How Peter Thiel’s $ 5 billion Roth IRA might flip your IRA and retirement financial savings on its head

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The website ProPublica recently reported that billionaire Peter Thiel owns a Roth IRA valued at more than $ 5 billion. That got leaders in Congress hugging and talking about passing laws that could affect your IRA.

The website says it received IRS data or taxpayer-filed statements, although it does not disclose how the information was obtained. But ProPublica says its claims about Thiel’s IRA are true.

As an early investor in PayPal, Thiel bought shares at a low cost, perhaps pennies per share. He had his Roth IRA buy some of the stocks. Since PayPal is a successful company, the value of the shares grew and is now worth significantly more than Thiels Roth IRA paid for it.

Thiel apparently stuck to all the rules. ProPublica makes no allegations that it broke or circumvented any law. But some leaders in Congress say they are upset that Thiel can cash out the profits tax-free because he had the foresight to buy them through a Roth IRA. They are now saying that IRAs and other tax-privileged savings accounts were only meant to help the middle class save for retirement. You are not supposed to accumulate such large credits.

Congressional leaders use the report as a reason to consider limitations and restrictions on all IRAs.

House Ways and Means Committee chair Richard Neal (D-Mass.) Said his committee was considering drafting laws that limit the amount of money that could be accumulated on tax-deferred retirement accounts. Members are also exploring other ways to limit the use of retirement accounts.

Senate finance committee chairman Ron Wyden (D-Ore.) Says he plans to introduce laws that limit the amount of money in Roth IRAs.

I have been warning about the potential of these and other retirement account restrictions for several years. One of the first steps in accelerating taxes on retirement accounts was the abolition of the Stretch IRA in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted in 2019. More are likely to follow.

Other changes that are supported by both parties in Congress include: capping IRA and 401 (k) balances, eliminating contributions for those with income or account balances above a certain level, and accelerated payouts to accounts above a certain level .

Congress could also mandate required minimum payouts for Roth IRAs or include Roth IRA payouts in modified adjusted gross income when calculating taxes on Social Security benefits, Medicare premium surcharge, and other stealth taxes.

In addition, higher income tax rates can be expected in the coming years. This would increase lifelong income tax for people who are saving money in traditional IRAs and 401 (k) s now and who will withdraw the money in the future. For many people, it would probably be better to pay tax at today’s tax rates and account balances than to pay tax at higher rates and large account balances in the future.

It is a good idea to consider repositioning your IRA or 401 (k) plan. There are several strategies worth considering.

A widely used strategy is to convert a traditional IRA to a Roth IRA. You pay taxes on the converted credit at today’s tax rates. Future distributions from the Roth IRA are tax-free for both you and your beneficiaries who inherit the Roth IRA.

Another strategy is to use the IRA to buy a permanent life insurance policy. You take a distribution from the traditional IRA, pay the tax on the distribution, and use the post-tax amount as a lump sum for permanent life insurance. One variant is to take annual distributions from the IRA and use the post-tax amount to pay annual premiums for a life insurance policy.

In both cases, the money comes from the IRA. In future, life insurance will pay your beneficiaries a guaranteed amount. Insurance benefit will likely be equal to or greater than the pre-tax IRA balance for most people. You may also have tax-free access to the cash value during your lifetime. You should work with an experienced insurance broker and estate planner to determine whether it makes sense to reposition your IRA as a life insurance policy and choose the best insurance policy for you.

Someone who is charitable may want to convert the IRA into a nonprofit residual trust.

You take a flat-rate distribution from the traditional IRA, pay income tax on it, and put the post-tax amount in a charitable residual trust. The trust pays you an annual income for life. After your death, the remainder of the trust will go to charities of your choice.

You are entitled to a charitable contribution deduction in the year you transfer money to the trust. The amount of the deduction depends on your age and current interest rates, and it reduces income taxes on the IRA distribution.

For decades, Congress offered tax incentives to people to invest money in IRAs and 401 (k) s. People reacted and accumulated billions of dollars in retirement accounts. Now Congress wants to raise more taxes on these assets. It might be a good idea for you to reposition your IRA before Congress increases taxes or restricts your action.

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