for IRAs beyond 70½. Naturally, this would affect Self-Directed IRAs, too, since they are governed by the same rules.
This means that, if enacted, you would no longer have to cease Self-Directed IRA contributions once you turn age 70½. You would still be able to contribute up to $6,500 per year up until the new cap, which is still being worked out.
If contributions are still tax deductible, this would essentially render RMDs moot up until the new cutoff age. What is more likely is that the age cap will not be lifted altogether but just increased by a few years, and the age at which IRA and Self-Directed IRA investors have to begin taking required minimum distributions would be raised to match them.
If Congress makes this law, then chances are good they will do the same for other retirements as well, including 401(K)s, Self-Directed SEP IRAs and Self-Directed SIMPLE IRAs.
On the whole, this would significantly benefit self-directed retirement investors, though if the ages are lifted across the board, it could mean a little less flexibility for people who are using health savings accounts as a retirement plus-up strategy, since, if the age change is applied to Self-Directed HSAs, they may have to wait longer before they can make penalty-free withdrawals for non-health-related expenses.
The other potential reform would require 401(K) plan sponsors to inform beneficiaries what income their current balance would generate if converted into an annuity.
There are a lot of details to be worked out about how precisely this would work. For example, any meaningful projection would require a lot of assumptions about inflation, as well as applicable interest rates at retirement time, which nobody can forecast with any reliability.
Unless there is some sort of exception carved out for Self-Directed Solo 401(K)s, this could get tricky. It is a simple matter for large investment companies to reprogram their computers to include an annuity income projection on monthly statements, using whatever set of assumptions Congress tells them they can use.
Self-Directed Solo 401(K) plans with self-directed investments do not have teams of computer programmers and analysts on the payroll to do this kind of work – which are a big part of why mutual fund expense ratios and annuity administration fees are such murder and can consume up to 25-30 percent of a retirement nest egg over a career!
(This is why we are big believers in our own flat fee-based pricing – it saves many investors thousands of dollars over time, and often thousands of dollars each year on larger accounts!)
The other difficulty is that the system would not apply very well to real estate 401(K)s. Rent yields, mortgages and leverage and the effect of eventually paying off those mortgages and leverage would be very difficult or impossible to account for in designing an algorithm suitable for all 401(K) beneficiaries.
So, we will have to see how this part of it plays out. We will keep you posted!