Everyone is mad at Peter Thiel. I am angry at him; he understood and used the system that now seems to be forcing an enormous overreaction. Congress is proposing dramatically restricting IRA investing because of what he did. Using the current tax code, Peter Thiel has accumulated over 5 Billion dollars in his Roth IRA. That is right, 5 Billion dollars. And the politicians are mad, acting like an angry child who says he will run away from home because he is mad at his parents. It’s a huge overreaction and reveals a lack of understanding on the part of the politicians who, like that angry child, are upset over this one situation.
Congress should not bury this wide-ranging provision in a 645-page document. It needs to be vetted, carefully considered, and crafted so that whatever its intent, it does not throw the baby out with the bathwater. Retirement accounts are by definition supposed to allow Americans some control over their financial future by encouraging saving and growing these savings in a balanced, diverse manner to be used once they retire. This legislation eliminates those principles without giving proper thought to the implications to every American who now holds or intends to hold a retirement account.
However, the truth is Peter Thiel did it legally. The politicians wrote the rules that he followed and accumulated an enormous amount of wealth. From what I have read, Mr. Thiel appears to be an eccentric and highly egotistical person. But he also took on some risk when he grew his account, which he was willing to absorb should things have gone a different way. I think where he made a mistake was not just accumulating the wealth, but flaunting what he did. This has made the politicians even madder.
The Average Roth IRA Is Only $39,000
Did you know the average Roth IRA owner has $39,000 in their account? I just read there are only 23,000 IRA accounts in the United States that are over 10 Million dollars. Ninety percent of these accounts are under 15 Million dollars. Over 50% of the value in that 90% was a rollover from a 401k. So we are now talking about 10,350 IRA accounts in the entire country that actually grew their IRA from annual contributions only (currently at $6,000 per year).
My point is that Congress, in its infinite wisdom, has decided to penalize 99.9% of the country because approximately 10,000 taxpayers worked incredibly hard to build their IRAs over 10 Million dollars. Sorry, I am an accountant, I like sharing numbers, and those numbers speak volumes about whom politicians are striking out against and whom they are hitting. Also, this does not speak to IRA Owners’ current year income; you cannot compare income to the value of an IRA.
Forced Distribution for IRAs Valued Over $10 Million
Part 3 of the House Ways and Means Committee takes a direct shot at IRAs; if you have an account over 10 Million dollars, it is proposed that you will be forced to take a distribution on 50% of the value over 10 Million dollars. Wow, that is a whopper of a required minimum distribution (RMD). Just so you know, the “value of over 10 Million dollars” is the accumulation of Traditional IRAs, Roth IRAs, and your 401k account. They are looking at all your retirement accounts, not just IRAs. So if you took your company pension, invested it wisely, let compounding do its magic, you will be made to pay the price. While I understand not many people you and I know fall in this category, but if they did, I sort of feel like they have every right to both benefit and suffer from investment decisions.
Elimination of Private Investments in IRAs
To add a little whipped cream to the bill, Section 138312 eliminates certain private investments in IRA accounts. If the asset is for accredited investors, it will not be allowed in an IRA. This is not for just Roth IRAs but all IRAs. For example, above, I noted approximately 10,350 investors that have an IRA above $10 Million. I would venture a guess that most of those IRA holders accumulated their wealth through solid investing using a mix of the stock market and private investments. These investors are not Peter Thiel, but Congress has decided to throw them in the same pot and limit their investing. There is a big difference between a $5 Billion IRA and $10,000,001. I am not underplaying $10,000,001, but we are comparing apples and oranges. There needs to be some sanity in our tax laws and whom we choose to tax.
Written by Dave Owens
President of Midland Trust Company