Claiming that the tax code needs “a dose of fairness” when it comes to its treatment of retirement savings, Sen. Ron Wyden, D-Oregon, issued a discussion draft of legislation that would cap contributions to so-called “mega” IRAs and make it easier for younger workers struggling with student debt to receive contributions to 401(k)s from employers.
“Tax incentives for retirement savings are designed to help people build a nest egg, not a golden egg,” said Wyden in a statement announcing the proposals under the Retirement Improvements and Savings Enhancements, or RISE, Act.
Those incentives will amount to more than $1 trillion over the next five years, according to Wyden.
A small cohort of savers is significantly benefiting from the tax-deferred treatment of savings in IRAs. According to a report issued by the Government Accountability Office in 2014, of the 43 million people with IRA accounts in 2011, about 8,000 had balances between $5 million and $10 million, about 800 had accounts valued between $10 million and $25 million, and several hundred had accounts with more than $25 million.
Mega accounts were brought to the country’s attention during the 2012 presidential race, when Mitt Romney, then the Republican nominee, disclosed tax statements showing that he had an IRA with more than $100 million in assets.
(Related: The No-Taxes Retirement Plan Distribution Strategy)
For the most part, accounts valued at more than $5 million tend to be owned by joint tax filers with gross income greater than $200,000 a year, who are older than 65, the GAO says.
But some have accumulated high account values by investing in assets unavailable to most savers, which are initially valued very low and enjoy disproportionately high returns, the GAO said, citing the example of company owners that invest nonpublicly held shares of their company and ultimately realize massive gains. If invested in a Roth IRA, distributions from those gains are not taxed.
A summary of Wyden’s draft proposal puts the market value of high-value Roth IRAs between $8 billion and $13 billion, and noted press reports of executives in the tech sector with balances between $30 million and $90 million. The Employee Benefits Research Institute said the median IRA account balance in 2013 was about $25,000.
Wyden’s draft would address that issue by prohibiting further after-tax contributions to Roth IRAs once their value exceeds the greater of $5 million or the value of the account as of Dec. 31, 2016, and would require distributions once the cap is exceeded.