Close Close
ThinkAdvisor

Retirement Planning > Saving for Retirement > IRAs

Debate: Should Mega Roth IRA Balances Be Capped?

X
Your article was successfully shared with the contacts you provided.

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 Contributions are made with after-tax funds, and both earnings and principal are then withdrawn tax-free in retirement.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.

Their Votes:

Bloink

Byrnes

Their Reasons:

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. 

____

Bloink: These tax-preferred accounts are designed to encourage ordinary Americans to strive for retirement readiness. Hardworking taxpayers face tight restrictions on how much they can actually contribute to these valuable accounts — and most are more inclined to be conservative in how they invest for their retirement. The super-wealthy, however, can evade current income limits on direct contributions by executing Roth conversions without limitation. They also have the resources and safety net to execute risky investment strategies within these tax-preferred accounts — all to avoid paying any tax on their gains. 

Byrnes: We’re only talking about this issue because some taxpayers have gotten lucky and succeeded in their IRA investments. If our goal is to find ways to encourage retirement savings, that success is actually a huge incentive to encourage ordinary, hardworking Americans to fund these accounts and potentially reap the tax-free benefits down the line. 

____

Bloink: IRAs were never meant to function as a tax shelter for the ultra-wealthy, and we should aim to take steps to shut these practices down so that the super-rich are required to pay their fair share in taxes. In reality, most ordinary Americans don’t have the resources or investment skills to engage tax and finance experts to place startup investments in these retirement accounts. It’s only the very wealthy who benefit from these self-directed investment opportunities.

Byrnes: Sending the IRS on a government-mandated witch hunt to punish anyone who happened to generate a multimillion-dollar retirement nest egg would do more harm than good. We aren’t even talking about changing the basic IRA contribution limits here — we’re talking about limiting how successful your IRA can be without losing the tax benefits promised up front. If we’re thinking logically, we have to remember that anyone could potentially achieve mega-Roth status — and we shouldn’t use the benefit of hindsight to limit the amount of investment growth that can be received tax-free under the clear rules governing Roths.

___________________

  • Learn more with Tax Facts, the go-to resource that answers critical tax questions with the latest tax developments. Online subscribers get access to exclusive e-newsletters.
  • Discover more resources on finance and taxes on the NU Resource Center.
  • Follow Tax Facts on LinkedIn and join the conversation on financial planning and targeted tax topics.
  • Get 10% off any Tax Facts product just for being a ThinkAdvisor reader! Complete the free trial form or call 859-692-2205 to learn more or get started today.