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 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). They can invest in private equity, venture capital, and hedge funds. However, they cannot be publicly traded like mutual funds or stocks on a stock exchange.

All retirement savers would have to comply with the new rule if it is passed. 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.

This measure aligns broadly with the overall goals of the tax package. It aims to improve the tax code and raise funds from wealthy Americans in order to increase the U.S. safety net, and climate mitigation investments.

Steve Rosenthal is a Senior Fellow at Urban-Brookings Tax Policy Center. He stated that IRAs should focus on investments that are accessible to everyone, and not extravagant investments with a potential mega return. “If you want to hold [these] offerings, hold them in your taxable accounts.”

The current owners of holdings can either sell them within their IRAs or use the funds to purchase a public investment. There are no tax penalties.

Experts warn that it might be challenging to sell private assets within the two year timeframe. 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 fishing net,” Ed Slott (an accountant and IRA specialist based in Rockville Centre) said about the proposal. The net catches a lot small fish, which are not intended targets.

William Barry is just 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 is an accredited investor because he has a more than $1million nest egg thanks to his diligent savings. His traditional pre-tax IRA has $500,000 of his private investment money, with another $100,000 still in the making.

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

“[Democrats] Barry stated, “Keep talking about mega-rich persons.” Barry said, “I am not the guy who has the $5 billion IRA. My IRA is $1 million.

Since the 1980s, income and wealth thresholds for accredited investors have not changed, even after inflation. Roughly 1.6% of American households qualified as accredited investors in 1983, according to the SEC. About 13% qualified for 2019

It is possible that the House legislation will not be made law. Even if Democrats achieve their tax goals, policy on accredited investors may be modified or repealed.

Rosenthal suggests that lawmakers could allow existing IRA investors the freedom to retain their private assets without any penalty, or provide a longer transition period of two years for retirement investors in order to reduce burdens.