IRAs and Roth IRAs have gained much attention in recent months after investor Peter Thiel managed to turn his Roth IRA into a multibillion-dollar investment. Now, proposals have been floated to limit the overall value of these Roth accounts and provide the IRS with resources to tax any amounts exceeding that cap.
Typically, most Roth IRA distributions are received tax-free. Contributions are made with after-tax funds, and both earnings and principal are then withdrawn tax-free in retirement. If an account owner’s Roth investments have performed well, that investor has the potential to realize significant tax savings.
We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about putting a cap on the overall value of a tax-preferred IRA.
Below is a summary of the debate that ensued between the two professors.
Bloink: In recent years, IRAs and Roth IRAs have been used more and more by ultra-wealthy taxpayers to avoid paying taxes on their investments in otherwise taxable assets. This is not at all what Congress intended when they developed the IRA tax preferences — and the IRS should have the ability to challenge those “mega” accounts. At a certain point, there should be a cap on the aggregate value of the account — and all funds in excess of that cap should be taxable.
Byrnes: Putting a cap on the overall value of a tax-preferred retirement account is never going to happen. Allowing unlimited Roth conversions provides a huge government benefit — in other words, the government gets a tax payment as soon as someone executes a Roth conversion. The federal government would almost always rather have that tax payment now, instead of 30 years down the line when the account owner cashes out the IRA.