Billionaire Peter Thiel, co-founder of PayPal and chairman of Palantir Technologies, during a press conference in Tokyo, Japan on November 18, 2019.
Kiyoshi Ota / Bloomberg via Getty Images
Billionaire Peter Thiel and others with huge pension account balances are in the crosshairs of lawmakers.
House Democrats on Monday unveiled a tax package that would enforce nest egg distributions if the value of individual retirement accounts, 401 (k) plans, and other retirement reserves exceed $ 10 million.
Thiel, a co-founder of PayPal, owns a Roth IRA that was valued at $ 5 billion in 2019, based on tax filing data, according to a ProPublica report released in June. The IRA was worth less than $ 2,000 two decades earlier.
The House of Representatives legislation would require Thiel to withdraw all but $ 20 million, which, according to tax experts, almost empties the account.
Roth IRAs are a kind of after-tax account. Contributions are taxed in advance; Investment income is tax-free unless the owner withdraws funds after 59½ years.
Based on the current language of the bill, Thiel, 53, would owe income tax on his investment growth – meaning he would likely owe taxes on nearly $ 5 billion, according to Ed Slott, an accountant and IRA expert based out of Rockville Center , New York.
(This example assumes the IRA is his only retirement account and the account is still worth $ 5 billion.)
"The whole thing was written in response to Peter Thiel," said Slott of the House of Representatives legislation. "Because he fits the profile: he's in his 50s and has $ 5 billion."
Thiel did not immediately return a request for comment from CNBC.
His situation illustrates the tax implications that new distribution rules can have on Americans with so-called mega-IRAs.
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The House of Representatives proposal is one of several changes to tax law. The House of Representatives Committee on Ways and Means passed the tax package on Wednesday and put it to a vote in plenary.
"IRAs are designed to provide retirement security for middle-class families and prevent the super-rich from paying taxes," said Ron Wyden, D-Ore, chairman of the Senate Finance Committee.
New distribution rules
Current law requires withdrawals from certain retirement accounts based on age. A 2019 law also created distribution rules for inherited IRAs and 401 (k) plans.
House legislation would complement these rules and require wealthy savers of all ages to withdraw a large portion of total retirement assets annually. You would potentially owe income tax on the funds.
The formula is complex and based on factors such as account size and account type (pre-tax or Roth). Here's the general premise: account holders must withdraw 50% of accounts worth more than $ 10 million. Larger accounts must also consume 100% of the Roth account size over $ 20 million.
Here are examples of the amounts at stake: a person with a Roth account of $ 50 million will need to withdraw $ 30 million next year; a person with a $ 15 million pre-tax account would draw $ 2.5 million.
"This is a monumental change for anyone with more than, say, $ 6 million or $ 7 million in their IRAs," said Robert Keebler, an accountant and estate planner based in Green Bay, Wisconsin. "And it'll hit people over $ 10 million right away."
However, single taxpayers with income less than $ 400,000 and married couples with less than $ 450,000 are exempt from the rules.
"If (Thiel) is really clever and can bring his (adjusted gross income) below the threshold, he will avoid this new rule entirely," said Keebler.
Not just Peter Thiel
The number of taxpayers with IRAs above $ 5 million tripled to approximately 28,600 from 2011 to 2019, according to a recent analysis by the Joint Committee on Taxation, the congressional tax scorer.
According to IRS statistics, they make up less than a tenth of 1% of the roughly 70 million taxpayers with a traditional (pre-tax) or Roth IRA.
That said, the super-rich aren't necessarily the only ones with multimillion-dollar accounts – especially after the bull market in stocks emerging from the Great Recession.
"It's not just people like Peter Thiel," says Beth Shapiro Kaufman, estate planner at law firm Caplin & Drysdale. "I see professionals who have amounts that could be in the tens of millions because the time of their working life was a phenomenal time on the stock market."
Most people, however, should be able to comfortably live on $ 10 million in retirement savings, she added.