President Biden’s $1 trillion Infrastructure Bill and $3.5 trillion American Families Plan, aim to benefit future generations by investing in education, child and family support, renewable energy, transportation, buildings and utilities. The significant increase in federal spending is proposed to be paid through corporate income taxes and various taxes to the top 1% of Americans, or those making more than $400,000 per year. In particular, the House Ways and Means Committee proposed limitations on Roth IRAs.
You may have heard of the Lord of the Roth, Peter Thiel, the billionaire founder of PayPal. Peter turned his Roth IRA, worth less than $2,000 in 1999, into a $5 billion tax-free nest egg. He achieved this astronomical growth by depositing private equity investments and private stock in his own company into his Roth IRA, where the investment gains are sheltered from taxation. Thiel isn’t the only person to take advantage of this 1997 law that was intended to help, “hard-working, middle-class Americans”. Ted Weschler, a deputy of Warren Buffett at Berkshire Hathaway, had $264 million in his Roth in 2018 and Alden Global Capital hedge fund manager Randall Smith had $253 million in his Roth.
To address these loopholes, the House Ways and Means Committee proposed that as of 1/1/2022, individuals making more than $400,000/year (or couples making more than $450,000/year) will no longer be able to make back-door Roth IRA contributions – a two-step transaction that ultimately results in an annual Roth IRA contribution. Further, as of 2032, these high-income earners will no longer be allowed to make Roth IRA conversions, or taxable transfers from pre-tax IRAs to after-tax Roth IRAs that benefit from future tax-free growth. The goal is to stop high income earners from taking advantage of tax-free benefits, and simultaneously tax higher income earners now, to generate much needed government funding. Additionally,traditional and Roth IRA account holders with a balance of $10 million or more would be restricted from making new contributions and subject to new annual distribution rules, essentially creating a cap on all $10 million retirement accounts.
The 2020 U.S. debt to GDP level was 129%, leading many to believe the U.S. must rapidly reduce debt through increased taxation, reduced spending, and other means. As such, many suspect that we may encounter a higher tax environment in the near future. That makes Roth IRA contributions and Roth IRA conversions which benefit from tax-free growth and tax-free distributions more valuable than ever. Most middle-class Americans will not be prevented from utilizing these strategies. However, these transactions can trigger a large increase in income tax that you should be prepared for. Therefore, talk to your Certified Financial Planner™ or CPA early if you are interested in utilizing these tax strategies as a part of your comprehensive financial planning.
The opinions expressed above are solely those of Kondo Wealth Advisors, Inc., (626-449-7783 info@kondowealthadvisors.com) a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, Inc. nor its representatives provide legal, tax or accounting advice.
Sources:
Bob Veres Media, Insider Information
https://www.propublica.org/article/lord-of-the-roths-how-tech-mogul-peter-thiel-turned-a-retirement-account-for-the-middle-class-into-a-5-billion-dollar-tax-free-piggy-bank
https://www.statista.com/statistics/269960/national-debt-in-the-us-in-relation-to-gross-domestic-product-gdp/