Beware: Your IRAs are in Danger

All of a sudden, Roth IRAs are in the spotlight.

If you have a Roth account, you're probably familiar with their benefits as retirement vehicles. Folks make limited annual contributions to Roth accounts with after-tax dollars, which grow tax free with absolutely no required payouts during the lives of the original owners. In short, you make post-tax contributions to a Roth in return for not having to pay taxes on withdrawals…and on what those post-tax contributions subsequently earn. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.

Why the Beef?

Public scrutiny of Roth IRAs gained momentum recently when ProPublica scrutinized certain wealthy Americans' Roth activities, like PayPal founder and bigtime investor, Peter Thiel. It seems that, quite legitimately, Mr. Thiel contributed very low-cost, very high-growth assets (in large part, less than penny-per-PayPal shares) into a Roth IRA, which as of 2019 held assets of about $5 billion. And yes, those assets will continue to grow tax-free without any required payouts during Thiel’s life.

Congressional Heartburn

Because IRAs, both traditional and Roth, were created to provide beneficial retirement security to middle-class folks, and because a number of people have benefited immensely from them due to rather exceptional circumstances, certain members of Congress have developed a serious case of heartburn over the matter.

Consequently, all tax-advantaged retirement account owners should be seriously concerned that Congress might conjure up new restrictions on IRAs. In fact, under terms of the 2019 Secure Act, both Republicans and Democrats imposed changes that now require many heirs of both traditional and Roth IRAs – your children and mine – to empty inherited IRAs within a decade of our unfortunate deaths.

Tax and Spendators

There's no way of knowing - yet - if additional changes are forthcoming, but a number of proposals to limit IRAs, mostly those lucrative Roths, are circulating, encouraged by Senate Finance Committee Chairman Ron Wyden, a Democrat from Oregon. Known as the Oregon “Tax and Spendator,” he is politicking with his cronies to disallow additional contributions to Roth IRAs once they reach $5 million in size. Now remember, contributions to Roths have already been taxed. What miffs Wyden and his crowd is that earnings from those contributions, including capital gains on investments, can grow untaxed until depleted by the owner and subsequent benefactors.

The good Senator’s proposals would also require payouts from all Roth IRA balances exceeding a $5 million limit. One approach would require that 50% of the excess be paid out annually…tax-free, we presume…but nonetheless to be embedded in the taxable world of money-grubbing politicians.

Wyden also proposes to end so-called Roth conversions – a saver’s ability to shift assets from traditional IRAs to Roths, which requires the payment of ordinary income-tax rates on the value of the converted assets. Politicians’ distaste for watching assets grown…untaxed!!!...inside those Roth accounts is something to behold. By the way, until 2010, such conversions were allowed only for folks with $100,000 of income or less. There has been no income restriction since then, much to the chagrin of the Wyden cohort.

IRA Crackdown

Another issue that is troubling the “tax and spendators” is the wide variety of assets allowed for investment in traditional and Roth IRAs (e.g., cryptocurrencies, real estate, sports franchises, beach rentals, nonpublic stock, etc.). Critics assume that abuses will thrive if these investment liberties continue; thus, a crackdown on such alternative-asset IRAs is under consideration. Because private investors can’t be trusted on the same scale as public servants, a crackdown of some sort is in stirring.

Politicians hate it when they create retirement opportunities that work too well for the regular old Joe. And they really hate it when the rich become richer, even when those rich folks follow the rules.

Keep an eye on these pols. They’re coming for your goodies.