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Retirement Planning > Saving for Retirement > IRAs

House Panel Crafting Bill to Limit IRA Savings

By Melanie Waddell

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What You Need to Know

  • Ways and Means Committee is working on legislation that will stop IRAs from being exploited, Neal said.
  • Peter Thiel's Roth IRA investment is absolutely legal, says IRA expert Ed Slott.
  • But Thiel isn't totally out of the woods for eventual tax exposure, Slott said.

House Ways and Means Committee Chairman Richard Neal, D-Mass., is mulling legislation that would limit “the total amount of money that can be saved in tax-preferred retirement accounts, and putting an end to the tax dodging some do when saving in IRAs,” he told ThinkAdvisor Thursday in an email.

“Incentives in our tax code that help Americans save for retirement were never intended to enable a tax shelter for the ultra-wealthy,” Neal said, referring to recent reports about Peter Thiel’s $5 billion Roth IRA. “The Ways and Means Committee is working on legislation that will stop IRAs from being exploited.”

Senate Finance Committee Chairman Ron Wyden, D-Ore., also plans to reintroduce legislation he floated in 2016 that would have limited the amount of money that could be invested in Roth IRAs, according to ProPublica.

Wyden told ProPublica that “If I had my way back in 2016, my bill would have passed, there would have been a crackdown on these massive Roth IRA accounts built on assets from sweetheart deals. I feel very strongly that the IRA was designed to provide retirement security to working people and their families, and not be yet another tax dodge that allows mega millionaires and billionaires to avoid paying taxes.”

ProPublica, an investigative news outlet, reported the story about Thiel’s massive Roth IRA in an article, “Lord of the Roths: How Tech Mogul Peter Thiel Turned a Retirement Account for the Middle Class Into a $5 Billion Tax-Free Piggy Bank.”

Thiel’s Move ‘Absolutely Legal,’ Ed Slott Says

IRA expert Ed Slott of Ed Slott & Co. told ThinkAdvisor, however, that “contrary to all the stories about Thiel’s massive Roth IRA, what he did was absolutely legal. He followed the Roth IRA tax and contribution rules and did nothing wrong. He just happened to have a lottery-ticket investment in his Roth IRA. I wish that for everyone.”

Thiel’s contribution to his Roth IRA, Slott explained, “was $2,000, which was the legal limit in 1999 when he made the contribution. He was able to do it because his income was under the Roth contribution income limits at that time.”

Also, Slott said, Thiel’s “was an investment in a startup company so this was not a prohibited transaction as some have said it was. It’s true that you cannot invest your IRA (or Roth IRA) funds in your own business since that is self-dealing and a prohibited transaction which would disqualify an IRA or Roth IRA. But Thiel did not do this.”

What Thiel did was “merely invested $1,700 of his $2,000 Roth IRA funds in PayPal stock as a startup at the price of one-tenth of one cent ($0.001) per share. He bought 1.7 million shares and they grew and grew in his Roth IRA for multibillion-dollar gains — all totally legal,” Slott maintained.

Published reports and members of Congress have stated “that was not the original intention of the Roth IRA. I disagree! This absolutely was and still is the intention of the Roth IRA. Earning a return is exactly the intention of making any investment,” Slott said. “And if you can do this in a tax-free account like a Roth IRA, that’s even better. That’s just good tax planning and all perfectly legal.”

Congress and Roths

What does Congress think “needs to be ‘reined in?’” Slott said. “Are they going to limit how much money you can earn on your IRA or Roth IRA investments? That’s ridiculous. Then what would be the purpose of risking money on any investment?”

Slott continued: “What’s really nonsensical in the tax code is that there are both income and contribution limits on being eligible to make annual Roth IRA contributions, but there are no such limits on Roth conversions and that’s where the big money is. Roth contributions are limited to $6,000 ($7,000 if 50 or over) and only if you do not exceed the income limits. But Roth conversions which have no income limits can be done for unlimited amounts. You could convert a billion dollars if you have the funds and can pay the tax. But if you want to contribute a mere $6,000 to your Roth, then there are limits on that. Makes no sense.”

Before 2010, “you could not convert if your income exceeded $100,000, but Congress eliminated that restriction and brought in gobs of tax revenue from converters once they opened the floodgates on that,” Slott stated. “Then over the years Congress viewed the Roth IRA as their Golden Goose and expanded Roth IRA availability in plans with Roth 401(k)s and other provisions that made it easier to put more money in Roths, because they realized that Roth IRAs bring in tax revenue.”

Secure Act 2.0 and Roths

In the proposed Secure 2.0, which passed the House Ways and Means Committee on May 5, “Congress again has inserted provisions expanding the use of Roth contributions as a revenue raiser,” Slott pointed out. “Deep down, Congress loves Roth IRAs because they bring in tax revenue up front (they are not good long-term planners, obviously!) so all of this Roth bashing by Congress is just a big show.”

Thiel never did a Roth conversion, Slott said.

“He simply invested $1,700 of his Roth IRA funds in a startup that took off. And the rest is history. Good for him,” Slott continued. “If he lost his money, like what happens with most risky startup investments, we wouldn’t be having this conversation and no one would ever care.”

Roth IRAs and Estate Taxes

While Thiel’s “multibillion-dollar Roth IRA will be income tax free to him for life, he’s not totally out of the woods for eventual tax exposure,” Slott said.

“His Roth IRA will be included in his estate and will be subject to possibly heavy estate taxes depending on what the estate tax rate might be at his death,” Slott said.

ProPublica reported, however, that Thiel acquired citizenship in New Zealand in 2011. “Unlike the United States, New Zealand has no estate tax,” ProPublica said. “It’s not clear whether estate taxes figured into Thiel’s decision.”

“Given that he is only in his 50s, his Roth IRA could easily be worth $10 or $20 billion by that time and half of that could easily be consumed by estate taxes,” Slott said.

IRAs and Roth IRAs “are always included in your estate. Unlike other assets that can be gifted or removed from the estate, IRAs cannot, unless they are cashed out, but then they lose their tax-favored status,” Slott stated. “Thiel’s Roth IRA could also be hit with the additional GST (generation-skipping transfer) tax if some of those Roth funds go to future grandchildren.”

Slott warned other Roth holders: “no matter how large your Roth IRA grows, it is included in your estate.”

Melanie Waddell

@Think_MelanieW

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