What You Need to Know
- Multimillion-dollar IRAs aren't a growing problem, as some lawmakers have said; they're a growing benefit for Uncle Sam.
- There is no abuse to crack down on as the funds contributed to these IRAs were under the legal limits.
- Senators might have a point in limiting restricted venture capital startup-type stock from being sheltered in retirement accounts.
IRA data released from the Joint Committee on Taxation revealing some mega-million dollar IRA and Roth IRA balances has set off alarm bells, with Congress citing shock and “abuse” and looking for something to do about this. But there is really no story here when you look at the numbers. This is a non-issue. Here’s why.
First, there is no abuse since the funds contributed to these IRAs were under the legal limits (unless they know something we don’t and that would be for IRS or courts to decide). These people followed the rules available to everyone.
It is not a growing problem. In fact, it’s a growing benefit for Uncle Sam (see why in the paragraphs below).
While this data, released by Senate Finance Committee Chairman Ron Wyden Wednesday, shows in some cases only a few hundred people with tens of millions in their IRAs, the data does not show the probably millions of people that lost money on their speculative IRA investments. Of course there will always be those that have better returns on their IRA investments, but that is true for all investments. Are we going to limit what people can earn on their investments? That’s ridiculous. Then what’s the point of risking capital to grow businesses?
A Valid Point
Next, the issue of some people having access to restricted venture capital startup-type stock that can be valued at near zero may be a valid concern. But again, these people are taking risks and most of these do not turn into multimillion-dollar tax-deferred investment returns. Most actually lose money, but we don’t hear about those, just like we don’t hear about the millions of people who don’t win the lottery. We only hear about the big lottery winners. But maybe the difference with the lottery is that everyone can play.
So the senators might have a point in limiting this kind of stock from being sheltered in retirement accounts. If anything, most people should have more stable investments in a retirement account since those funds will need to be relied on for many years in retirement.
Uncle Sam Loves IRAs
In addition, the JCT report lists more people with mega-millions in traditional IRAs than Roth IRAs. The government should love this! Accountants like me would call this a healthy balance of accounts receivable — large amounts of future income tax that the government will reap.
This is why I said above that this is, in fact, a growing benefit for Uncle Sam. Accounts receivable are assets on the balance sheet, which means they are liabilities for those who owe it. These funds are growing only tax-deferred. The tax day of reckoning still looms over them. The only way to use these funds is to withdraw them and that will trigger an income tax bill. The tax deferral cannot go on forever. Traditional IRAs are subject to required minimum distributions which will have to begin after age 72.