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Monday, December 6, 2021

A Middle-Class Retirement Account is the hottest tax break for the Rich

According to Bloomberg News, for most Americans, utilizing the proceeds of their retirement accounts is the only way they can stop working without worrying about falling into poverty. But for the rich, this is a mere tool with the help of which they can enjoy tax breaks and eventually pass on their wealth to their heirs or successors. 

The nonpartisan Joint Committee on Taxation reveals that at least $279 billion is in the mega-IRAs, individual retirement accounts, each with at least $5 million. 

Although, regulations are designed in such a way that there is a limit to IRA contributions that can be made by the rich, yet almost 29,000 Americans have these huge giant accounts. And around 500 managed to get $25 million and perhaps more than that into their IRAs. 

However, the Democrats in Washington are trying their best to stop this trend of giant IRAs. A tax plan that has been approved Wednesday by the House Ways and Means Committee imposes limitations on the use by the rich, which also includes stringent norms on the retirement accounts the values of which are beyond $10 million. 

Before Congress imposed the new norms, till then the IRA was attracting a lot of attention and importance from the rich and their advisers. However, the Democrats must be thanked for the new norms along with President Joe Biden’s proposals to increase taxes on the rich, and especially when it comes to the gains from their investments. 

One of the main reasons for the changes and new impositions is because the Roth IRA, in particular, usually will create an asset pool, and the same can be sold, bought, or spent with almost no or zero tax consequences or impositions. 

Favoring the wealthy

According to Bloomberg News, the imposition of the new rules would restrict the flow of assets into these giant IRAs, provided these changes are approved as a legislative process and go on to become a law. 

It is being reckoned that the Senate Democrats are also thinking along similar lines and are contemplating similar plans. Some experts have also written that the mega or giant IRAs signal a serious ailment, which is essentially a retirement savings system that unequally shows a preference for the rich or favors the rich. 

Bloomberg News also states that in the last 30 years, the gap between the rich and the other sects have become wider. In 1989, one-tenth of the affluent Americans held at least 6.5 times more in the Individual Retirement Accounts (IRAs) and the other accounts related to retirement as compared to the ones that saved in the 50th percentile to 75th percentile, when it comes to net worth. 

By the year 2019, reports from the Federal Reserve Survey of Consumer Finances, Bloomberg News states that the difference between the 10% of America’s richest and those between the middle-class was seen to be magnified by more than 12 times. 

Inequality in Retirement

Earlier, it was difficult to get a few million dollars into the Individual Retirement Account and sometimes impossible, except for few lucky investors. When the norms related to the IRA were framed, it was done so keeping in mind the stringent limits that decided how much could be contributed to the IRA or similar 401(k) accounts. 

Regardless of the type of IRAs, they were not easy to access by the rich, mainly since their tax benefits are potent. As a rule, the moment an investment is made into the Roth account, the proceeds that are earned from the account are never taxed till the time the investor is alive. 

Even after the death of the investor, the heirs will continue to enjoy the tax-free proceeds at least for a decade. 

As far as the Ultra-rich Americans that prefer to get their assets confined within the Roth IRAs, an extreme instance or example is that of Peter Thiel. Bloomberg News reveals that the ProPublica records show that in the month of June, citing confidential tax records, Peter Thiel amassed as much as $5 billion in Roth. In the year 1999, he placed his PayPal shares in his account, the time when the company was private. Within a span of 12 months, the value of the shares skyrocketed to $3.8 million from just $1664. 

According to Bloomberg Billionaires Index, Thiel is worth $7 billion. He used the Roth account for investing in similar stakes that were lucrative enough like in Facebook Inc and Palantir Technologies. 

A tax-free growth

In Silicon Valley, as per filings, it has been found that there are many founders, startups, and venture capitalists that have tried to tread the path of Peter Thiel. Bloomberg News reports that the co-founder of Facebook, Dustin Moskovitz, with a net worth of $27 billion has amassed $285 million in shares of Asana Inc in his Roth IRA. Asana Inc is a task management software firm he co-founded in the year 2008, as per filings. 

Building a Roth IRA worth multi-millions is a task that is next to impossible. However, for the ultra-wealthy, it becomes possible for them since they can inject millions into the account. 

The strategy that these rich people adopt is to amass wealth from any traditional retirement account and then get it converted into Roth IRA. 

Roth 401(k)s and Roth IRA are just opposite to what the traditional accounts are. The contributions comprise post-tax dollars, which will not lower the current tax bill. However, when it is in Roth, they will be treated as off-limits for the IRS if the account exists, and it can be as long as 10 years. 

A traditional IRA aside from a traditional 401(k) workplace retirement account that works, in the same way, can be converted into an IRA takes pre-tax dollars. Contributing to it, the tax bill can be lowered, and the growth can be tax-free at least for a short while. 

At least when the investor attains the age of 72, he must start using the traditional IRA, and the withdrawals that are made from here are taxable. 

Limits of contribution 

The official limit is that one cannot contribute beyond $6000 to the IRAs this year or $7000 if the age of the investor is above 50 years. The ones earning beyond $208,000 will not be allowed to contribute to Roth IRAs at any cost. 

Basic 401(k) plans have limits as well which will not be more than $19,500 in employee contributions in 2021 and with a $6,500 “catch-up contribution” for the people age 50 years and more. In actual cases, these limits have not been applied to rich Americans for the past 20 years. 


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Josie Patra
Josie Patra is a veteran writer with 21 years of experience. She comes with multiple degrees in literature, computer applications, multimedia design, and management. She delves into a plethora of niches and offers expert guidance on finances, stock market, budgeting, marketing strategies, and such other domains. Josie has also authored books on management, productivity, and digital marketing strategies.

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