New Legislation Targets Self-Directed IRAs

A new bill introduced in Congress would place significant restrictions on large IRAs, 401(k)s, and other tax-advantaged retirement accounts.

The legislation was introduced by Senator Ron Wyden of Oregon and Representative Richard Neal of Massachusetts, the ranking Democratic members of the Senate Finance Committee and House Ways and Means Committee. The proposal is aimed at what its sponsors call “mega-retirement accounts,” particularly accounts that have grown through investments in private companies before those companies became publicly traded.

Although the bill would apply to retirement accounts generally, self-directed IRA investors are receiving much of the attention. High-profile investors have used self-directed IRAs and Roth IRAs to invest in startups, private companies, and other non-publicly traded assets that later produced substantial returns.

The important news for most self-directed IRA investors is that the bill does not prohibit self-directed IRAs, private investments, real estate, IRA/LLC structures, or other alternative assets. Instead, it would impose contribution restrictions and mandatory distributions on certain high-income taxpayers whose combined retirement account balances exceed $10 million.

The bill also faces long odds of becoming law under the current Congress. However, its introduction demonstrates that restrictions on large retirement accounts remain an active policy objective among influential congressional tax writers.

What the Proposed Legislation Would Do

The legislation would apply only when two separate requirements are met.

First, the taxpayer must have combined vested balances exceeding $10 million across applicable IRAs and defined contribution retirement plans.

Second, the taxpayer must exceed the applicable modified adjusted gross income threshold. The threshold is $400,000 for an individual taxpayer and $450,000 for a married couple filing jointly.

These income limits are important. The bill would not automatically impose mandatory distributions on every person whose retirement accounts exceed $10 million. Both the account-balance requirement and the income requirement would generally need to be satisfied.

For affected taxpayers, the proposal would make three primary changes.

1. Contributions Would Be Prohibited

An affected taxpayer whose combined retirement account balances exceeded $10 million at the end of the prior year would be prohibited from making additional contributions to a traditional IRA or Roth IRA.

The account owner would not necessarily be prohibited from participating in all employer retirement plans. However, the legislation would restrict additional IRA contributions once the applicable account and income limits were exceeded. The sponsors’ official summary specifically states that the bill would prohibit further traditional and Roth IRA contributions when combined IRA and defined contribution plan balances exceed $10 million.

2. Accounts Between $10 Million and $20 Million Would Face Required Distributions

Affected taxpayers with combined retirement account balances above $10 million would generally be required to distribute 50% of the amount exceeding $10 million.

For example, suppose an affected taxpayer had combined retirement account balances of $12 million. The excess over $10 million would be $2 million. The required distribution would generally be 50% of that excess, or $1 million.

If the required distribution came from a traditional IRA or pretax 401(k), the amount distributed would generally be taxable as ordinary income.

That could create a substantial tax liability, particularly when the taxpayer is forced to recognize income in a year when the distribution was not otherwise needed.

3. Accounts Above $20 Million Would Face Additional Roth Distributions

The proposal contains more aggressive rules for retirement balances exceeding $20 million.

An affected taxpayer would first be required to distribute amounts above $20 million. Those distributions would generally be required to come from Roth accounts before other retirement accounts.

For example, a taxpayer with a $100 million Roth IRA could be required to distribute $80 million to reduce the account to $20 million. Additional distribution requirements could then apply to the remaining balance between $10 million and $20 million.

This aspect of the bill specifically targets the tax-free growth available inside Roth accounts. A qualified Roth IRA can generate tax-free distributions after years or decades of investment growth. Forcing assets out of the Roth IRA would eliminate the opportunity for future appreciation on those assets to remain inside the tax-free account.

The Bill Would Not Take Effect Immediately

If enacted, the proposal would become effective after 2033.

The delayed effective date is intended to provide account owners with time to address large account balances and investments that may not be readily distributed or sold.

That delay does not resolve every practical issue.

Many self-directed IRAs hold illiquid assets, including:

• Privately held company stock
• Real estate
• Private equity and venture capital interests
• Private funds and syndications
• Promissory notes
• Mineral rights
• Closely held LLC interests

An account owner may not be able to sell these assets on demand. Some private investments have contractual transfer restrictions, limited redemption periods, or no established secondary market.

A forced distribution may therefore require an in-kind distribution of the asset itself. An in-kind distribution transfers ownership of the investment from the retirement account to the account owner personally. The fair market value of the distributed asset may be taxable when it comes from a traditional account, even though the taxpayer did not receive cash from the distribution.

Those practical and valuation issues could become significant if the legislation were enacted in its current form.

Why Self-Directed IRAs Are Part of the Debate

Self-directed IRAs are not a new type of retirement account. They are traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs, and other retirement accounts administered by a custodian that permits investments beyond conventional publicly traded securities.

A self-directed IRA may invest in assets such as:

• Rental real estate
• Private companies
• Startups
• Private equity
• Venture capital funds
• Private loans
• Real estate funds
• Cryptocurrency
• Precious metals

The rules permitting IRAs to own private investments have existed for decades. The Internal Revenue Code generally identifies investments and transactions that are prohibited rather than limiting IRAs to stocks, bonds, and mutual funds.

Traditional brokerage firms usually restrict IRA investments to assets available on their brokerage platforms. These commonly include publicly traded stocks, bonds, mutual funds, exchange-traded funds, and similar securities.

A self-directed IRA custodian such as Directed IRA administers the same type of tax-advantaged retirement account but permits the account owner to direct investments into alternative assets.

The custodian does not select the investment, recommend the investment, guarantee its performance, or perform investment due diligence. The account owner is responsible for evaluating the investment and complying with applicable tax rules.

How Some Retirement Accounts Became So Large

The current debate has focused on investors who used retirement accounts to purchase private-company shares before the companies experienced substantial growth.

Mitt Romney’s large IRA attracted attention when its estimated value became public during his presidential campaign. His retirement investments reportedly included interests connected to private companies purchased through Bain Capital before those companies increased substantially in value.

Peter Thiel’s Roth IRA later became another prominent example. According to prior reporting, Thiel used a Roth IRA to acquire early private-company shares, including shares connected to PayPal. The account reportedly grew to billions of dollars as those investments appreciated.

More recently, reporting has examined startup founders, executives, and early investors who accumulated large retirement balances through investments in companies such as Roblox and other businesses before those companies became publicly traded. The Wall Street Journal reported that these accounts helped renew congressional interest in limiting the size of tax-advantaged retirement accounts.

These examples involve exceptional investment outcomes. Private-company investments can generate substantial gains, but they can also fail completely. The government does not reimburse an IRA when a startup becomes worthless, a real estate investment declines in value, or a private borrower defaults.

The investor bears the risk of loss. Under current law, the retirement account also receives the benefit when the investment succeeds.

How Many Large Retirement Accounts Are There?

In announcing the legislation, Wyden and Neal released Joint Committee on Taxation estimates concerning large retirement accounts.

According to the figures cited by the Senate Finance Committee, more than 32,000 individuals held over $10 million each in tax-sheltered retirement accounts at the end of 2024. Their average balance was approximately $17 million.

The committee also reported that 208 individuals collectively held $85.1 billion in retirement accounts, with an average account balance of approximately $409 million.

The bill’s sponsors argue that retirement tax incentives should primarily support ordinary workers saving for retirement, not permit extremely wealthy taxpayers to shelter hundreds of millions of dollars.

Opponents of the approach argue that Congress already limits annual contributions and that investors who follow the same retirement rules should not lose the account’s tax benefits merely because their investments performed exceptionally well.

That is the fundamental policy dispute.

Should Congress limit only the amount contributed to a retirement account, or should it also limit how much the account may ultimately become worth?

This Is Not the First Attempt to Restrict Large IRAs

Congress has considered similar proposals before.

During the debate over the Build Back Better legislation, lawmakers proposed restrictions on retirement accounts exceeding $10 million. Earlier versions also contained provisions that could have prohibited IRAs from holding certain investments requiring accredited investor status and restricted the use of some IRA/LLC structures.

Those private-investment restrictions did not become law. The broader Build Back Better legislation also failed to enact the proposed $10 million account limitation.

Presidents Barack Obama and Joe Biden previously included proposals addressing large retirement accounts in budget or legislative initiatives, but those measures were not enacted. The current proposal therefore reflects a recurring policy objective rather than an entirely new concept. The Wall Street Journal reports that the legislation could receive renewed attention if the political control of Congress changes.

How Likely Is the Bill to Pass?

The proposal is unlikely to pass under the current political makeup of Congress.

Republicans presently control Congress, and the bill was introduced by the ranking Democratic members of the committees responsible for tax legislation. The Wall Street Journal described the proposal as facing long odds, while also noting that Wyden and Neal would be positioned to lead their respective tax-writing committees if Democrats gained control.

The bill should therefore be understood as proposed legislation, not current law.

IRA owners are not currently required to withdraw funds merely because their retirement account exceeds $10 million. Current law also does not prohibit an IRA from continuing to grow beyond that amount.

Account owners should not sell investments, distribute assets, or make tax decisions based solely on the introduction of this bill.

However, investors with large retirement accounts should monitor the legislation. Similar proposals have appeared repeatedly, and the underlying debate over large Roth IRAs and private investments is unlikely to disappear.

What This Means for the Typical Self-Directed IRA Investor

For most self-directed IRA owners, the bill would have no direct effect even if it became law.

The proposal targets high-income taxpayers with more than $10 million in combined retirement account balances. It does not eliminate the ability of ordinary investors to establish a self-directed IRA or invest in alternative assets.

Under the proposal, investors could still use self-directed retirement accounts to invest in:

• Real estate
• Private companies
• Private funds
• Private lending
• Startups
• Cryptocurrency
• Precious metals
• Other legally permitted alternative assets

The bill is therefore better described as a proposed limitation on very large retirement account balances than a prohibition on self-directed IRAs.

Nevertheless, self-directed accounts are central to the policy discussion because private assets can produce returns that are difficult to achieve through ordinary retirement contributions alone.

A startup investment may become worthless. It may also grow by 100 times or 1,000 times its original value. When that investment is held in a properly structured Roth IRA, the resulting gain may remain tax-free if the applicable Roth requirements are satisfied.

That opportunity is exactly why investors use self-directed IRAs.

The Better Policy Question

The sponsors of the bill view large retirement accounts as an unintended use of taxpayer-subsidized savings vehicles.

There is another way to evaluate the issue.

Instead of asking how to prevent successful investors from accumulating large retirement balances, policymakers could ask how more Americans can gain access to effective retirement savings tools, broader investment options, and financial education.

Retirement accounts are one of the principal ways Americans build long-term wealth. Annual contribution limits already control how much money can enter an IRA. Once the money is properly contributed, the account owner bears the risk associated with the investments selected.

Some investments will lose money. Others will produce ordinary returns. A small number will become extraordinarily successful.

Under current law, the result belongs to the retirement account.

At Directed IRA, we believe investors should be able to invest their retirement funds in the assets they understand and believe offer the best opportunity for their financial goals, provided they comply with the applicable tax rules. That includes publicly traded securities, real estate, private businesses, private funds, private lending, and other legally permitted investments.

Directed IRA does not sell or recommend investments. We provide the custodial structure that allows investors to use their retirement accounts to invest in alternative assets of their choosing.

What Investors Should Do Now

The proposed legislation has not become law, and no immediate action is required.

Investors should continue to follow existing IRA and retirement-plan rules, including contribution limits, distribution requirements, prohibited transaction rules, and the specific requirements applicable to traditional and Roth accounts.

Those with retirement balances approaching or exceeding the proposed thresholds should consult qualified tax and legal professionals before making significant transactions. They should also continue monitoring the bill and any amendments that may be made as it proceeds through Congress.

Directed IRA will continue providing updates as the legislation develops.

The introduction of this bill is an important development for the self-directed IRA industry, but it does not change current law. Self-directed investors may continue using their IRAs and other retirement accounts to invest in real estate, private companies, private funds, private loans, cryptocurrency, and other alternative assets permitted under existing rules.