The House Ways and Means Committee voted out part of a budget bill last week that includes significant changes to the tax code affecting wealthier Americans. Some of these changes are aimed squarely at the richest investors who have leveraged loopholes in the code and access to private investments unavailable to most Americans to build massive, taxpayer subsidized IRAs and 401(k)s.
Other committees must do their work and Congress must wrangle over controversial provisions before passing a final bill. But the provisions dealing with large IRA accounts are less contentious as they affect a small slice of the population and make some long overdue corrections.
Individual Retirement Arrangements (IRAs) were created in 1974 to provide a retirement savings option to workers without a company pension. In 1981 IRAs were opened to all workers and their spouses, but with limited deductibility if the worker had a company plan. Then the Tax Reform Act of 1997 created the Roth IRA account which allows earnings on after-tax contributions to be withdrawn tax free subject to certain conditions. A later act allowed taxpayers to convert traditional IRAs and 401(k)s into Roth accounts by paying the taxes due.
Clearly the intent was to assist average workers in addressing their growing retirement savings deficit as traditional pension plans waned. And they have been popular: 60 million Americans own IRAs, with an average balance of $157,000 according to the IRS. But a small number of wealthy investors have utilized certain provisions in ways Congress never intended to build multimillion or billion-dollar tax-sheltered accounts subsidized by ordinary taxpayers.
The most prominent example is that of Billionaire Peter Thiel, founder of PayPal. Thiel was able to use his $2,000 Roth account to buy private, super-low priced restricted stock in his startup companies. Over the past 20 years, Thiel’s Roth has ballooned to $5 billion on which he owes no income tax. Most taxpayers do not have access to similar opportunities.