The ultra-rich have hijacked Roth IRAs. The Senate Finance Presidency is considering a crackdown.
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Senate Finance Committee Chairman Ron Wyden said Thursday he was reconsidering a bill that would crack down on giant tax-free retirement accounts amassed by the ultra-rich after a story from ProPublica revealed that billionaires were protecting fortunes inside of them.
“I am convinced that the IRA was designed to provide retirement security for workers and their families, not to be another tax dodge allowing mega millionaires and billionaires to avoid paying taxes,” Wyden said. in an interview.
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ProPublica reported Thursday that the Roth IRA, a retirement vehicle originally intended to boost middle-class savings, was being hijacked by the ultra-rich and used to create giant tax shelters on land. Tax records obtained by ProPublica revealed that Peter Thiel, co-founder of PayPal and investor in Facebook, had a Roth IRA worth $ 5 billion in 2019. According to the accounts rules, if he waits to be 59 and a half years old. , he can withdraw money from the account tax free.
The story is part of ProPublica’s ongoing series of how the country’s wealthiest citizens are bypassing the country’s income tax system. ProPublica has obtained a wealth of data on IRS tax returns on thousands of the richest people in the United States, spanning over 15 years. The files allowed ProPublica this month to begin an unprecedented exploration of tax avoidance strategies available to the ultra-rich, allowing them to avoid taxes in ways most Americans cannot. .
Wyden said the ProPublica stories had shifted the tax debate to the local level, pointing to a “double standard” that a nurse in Medford, Oregon would dutifully pay taxes “with every paycheck” while the richest Americans “only postpone, postpone, postpone paying their taxes almost in perpetuity.
Wyden said, “Now the American people are with us on the proposition that everyone should pay their fair share, and in that sense the tax debate has really changed a lot.”
The focus on recovering lost tax revenue comes at a critical time, according to Wyden and others, as lawmakers seek ways to fund President Joe Biden’s infrastructure plan and other national spending.
Wyden had feared for years that the Roth IRAs would be abused by the ultra-rich. In 2016, he presented a proposal that would have limited the amount of money that could be stored inside.
“If I could have come back in 2016 my bill would have passed, there would have been a crackdown on these huge Roth IRA accounts built on assets from cherished deals,” Wyden said.
The proposal was known as the Retirement Improvements and Savings Enhancements Act. This would have forced owners of Roth accounts worth over $ 5 million to withdraw money over time, thus capping account growth. It would also have closed a backdoor that would have allowed the wealthy to transfer fortunes to Roths from less favorable retirement accounts. This maneuver, known as a conversion, allows a taxpayer to turn a traditional IRA into a Roth after paying a one-time tax.
Ted Weschler, an assistant to Warren Buffett at Berkshire Hathaway, told ProPublica he supports reforms to curb Roth IRA giants like his. Weschler’s account hit the $ 264.4 million mark in 2018 after converting $ 130 million and paying a one-time tax years earlier, according to tax records obtained by ProPublica.
In a statement to ProPublica earlier this week, Weschler did not address any specific reform plans, but said: “Although I have been a huge beneficiary of the IRA mechanism, I personally don’t think the tax shield that m offer my IRA is necessarily good. tax policy. To that end, I am openly in favor of changing the benefit granted to retirement accounts once they exceed a certain threshold. “
Wyden’s proposal also targeted the placement of undervalued assets in Roths, which Congressional investigators had pointed to as the foundation for many large accounts. Under the Wyden Bill, purchasing an asset for less than fair market value would deprive the entire IRA of tax benefits.
ProPublica’s investigation showed that Thiel bought the shares of the founder of the company that would become PayPal at $ 0.001 per share in 1999. At that price, he was able to buy 1.7 million shares while remaining below the maximum contribution limit of $ 2,000 that Congress set at the time for Roth IRAs. PayPal later revealed in an SEC filing that these shares, and others issued that year, had sold “below fair value.”
A spokesperson for Thiel accepted detailed questions on Thiel’s behalf last week, and then never responded to phone calls or emails.
The RISE law was never introduced because, Wyden said, Republicans controlled the Senate at the time and made it clear that they opposed the effort. The proposal was also strongly opposed by promoters of non-traditional retirement investments. One of them wrote at the time: “Everything about the RISE bill is against capitalism and economic freedom.
Following ProPublica’s story on Roths, Senator Elizabeth Warren, D-Mass., Said the way to settle the gargantuan accounts would be a wealth tax, which would impose an annual levy on households with net worth over $ 50 million.
Warren tweeted linked to the story and wrote: “Yes, our tax system is rigged with loopholes and tax shelters for billionaires like Peter Thiel. And stories like this will keep popping up until we pass a simple #WealthTax on assets over $ 50 million to get these guys to pay their fair share.
Daniel Hemel, a tax law professor at the University of Chicago who has researched the big Roths, said Congress should simply ban IRAs from buying assets that are not bought and sold in the public market.
“There is no reason that people can gamble their retirement assets on pre-IPO stocks,” Hemel said.
He added that lawmakers should move beyond reforms directly targeting accounts and tackle a potential Roths-linked tax dodge.
If the owner of a significant Roth dies, the retirement account is considered part of the taxable estate and significant tax is due. But, said Hemel, nothing prevents an American who amassed a Roth giant from renouncing his citizenship and moving abroad to a country without inheritance tax. It is rare, but not uncommon, for the ultra-rich to give up their U.S. citizenship to avoid taxes.
Under federal law, US citizens who renounce their citizenship are taxed that day on assets that have appreciated in value but not yet sold. But there is an exception for certain types of assets, Hemel said, including Roth retirement accounts.
Thiel acquired New Zealand citizenship in 2011. Unlike the United States, New Zealand does not have inheritance tax. It is not clear whether property taxes were factored into Thiel’s decision.
A spokesperson for Thiel did not immediately respond to questions on whether property taxes were factored into Thiel’s decision to become a New Zealand citizen on Friday.
In his citizenship application, Thiel wrote to a government minister: “I have long admired the people, culture, business environment and government of New Zealand, and the encouragement that is given to investment. , business and commerce in New Zealand.
Closing the hole in the expatriation law, Hemel said, “should be a top political priority as we are talking, with Thiel alone, about billions of dollars in taxes.”
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