Billionaire Peter Thiel, co-founder of PayPal and chairman of Palantir Technologies, at a press conference in Tokyo, Japan, November 18, 2019.
Kiyoshi Ota / Bloomberg via Getty Images
Billionaire Peter Thiel and others with large balances in retirement accounts are in the sights of lawmakers.
House Democrats on Monday unveiled a tax package that would force distributions of his nest egg if the value of individual retirement accounts, 401 (k) plans and other pensions exceeds $ 10 million.
PayPal co-founder Thiel owned a Roth IRA worth $ 5 billion in 2019, according to a ProPublica report released in June on the Income Tax Reporting Database. Two decades ago, IRAs cost less than $ 2,000.
According to tax experts, House law would require Thiel to withhold everything but $ 20 million, nearly emptying the account.
A Roth IRA is a type of after-tax account. The contribution is taxed in advance; Investment income is tax-free unless the owner withdraws the money after age 59.
Based on the bill’s current wording, Thiel, 53, is expected to pay taxes on the growth of his investments – meaning he is expected to tax around $ 5 billion, according to Ed Slott, accountant and specialist. of the IRA based in Rockville Center, New York.
(This example assumes that the IRA is his only retirement account, and the account is still worth $ 5 billion.)
“It was all written in response to Peter Thiel,” Slott said of the House Act. “Because he fits the profile: he’s in his 50s and $ 5 billion.”
Thiel did not immediately return a request for comment to CNBC.
Their position reflects the fiscal impact of the new distribution rules on Americans with what are called mega IRAs.
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The House’s proposal is one of many changes to the tax code. Democrats aim to raise up to $ 3.5 trillion for the rich to spend on education, paid vacation, child care, health care and climate action. The House Ways and Means Committee adopted the tax package on Wednesday, preparing it for a vote in the plenary chamber.
According to Senate Finance Committee Chairman Ron Wyden, D-Ore., “IRAs were designed to provide retirement security for middle-class families, not allowing the very wealthy to avoid paying. taxes.”
new distribution rules
Current law requires withdrawals from certain retirement accounts based on age. The 2019 law also created distribution rules for Legacy IRAs and 401 (k) plans.
Domestic law would add rules that would require wealthy savers of all ages to withdraw a substantial portion of their total pension balance each year. They will probably have to pay taxes on the money.
The formula is complicated, depending on factors such as account size and type of account (before taxes or Roth). Here’s the general premise: Account holders must withdraw 50% of accounts valued over $ 10 million. Large accounts must also withdraw 100% of the Roth account size exceeding $ 20 million.
Examples of the amounts involved are: Someone with a Roth account of $ 50 million must withdraw $ 30 million the following year; Someone with a pre-tax account of $ 15 million would withdraw $ 2.5 million.
According to Robert Keibler, accountant and estate planner based in Green Bay, Wisconsin, “this is a big change for anyone who has over $ 6 million, or $ 7 million, in their IRA.” “And that would immediately affect people worth over $ 10 million.”
However, single taxpayers earning less than $ 400,000 and married couples earning less than $ 450,000 are exempt from the rules.
“if [Thiel] is really smart and can get it [adjusted gross income] Below that threshold he will completely avoid this new rule, ”Keibler said.
not just peter thiel
According to a recent analysis by the Congressional Tax Scorekeeper, the Joint Committee on Taxation, the number of taxpayers with more than $ 5 million in IRAs from 2011 to 2019 has grown to nearly 28,600.
According to IRS statistics, less than a tenth of the 1% of the nearly 70 million taxpayers represent a traditional (pre-tax) or Roth IRA.
However, those with multi-million dollar accounts aren’t the only ones super rich, especially after a bull market for stocks emerging from the Great Recession.
According to Beth Shapiro Kaufman, estate planner at the law firm Caplin & Drysdale, “It’s not just people like Peter Thiel. “I see professionals who can have double digit amounts in the millions, because the length of their working life was an unprecedented period in the stock market.”
However, most people should be able to live comfortably on $ 10 million in retirement savings, she said.