Peter Thiel, the billionaire co-founder of PayPal.
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Democrats appear to have spared wealthy Americans like billionaire tech mogul Peter Thiel from huge tax bills on their huge Roth savings for retirement by enacting law this week.
That interruption is thanks to a new language in a $ 1.75 trillion social and climate measure that revolves around required withdrawals from Roth accounts. Moving to an earlier version of the plan protects the withdrawals from the tax.
House Democrats proposed a law Wednesday that would force taxpayers with retirement accounts totaling more than $ 10 million to withdraw money every year. (A similar proposal in September was removed from the legal framework in October but then re-added.)
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The rule aims to curb the use of 401 (k) plans and individual retirement accounts as tax protection for the rich. It would ensnare investors like Thiel, a co-founder of PayPal, who have so-called mega-IRAs.
Thiel, for example, had a $ 5 billion Roth IRA in 2019, according to a ProPublica report released in June based on tax return data. (The IRA was worth less than $ 2,000 two decades earlier.)
According to tax experts, the original proposal of the house would probably have forced Thiel to almost empty the account in the next year. Because of his age, Thiel, 53, would have owed income taxes on any portion of the deduction attributable to investment growth – meaning he likely owed taxes on nearly $ 5 billion, tax experts said.
However, Wednesday's updated proposal would exempt him – and other young investors with large Roth accounts – from taxes.
"They didn't tax (Thiel's) forced evictions," said Ed Slott, an accountant and IRA expert at Rockville Center, New York, of lawmakers. "That is new."
There are very few people with large Roth accounts – only 818 taxpayers had Roth accounts worth more than $ 10 million in 2019, the Joint Tax Committee said in July. They hold about $ 25.7 billion.
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Roth IRAs are a type of after-tax savings account.
They have many advantages: investments grow tax-free, withdrawals in retirement are not taxable. Investors do not have to withdraw any money even after the age of 72, as with other retirement accounts.
Investors like Thiel have been able to use Roth IRAs to amass wealth, sometimes by buying large stakes in high-growth startups and protecting those wealth from taxes, according to the ProPublica research.
However, there are situations where the federal government will tax investment growth on a Roth account.
IRA owners will only receive the tax break if they withdraw cash after the age of 59½ and if their account is at least five years old. This is a "qualified distribution" within the meaning of federal tax legislation.
Anyone who withdraws funds and does not meet these conditions (i.e. the account is too new or the investor too young) will be subject to tax on their investment income.
It's a big change.
Accountant and estate planner
The House of Representatives' complex tax proposal generally forces investors to withdraw 100% of Roth's savings over $ 20 million. (There may be additional withdrawals for amounts smaller than $ 10 million.)
But the first version in September did not exempt investors under 59½ years of age from income tax on capital gains that are withheld. However, the proposal presented on Wednesday treats it as a "qualified distribution" that is tax exempt.
"It's a big change," says Robert Keebler, an accountant and estate planner from Green Bay, Wisconsin.
However, the change is fair and workable, said Keebler. Imposing taxes on these funds would mean the government is breaking a promise with the Roth IRA owners, he said.
Of course, the rich would still be forced to withdraw copious amounts of money and determine where to park the funds – perhaps in less tax-friendly oases.
Aside from treating Roth IRA payouts as "qualified," the House of Representatives proposal spared Thiel and other taxpayers with yet another change, according to tax experts.
The original proposal would have put these new required minimum distribution rules into effect in 2022. The updated version would take effect from 2029.
Thiel will then be 60 years old – and could receive tax-free Roth payments anyway.
Thiel did not respond to a request for comment from Palantir, where he serves as chairman of the board.