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U.S. President Joe Biden

The federal spending bill now awaiting a House vote would slam the door on Roth IRAs for well-off Americans and stop so-called “back-door” conversions of traditional retirement accounts into Roths. Spurred by reports of billionaires with giant tax-sheltered IRAs, the proposed changes are a move to return the Roth IRA to its middle-class origins.

If signed into law, the new rules would bar IRA contributions by individuals whose retirement accounts exceed $10 million and whose annual income exceeds $400,000. Balances above $20 million could require withdrawals. Taxpayers above that same income level would be barred from Roth conversions.

The Roth revisions won’t matter to 99.99% of those using the accounts, says Ed Slott, an accountant and IRA expert, because middle-income savers won’t trigger the income or account-balance cutoffs. Even those with large retirement balances can plan around some of the proposed changes by keeping their income below $400,000. But those with both large balances and heftier incomes could find their options limited if the new rules become law.

The Roth IRA came into being in 1997, through the efforts of William Roth Jr., a Republican Senator from Delaware. Before then, contributions to a traditional retirement account weren’t taxed when they went in. Only when the savings were withdrawn years later was tax due, presumably then at the low tax rates applied to a retiree’s modest income. Roth IRAs reversed that tax treatment: Contributions counted as taxable income when made, but withdrawals were tax-free.

Roth accounts were intended as an additional way for middle-class America to save. But a June expose in ProPublica reported that billionaires like Peter Thiel were using their Roth IRAs to shelter hundreds of millions of dollars in investment gains. The nonprofit newsroom said it had received copies of tax returns for many wealthy Americans. ProPublica reported that Thiel— a founder of

PayPal Holdings and


Palantir Technologies

and the first outside investor in


Facebook

— had $5 billion in his Roth IRA.

According to ProPublica’s reporting, Thiel was able to seed his Roth account with shares of a start-up company—then valued at $2,000 or less. When the company became a success, those shares grew in value. In 2027, when Thiel is 59 and half, he’ll be able to make withdrawals tax-free.

But not if the new rules take hold before then: They would force taxable distributions by Thiel and others with huge IRA balances. ProPublica said that Thiel didn’t respond to its questions. Barron’s queried spokespeople and attorneys who have represented Thiel, but they didn’t respond.

The news of these mega-IRAs dismayed many in Washington. In July, Senate Finance Committee Chair Ron Wyden (D., OR) and House Ways and Means Committee Chair Richard Neal (D., MA) released a tally showing that since 2011, the number of Americans with traditional and Roth IRA balances of $5 million or more has tripled—to 28,000 individuals whose balances aggregate to $279 billion. Nearly 500 taxpayers had IRAs worth $25 million or more, with the average balance in those accounts topping $150 million. The average Roth IRA balance among the 156 largest accounts was $100 million.

“It is shocking, but not surprising, to see how the use of mega-IRA accounts by mega-millionaires and billionaires has exploded,” Wyden said in a press release. “IRAs were designed to provide retirement security to middle-class families, not allow the super wealthy to avoid paying taxes.”

The repercussions of these IRA revelations can be seen in the spending bill reported out to Congress this week. For people earning more than $400,000 (and couples above $450,000), the bill would bar IRA contributions in any year following the year in which the person’s retirement accounts had exceeded $10 million. Counted toward the $10 million aggregate would be a person’s traditional IRAs, Roth IRAs, and even the employer programs known as 401(k) plans.

Taxpayers in those same income brackets would also have to take distributions from their retirement accounts equal to half the amount exceeding the $10 million ceiling, and any Roth amounts that lifted the total above $20 million.

For those same high-income taxpayers, the bill would also close a back door to Roth tax treatment, under which traditional IRAs and 401(k) savings, after a one-time tax payment, were allowed to convert into never-again-taxed Roth accounts.

The end of Washington’s spending battles is hard to forecast, says Slott, an accountant and IRA expert. But he’s seeing little opposition to most of the Roth revisions in the current House spending bill. “Obviously, Congress doesn’t like large retirement balances,” Slott says.

One provision that is drawing criticism from well-heeled corners, notes Slott, is a prohibition against an IRA holding investments available only to “accredited investors”—that is, the high-net-worth and presumably sophisticated folks that federal securities laws allow to invest in private placements of stocks, or in hedge funds, private equity, and other private partnerships. Also prohibited as IRA holdings would be shares in a private business owned or managed by the IRA account holder.

Slott believes that Roth IRAs should remain an attractive hedge against future increases in federal tax rates. But that might not be the case for much longer for high earners with billions of dollars in retirement accounts.

Write to Bill Alpert at [email protected]

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