A tax package unveiled by House Democrats would forbid individual retirement accounts from holding certain private investments typically reserved for the wealthy.

While proponents think the proposal would raise investor protection and reduce an the use of an IRA as a tax shelter for the rich, critics think it could lead to a big financial hit for some investors — even some everyday savers.

The House legislation, unveiled last week, would prevent IRAs from holding investments offered to “accredited investors.”

More from Personal Finance:
The wealthy may avoid $163 billion in taxes every year
Billionaire Peter Thiel may need to pull $5 billion from his IRA if House bill passes
Time running out to sign up for advance child tax credit

This status is for investors who hit certain benchmarks, like $200,000 of annual income or a $1 million net worth (excluding a home). It lets them invest in securities like private equity, hedge funds and venture capital; they aren’t publicly traded, unlike mutual funds and stocks available on a public stock exchange.

If passed, the rule would apply to all retirement savers. Current owners would have to divest of such IRA holdings by the end of 2023 or lose the account’s tax benefits — potentially sticking them with a big tax bill.

The measure broadly aligns with overarching goals of the tax package, to make the tax code fairer and to raise money from wealthy Americans to expand the U.S. safety net and make climate-mitigation investments.

“IRAs should be about investments that are available to everybody, not exotic investments that potentially have a mega return,” according to Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center. “If you want to hold [these] offerings, hold them in your taxable accounts.”

Current owners can sell holdings within their IRAs and use the proceeds to buy a public investment without tax penalties.

However, it may be difficult to sell private holdings within the required two-year time frame, according to experts. There may not be a ready market for such investments, perhaps pushing owners to sell at an undesirable price — a potentially unfair outcome for some investors, especially those earning modest incomes who’ve followed all the rules to this point, they said.

“It’s like a fisherman’s net,” Ed Slott, an accountant and IRA expert based in Rockville Centre, New York, said of the proposal. “The net picks up a lot of small fish that are unintended targets.”

William Barry is one example. The 52-year-old accountant, a resident of Clearwater, Fla., has a taxable income of roughly $75,000 — well short of the $400,000 income threshold the White House and congressional Democrats have generally eyed as a demarcation line for the wealthy.

Barry has built a nest egg of more than $1 million due to diligent saving, making him an “accredited investor.” He has almost $500,000 tied up in private investments in his traditional pre-tax IRA, and has another $100,000 investment in the works.

He’s afraid of potentially incurring tens of thousands of dollars in additional taxes if unable to unwind his holdings within two years.

“[Democrats] keep talking about mega-rich people,” Barry said. “I’m not the guy with the $5 billion IRA. I’m the guy with the $1 million IRA.”

The Securities and Exchange Commission sees accredited investors as financially sophisticated and more able to withstand the risk of loss from a private securities offering.

Investments that aren’t publicly traded don’t require as many financial disclosures as publicly traded stocks, bonds and mutual funds, for example.

Fraudsters also tend to target private markets more regularly, according to Joe Wojciechowski, managing partner at Stoltmann Law Offices in Chicago, which represents investors in fraud cases

“They are so frequently the targets of Ponzi schemes,” Wojciechowski said of private investments held in IRAs. “If you don’t allow [them], I think that would have a real investor-protection benefit.”

More investors have achieved the “accredited” label over time.

The associated income and wealth thresholds haven’t changed since the 1980s, even to account for inflation. Roughly 1.6% of American households qualified as accredited investors in 1983, according to the SEC. About 13% of households qualified in 2019.

The House legislation may not become law. Even if Democrats’ tax agenda ultimately succeeds, the policy around accredited investors might be removed or changed.

For example, lawmakers may allow existing IRA investors to keep private holdings intact without penalty or allow for a longer transition period than two years to ease any burden on retirement investors, according to Rosenthal.