What Peter Thiel's Roth IRA Means for Yours

[question everything]

Large Roth IRAs owned by the superrich are in the tax spotlight now, and all savers should consider the implications for their own retirement accounts. Recently, the investigative site ProPublica published a new article in its series contending the wealthiest Americans don’t pay their fair share of taxes, based on IRS data it says it obtained. The story claimed some wealthy Americans have multimillion- or even billion-dollar, tax-advantaged retirement-savings accounts. The largest one cited was a Roth IRA with $5 billion in assets (as of 2019) belonging to PayPal founder and investor Peter Thiel.

How could a Roth IRA be that large? Savers with Roth IRAs make contributions to these accounts with after-tax dollars, and funds in them can grow tax-free with no required payouts during the original owner’s life. If someone can put very low-cost, very high-growth assets into a Roth IRA—as Mr. Thiel is said to have done with investments including PayPal shares costing less than a penny each—then federal taxes on transactions and growth in the account can be nil. Withdrawals are often tax-free as well.

(snip)

The new focus on IRA limits raises questions about saving strategies for everyone, not just the superrich. Many financial planners are urging clients to convert traditional IRA assets into Roth IRAs. The idea is to position for possible higher tax rates down the road either from a law change or asset growth, although the switch means accelerating tax bills.

(snip)

With Roth IRAs, there’s also a key budget issue: Contributions are in after-tax dollars. So when a worker contributes to a Roth account or someone converts assets from a traditional IRA into a Roth IRA, Uncle Sam receives revenue. But the costs of a Roth IRA’s tax-free growth and withdrawals often fall outside the 10-year period Congress uses when making budgets. What will happen is unclear, but a number of existing proposals would impose limits on IRAs, mostly large Roth IRAs. If changes don’t pass soon, they might re-emerge in the future.

Restrict account size

In 2016 and again recently, Sen. Wyden proposed disallowing contributions to Roth IRA accounts once they reach $5 million of assets. His aim: to stem the government subsidy of “mega Roths.”

Force withdrawals

Sen. Wyden’s proposals would also force payouts from Roth IRAs exceeding the $5 million limit. One rule would require half the excess amount in the Roth IRA to be paid out each year. So if someone has a $6 million Roth IRA, the required payout would be $500,000. These payouts would likely be tax-free.

End Roth IRA conversions

Sen. Wyden has also proposed to end savers’ ability to transfer assets from traditional IRAs into Roth IRAs, paying ordinary income-tax rates on the conversion. Until 2010, such conversions were only allowed for taxpayers with $100,000 of income or less. Currently, there is no income threshold. Ending or restricting Roth conversions could cost the government revenue, depending on details.

Crack down on alternative-asset IRAs

Current law allows both traditional IRAs and Roth IRAs to be invested in a wide variety of assets, including real estate, nonpublic stock, cryptocurrency or a sports franchise. (Collectibles such as rugs or gems aren’t allowed.) Critics suspect abuses in this area and say the IRS hasn’t had resources to pursue them. Abuses could involve undervaluations of assets like nonpublic stock, or self-dealing—such as having an IRA hold a rental house on the beach and then using it oneself. Sen. Wyden’s proposals seek to ensure the contributions of these assets are at fair-market value and subject to qualified appraisals.

https://www.wsj.com/articles/what-peter-thiels-roth-ira-means-for-yours-11625218209 (subscription)

[progree]

1. Interesting. I didn't know any of this was coming down the pike

Last edited Sat Jul 3, 2021, 05:10 PM - Edit history (1)

Thanks for the headsup.

Luckily (taxwise anyway) i don't have anywhere near $5M in my Roth account (and won't ever with near metaphysical certainty), and as for Roth conversions, I've converted everything that I can convert except a relatively small amount that I expect to convert this year, and if I don't, who cares, I'll donate the RMDs to charity via QCD when I reach age 72 (that way I don't pay tax on the distribution, and neither does the charity).

Edit - RMDs for regular traditional IRA are required beginning at age 72 (sort of, in general, one can wait til April of the year following turning age 72, but then one ends up taking 2 distributions in one calendar year blah blah and so on) -- thanks question everything

Separately I have an inherited traditional IRA that I can't convert to Roth (that's not allowed for inherited IRAs). Unfortunately I have to take about $15,000/year in RMDs so that adds quite a lot to the annual tax bill, and that amount is growing rapidly as the divisor for figuring RMDs is quickly getting smaller. I might "QCD" those to charity when I reach age 70.5 in the not-overwhelmingly-distant future. (Qualified Charitable Distribution)

Edit - one can start taking QCD's at age 70.5. Since i have been and have to take RMDs on the above inherited account, no matter what my age, this is a great option for me to exploit when I turn 70.5.

[jimfields33]

2. I'm so glad I converted my traditional IRA to ROTH

Yes I paid some taxes but in the future they will be higher no doubt. Now in twenty years, I can pay for anew roof tax free probably with gains. ROTHS are the best. Of course they are going to change things. The one thing they won’t do is tax withdrawals. They do that and who want it will be voted out immediately at next primary.

[question everything]

4. I think that you now can wait to 72 to start withdrawing.

[progree]

6. Yes, you are right, I will clarify that in my posting. 70.5 is the age when one can do QCD

withdrawals, while 72 is the age at which one must do RMDs. Thanks

[bucolic_frolic]

3. There always should have been limits on size of IRAs, but that's not what the GOP wanted

IRAs are a Republican policy. If you started one in 1982 they gave you a chart how your investment would grow over 40 years. Sometimes they'd give you a toaster for opening an account.

Roth IRAs were a worse idea, and they were made to suit Republicans. They created a whole class of greedy, professionals with overweaned Trust Fund Baby progeny. Financial planners make money, but these people are divorced from any real economy that actually produces output that people can use.

IRAs as a policy were sold as the future of Social Security, or an alternative complement to Social Security, in other words, to support working people (because you had to have income to open one) in old age. IRAs are now funding luxury for the Republican economic brackets, even if you're a Democrat.

[question everything]

5. IRAs and 401K ended up replacing the disappearing pensions.

If one got a new job - which we ended up doing too many times - we often had to wait a year or so before we could start to contribute to 401K. So we opened IRAs instead. Dodge & Cox Stock did a fantastic jobs. When we left the jobs and the amount was not worth it to keep with the former employers, we rolled the 401K to the IRAs.

When I was not working, I could still contribute to IRA as a "non working spouse."

Some years back 401Ks left with a former employers were treated differently, I don't remember exactly. So we rolled them over to IRAs with Vanguard (this is where they were held, anyway.)

So I disagree with your statement that "IRAs are a Republican policy." Had we not have iRAs throughout the years, we would not be able to retire now

[bucolic_frolic]

7. IRAs were Reagan's policy

Republicans wanted to end the evil government Social Security and replace them with private investment funds - hence the IRA.

It may well be that they are beneficial in supporting those who funded them, and that they fund retirement well, but truly poor people didn't have the income or discipline to invest, manage, keep until retirement. They created more haves and have-nots - the very essence of privilege based on having money over those who don't.

Social Security was conceived to give working people, all workers, subsistence level support in retirement - heat, food, rent. It was not meant to insure against inflation and support the rich. So its goals have changed since 1936.

[progree]

8. I did a little Googling - I suspect IRAs were quite bipartisan

From a quickie Google --

IRAs were first authorized by the Employee Retirement Income Security Act of 1974 (ERISA; P.L. 93-406). IRAs were originally limited to workers without pension coverage, but the Economic Recovery Act of 1981 (P.L. 97-34) made all workers and spouses eligible for IRAs. (Republican presidents both -P)

The Roth IRA was introduced as part of the Taxpayer Relief Act of 1997 (Senator Roth was a Republican, but Clinton was president -P)

I suspect if I looked into the Congressional votes, I'd find an overwhelming majority supporting both these in both parties. That's just the way the world works.

Edit: definitely true of the 1997 act, which besides introducing the Roth, also lowered capital gains tax rates, and increased the estate tax exemption. And more, quite a grab-bag
https://en.wikipedia.org/wiki/Taxpayer_Relief_Act_of_1997

House: Repukes 225 to 1, Dems 164 to 41
Senate: Repukes 55 to 0, Dems 37 to 8

[bucolic_frolic]

9. I mean I sort of want to agree with you, and recognize your point, BUT

the number of self-employed people in the 1970s was far fewer than now, and while that number has increased as time moves along, IRAs were not visible to the general public until Reagan sold it as the up and coming alternative to Social Security as banks, big banks, regional banks, and Wall Street licked itheir chops over the fees that would be earned in IRA investments.

In the 1970s you needed to have a Keogh HR-10 as a tax-deferred pension account for self-employed people. You might well not even know about them unless you used a CPA to file taxes. Surely musicians, writers, CPA's were informed, but not the general public.

Yes, Democrats went along with Reagan's IRA, most of them reluctantly, or unaware of the far-reaching implications. As you can see from the votes in Congress, Democrats were slightly opposed. Perhaps they saw it as a supplement retirement plan, which it was in its early stages, and didn't realize it could become a major stand-alone retirement plan that potentially dwarfed SS.

In my view Democrats would have been better off to support the lower end of the SS scale, and temper the COLA adjustments. Those flat % increases have really added up for high-income retirees.

Original IRA/Keogh legislation was the alternative to private sector pension plans, for those without private pensions.

[progree]

10. "As you can see from the votes in Congress, Democrats were slightly opposed."

Which votes?