How Your IRA And Retirement Savings Could Be Upended By Peter Thiel’s $5 Billion Roth IRA

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The web site ProPublica recently reported that billionaire Peter Thiel has a Roth IRA with a value of more than $5 billion. That has leaders in Congress up in arms and talking about passing laws that could affect your IRA.

The web site says it obtained IRS data or taxpayers’ filed returns, though it didn’t disclose how the information was obtained. But ProPublica says its claims about Thiel’s IRA are accurate.

As an early investor in PayPal, Thiel acquired shares at a low cost, perhaps for pennies a share. He had his Roth IRA purchase some of the shares. Since PayPal is a successful company, the value of the shares grew and now are worth substantially more than Thiel’s Roth IRA paid for them.

Thiel apparently followed all the rules. ProPublica makes no allegations that he broke or skirted any laws. But some leaders in Congress say they are upset that Thiel will be able to cash out the gains tax free because he had the foresight to buy them through a Roth IRA. They now say that IRAs and other tax-favored savings accounts were intended only to help the middle class save for retirement. They aren’t supposed to accumulate such large balances.

The congressional leaders are using the report as a reason to consider restrictions and limits on all IRAs.

House Ways and Means Committee Chairman Richard Neal (D-Mass.) said his committee is considering drafting legislation that would limit the amount of money that could be accumulated in tax-favored retirement accounts. The members also are looking at other ways of limiting the use of retirement accounts.

Senate Finance Committee Chairman Ron Wyden (D-Ore.) says he plans to introduce legislation limiting the amount of money in Roth IRAs.

I’ve been warning about the potential for these and other restrictions on retirement accounts for several years. One of the first steps in accelerating taxes on retirement account balances was the elimination of the Stretch IRA in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted in 2019. More are likely to come.

Among the other changes that have bipartisan support in Congress are: limiting IRA and 401(k) balances, eliminating contributions for those with incomes or account balances above certain levels, and accelerating distributions on accounts above certain levels.

Congress also might impose required minimum distributions on Roth IRAs or include Roth IRA distributions in modified adjusted gross income when calculating taxes on Social Security benefits, the Medicare premium surtax, and other Stealth Taxes.

In addition, higher income tax rates are likely in coming years. That would increase lifetime income taxes on people who are saving money in traditional IRAs and 401(k)s now and who withdraw the money in the future. It likely would be better for many people to pay taxes at today’s tax rates and today’s account balances than to pay taxes at higher rates and on large account balances in the future.

It’s a good idea to consider repositioning your IRA or 401(k) plan. There are several strategies worth considering.

A widely-used strategy is to convert a traditional IRA to a Roth IRA. You pay taxes on the converted balance at today’s tax rates. Future distributions from the Roth IRA are tax free to both you and your beneficiaries who inherit the Roth IRA.

Another strategy is to use the IRA to buy a permanent life insurance policy. You take a distribution from the traditional IRA, pay the taxes on the distribution, and use the after-tax amount as a lump sum deposit on a permanent life insurance policy. A variation is to take annual distributions from the IRA and use the after-tax amount to pay annual premiums on a life insurance policy.

In either case, the money is out of the IRA. The life insurance policy will pay a guaranteed amount to your beneficiaries in the future. The insurance benefit is likely to equal or exceed the pre-tax IRA balance for most people. You also might have tax-free access to the cash value during your lifetime. You should work with an experienced insurance broker and an estate planner to determine if it makes sense to reposition your IRA as a life insurance policy and select the best insurance policy for you.

Someone who’s charitably inclined might want to turn the IRA into a charitable remainder trust.

You take a lump sum distribution from the traditional IRA, pay the income taxes on it, and put the after-tax amount in a charitable remainder trust. The trust pays annual income to you for life. After your death, any amount left in the trust goes to charities you selected.

You’ll be eligible for a charitable contribution deduction in the year you transfer money to the trust. The amount of the deduction depends on your age and current interest rates and will reduce income taxes on the IRA distribution.

For decades Congress provided tax incentives for people to put money in IRAs and 401(k)s. People responded and have accumulated many billions of dollars in retirement accounts. Now, Congress wants to collect more taxes on those balances. It might be a good idea for you to reposition your IRA before Congress increases the taxes or restricts what you can do.

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