As I referenced in my last post (related to my recent newsletter), I was recently interviewed by seven members of the U.S. Government Accountability Office (GAO) related to a new report they are putting together on “self-directed” retirement accounts (i.e., IRAs and 401(k) accounts that are invested into “nontraditional” assets; and also “ROBS” structures, which involve investing retirement funds through a 401(k)/C-Corporation structure for the purpose of operating a business). Below is my newsletter article on this subject.
Also, for purposes of understanding how these reports get started, here is a letter from Senator Ron Wyden (D-Oregon), Ranking Member of the Senate Finance Committee, to the GAO requesting the report (which provides what I think is valuable insight into what members of Congress are thinking about self-directed IRAs and other similar retirement account vehicles).
The US Government Accountability Office (GAO) is researching “non-traditional” investments within self-directed (again). Reason for concern or optimism?
For those of you who have followed my past articles and/or my blog posts on the topic of self-directed IRA investing (i.e., retirement accounts that invest into “non-traditional” assets, like real estate, lending, privately-held companies, etc.), you will know that the US Government Accountability Office (GAO) published a report on November 19, 2014 on “large balance” retirement accounts (for example, IRAs that have invested into hedge funds or start-up companies and grown to $5, $10, $20 million, or much more). The title of this 2014 report was “IRS Could Bolster Enforcement on Multimillion Dollar Accounts, but More Direction from Congress is Needed” (quite eloquent, I know!). I was interviewed for this report in February of 2014 and I later wrote a brief summary of the GAO’s findings (click here).
On October 8, 2015, I was contacted again by a GAO officer regarding a new report being developed by the GAO (which, as always, was at the request of Congress). This project appears to be much broader than the first one, because it will focus on all “self-directed” accounts, not just accounts will “large balances”. The GAO’s initial email to me provides a nice overview of the forthcoming report. In part, the email said:
“Senator Ron Wyden has asked GAO to study ‘self-directed’ IRAs and other nontraditional retirement savings arrangements, such as ‘self-directed’ 401(k) plans and Rollovers as Business Startups. The team that solicited input from you in 2014 regarding IRAs with large account balances recommended we contact you as a key expert on this topic.
We have just begun this work. We are tentatively planning to look at the prevalence of these nontraditional arrangements, assets they are invested in, providers’ administration of these arrangements (including who are they, how many are there, what are their roles and responsibilities, and what types of services do they offer?), challenges providers face in complying with regulations, if any, and challenges account holders face when using these arrangements, if any (fraud risks, compliance or implementation challenges, etc.).”
On November 19, 2015, I met with three GAO officers (from Seattle, Chicago, and Washington D.C.) at my office and an additional four GAO officers listened in over conference call [note: I mention these numbers not to brag – after all, who in their right mind would study this stuff enough to be asked about it by seven employees of an obscure government organization(!) 🙂 – but rather to emphasis the apparent importance of this report]. I was told that this second report will probably not be published for 6-9 months.
Below are just a few (of many) “takeaway points” from this meeting:
(1) Talking with the GAO officers was actually very similar to speaking with a new self-directed IRA client – i.e., they are very intelligent people, who generally understand accounting and business entity concepts, but at the same time lack expertise on the unique legal and tax rules that govern self-directed IRAs. In this way, the federal government appears to be just trying to get their heads around what is going on in the non-traditional retirement account investment space.
(2) As was the case with the “large balance” accounts report, the GAO (and Congress) seem concerned with the most extreme situations. For example, there have been cases reported in the news where self-directed IRA accountholders lost ever penny in their IRA because they invested into a fraudulent scheme. Although these IRAs can be abused by “bad actors”, I emphasized to the GAO that these problems are not unique to retirement accounts – rather, fraudulent investment schemes exist in many other marketplaces.
Overall, I believe that it is a good thing for the federal government to be looking into self-directed IRAs and similar retirement account investment vehicles. For many years, the self-directed IRA marketplace has operated without enough “guidance” (e.g., tax laws, court cases, regulations, IRS rulings, etc.), which resulted in far too much “gray area”. Assuming that Congress and/or the IRS does not take any sort of extreme action (e.g., “only publicly-traded assets can be purchased in a retirement account”), then I believe the GAO’s second report will be a positive step.