Opinion: While the Super Wealthy Exploit IRAs, Congress Is Considering Changes

You would think that a proposal to limit accumulations in Individual Retirement Accounts (IRAs) wouldn’t be very controversial. The favorable tax provisions for retirement savings are intended to encourage ordinary workers to save, not to make the rich richer.

The website Pro-Publica recently reported that billionaire Peter Thiel has a Roth IRA worth more than $5 billion. The problem is that Peter Thiel and other entrepreneurs can buy a large number of stocks for a fraction of a cent a share and put them into an IRA where they can grow in value tax-free. And, according to the Joint Tax Commission, approximately 28,615 taxpayers have IRAs with more than $5 million (see Table 1). Together, these accounts are worth $280 billion.

Read: How Peter Thiel Turned $2,000 in a Roth IRA into $5,000,000,000

Unsurprisingly, members of Congress are getting up to speed and want to prevent such abuses. Anthony Scaramucci, former White House communications director, isn’t surprised Congress wants to act. He told CNBC“There’s probably going to be a threshold after a story like this because I think the purpose of this stuff was to give middle-income people a nest for their future.” Introducing a threshold certainly seems a reasonable response to me.

But the headline of a recent article by my friend Mark Warshawsky warned:“If plans to reduce IRAs succeed, the middle class will be collateral damage.” His argument is that a well-paid police chief could easily get a $230,000 benefit — the current IRS limit — from a state or local retirement plan. With adjustments to the cost of living in retirement and the current negative real interest rates, such a pension could be worth $10 million. Hence, the argument goes that placing a $5 million cap on IRA balances for people with all their retirement savings in an IRA would put them at a disadvantage against the police chief.

If Mark claims that the threshold should be $10 million instead of $5 million to reconcile things with limits for other types of plans, I’d be fine with that. Not that anyone asked for it. But let’s be clear, neither threshold — $5 million or $10 million — has anything to do with the “middle class.”

Even for the top quintile of the income distribution aged 55-64, the average of retirement and other financial assets is only $2.3 million (see Table 2).

The more difficult issue is how to implement a new program that would prevent further abuse of IRAs. What about the following, assuming a $10 million threshold?

For new IRAs, Congress could ban all privately traded shares of IRAs.

For existing traditional IRAs:

  • Less than $10 million, contributions and appreciation could continue.

  • When the account reaches $10 million, contributions must cease and any amount over $10 million is considered a distribution and taxed as ordinary income.

  • For accounts already over $10 million, any increase above their value in 2021 would be considered a distribution and taxed as ordinary income.

For existing Roth IRAs (where contributions are made from after-tax income):

  • Less than $10 million, contributions and appreciation could continue.

  • When the account reaches $10 million, contributions must cease and any amount over $10 million is removed from the IRA and is no longer eligible for tax-exempt valuation.

  • For accounts already over $10 million, any increase in their value in 2021 would be removed from the IRA and no longer eligible for tax-exempt capital gains.

In short, it’s really annoying to see the super-rich exploiting IRAs, and Congress should take action.

.