After ProPublica released their not-so-bombshell report on wealthy individuals and their taxes in June, Congress took notice.
Different members of the House Ways and Means Committee (HWMC) have recently mentioned intent to craft legislation putting new restrictions on Individual Retirement Accounts (IRAs) and 401(k)s.
These kinds of investment accounts were created to enable average, middle-class Americans to save for retirement more easily and effectively. The IRAs in particular are accounts that have a low barrier to entry and allow any American to grow their wealth for the purpose of retirement.
Traditional and Roth IRAs have slightly different rules, but the principles remain the same: you invest your money within the account, it grows, and the taxes you pay on that growth are significantly limited. In exchange for the tax advantages, you cannot easily access that money you invested until you hit retirement age, defined as 59-and-a-half.
In a Roth IRA specifically, you put post-tax money in, and once you reach retirement age, you can withdraw all of that money without any additional taxes taken out.
That leads us to the controversy surrounding Peter Thiel, co-founder of Paypal, and his use of a Roth IRA.
In the ProPublica report, it was found that Thiel grew his Roth IRA from essentially nothing to $5 billion. And you already know how ProPublica colored that narrative: tax avoidance.
Thiel bought shares of Paypal when it was just starting out for $.001 a piece. He invested $1,700 in the company to own 1.7 million shares.
Once the share price rose significantly after PayPal took off, Thiel sold some of those stocks to invest in other tech startups, like Facebook, before they were popular.
He continued these well-performing investments up through today, when his Roth IRA is worth $5 billion.
ProPublica painted this as a “sidestep” of the tax code when, in reality, he just hit the lottery with his investments.
There have been concerns raised that the PayPal shares were simply undervalued before Thiel bought them, as he was a co-founder, but there has been no evidence to prove these allegations.
If there are legitimate concerns about such malfeasance, it should be investigated. But based on the facts now, though, Thiel did nothing wrong. He just used the system to his advantage and hit the jackpot with his investments. We should wish that for every American looking to save for retirement.
The new rumored restrictions on retirement accounts should alarm every person who has one or is looking to create one.
Rep. Richard Neal (D-Mass), Chairman of the HWMC, said he is considering legislation that would limit “the total amount of money that can be saved in tax-preferred retirement accounts, and put an end to the tax dodging some do when saving in IRAs.”
Tax-dodging? Seriously? The whole point of these accounts is that they are tax-advantaged in the first place, not taxed as normal. People would not be so incentivised to actually use the accounts and save for retirement if they were not tax-advantaged.
Thiel followed all the rules, so he deserves the money in his account. Contrary to critics, he did not use it as a “tax shelter.”
Sen. Ben Cardin (D-Maryland) said he is “considering reforms, such as banning the use of IRAs to purchase nonpublic investments.”
Others have said that once an IRA reaches a certain threshold, everything above that threshold should be taxed.
Restrictions such as these and others will only serve to harm everyday Americans who make smart investing decisions to set themselves up for a successful retirement.
Per Investopedia, “There [are] just 791 IRAs with between $10 million and $25 million, accounting for only 0.0018% of accounts. The vast majority of IRAs—about 98%—have balances of $1 million or less.”
Clearly, the vast majority of people taking advantage of IRAs are everyday Americans who have a modest amount saved for their retirement. Congress was the one to create this avenue for saving, and now they are trying to backpedal.
Enacting restrictions on these useful accounts people rely on for retirement will do nothing to stop supposed “tax evasion” and will instead hurt people like you and me, making it harder for us to set ourselves up for retirement.