The concept of IRAs and Qualified Plans has been around for many years, first created conceptually by the Chancellor of Germany, Otto von Bismarck, in the 1800s. The United States had a series of events that culminated in the government enacting the Employee Retirement Income Security Act of 1974 or ERISA. Its rules are codified in the U.S. Treasury Codes and are for the most part governed by the Department of Labor.
In this video, Yieldstreet Director of Retirement Services, Joe DiDomenico goes over the history of IRAs, or Individual Retirement Accounts, and why some of the rules around them might seem antiquated in these times.
The reason the Department of Labor is involved is that ERISA was mostly targeted to protect the interests of employees who participated in company retirement plans like pension programs. IRAs were established at the same time to give people who didn’t work for companies with retirement plans an opportunity to save for retirement.
In the 1930s, under the Roosevelt administration, there was a lot of activity to pass legislation under the president’s New Deal. This included allowing collective bargaining rights that gave labor unions a boost. However, it also created a divisive atmosphere between large company ownership and management versus employees.
One of the biggest events that triggered the creation of rules for employer-sponsored plans and IRAs was the closing of the Studebaker plant in South Bend, Indiana on March 18, 1933. It set in motion a movement that led to some real changes in this country that are still in effect today. The American automaker was hit hard by the Great Depression and went into receivership because it was so heavily in debt. As a result, over 4,000 factory workers lost their jobs as well as most of their pensions. The average age of these employees was 52 and their average tenure of service for the company was 23 years. The management and ownership group did not experience the kind of heavy losses as the lower-ranking employees.
The overarching purpose of the set of laws put in place for IRAs is to allow Americans from all walks of life to save for retirement in a tax-advantaged way and encourage investing.
As Congress was facing a wide-sweeping tax proposal at the time, it wanted to protect against certain unintended consequences of IRAs. This led them to disallow certain activities with regard to IRAs.
One of the things they wanted to prevent was giving assets owned by retirement plans a competitive advantage over assets that are not. What would end up happening if this were allowed is that every business would eventually be owned by a retirement plan. For example, a business would be able to charge lower prices because they wouldn’t have to worry about paying taxes.
Additionally, at this time, a lot of congressmen were a part of families who owned leading companies in a number of different industries. These families were worried they were going to be displaced. They were also worried that wealthy people would try and use IRAs as a way to avoid estate taxes by selling assets in retirement plans to the next generation at a low price.
Finally, they were worried people would just have their IRAs buy things that they would use and consume so they would never need to take a distribution from their IRA. They would just enjoy the things the IRA buys until it was gone. The Treasury, in this case, would never receive the tax revenue from distributions.
Overall, the main idea behind IRAs is to give people a deferral of taxes and for the government to get their revenue, eventually, down the road. For these reasons, some parties are not allowed to do business with your IRA, including yourself. Certain types of investments are also not allowed, and some investment activity is taxed, even though they are held in an IRA.
Stocks, bonds, and mutual funds, marketable securities, in other words, are allowed to be owned by IRAs. In fact, there are so many things that can be invested in with an IRA that the IRS has just listed the few things that can’t be invested in. These include:
IRAs have endured more than 40 years of tax law tinkering and are definitely here to stay as one of the foundations of the American Dream.
You can now invest in Yieldstreet’s line of alternative investments by rolling over your existing IRA(s) or enrolling in the Yieldstreet IRA. To learn more about how you can take retirement planning to the next level, contact us at [email protected]
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