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The number of multi-million dollar individual retirement accounts has grown over the past decade as wealthier Americans use tax-privileged vehicles to protect wealth from income taxes, according to new data released by Congress today.
The data shows, for the first time, how much money has been wasted on tax-free Roth mega accounts: more than $ 15 billion held by just 156 Americans.
The new data also shows that the number of Americans with traditional and Roth IRAs worth over $ 5 million has tripled to more than 28,000 between 2011 and 2019.
The data was provided by Senate Finance Chairman Ron Wyden, D-Ore., And House Ways and Means Chairman Richard Neal, D-Mass. requested after ProPublica investigated the rise of mega-Roth IRAs last month. The story, based on ProPublica’s confidential IRS data, revealed that technology mogul Peter Thiel owns the largest known Roth IRA, valued at $ 5 billion as of 2019.
In a Finance Senate hearing on retirement Wednesday, Wyden said such massive accounts highlight the country’s inequalities. “People at the top – at the very top – are able to play the rules to get ahead and basically abuse taxpayer-subsidized accounts with expensive accountants and lawyers,” said Wyden. “This increases the pre-existing pension inequality between retirees and the dispossessed to an extreme level.”
Roth IRAs were formed in 1997 to encourage middle-class Americans to save for retirement. Congress has set strict limits, including a cap on how much money can be deposited into the accounts each year, which is now $ 6,000 for most Americans. The average Roth account was worth $ 39,108 at the end of 2018.
But a select group of the ultra-rich has managed to bypass the limits set by Congress and turn the vehicle into powerful tax protection on land. One way to do this is to buy non-public stocks of companies with extremely low valuations. This enables them to put a huge volume of shares in a retirement account. Congressional investigators previously determined that the IRS had difficulty enforcing rules on these investments, including whether the ratings are legitimate.
As soon as money has been deposited into a Roth account, all income from investment gains is tax-free. For example, a Roth owner who sells a successful technology investment for a profit of $ 1 million can keep all of the money, potentially saving $ 200,000 in federal taxes. The savings can then be reinvested tax-free as long as the Roth owner waits with the payment until he is at least 59 and a half years old. Traditional IRA owners, on the other hand, enjoy tax-free growth but must pay income tax on withdrawals. The Roth is considered to be the more powerful tax avoidance tool for the rich.
The latest figures come from analysts on the non-partisan mixed tax committee of Congress. They update a much-cited study by the Government Accountability Office that released numbers on major IRAs in 2011.
The new numbers show that in 2019, nearly 3,000 taxpayers owned Roth IRAs worth at least $ 5 million. (The total of more than 28,000 people owning IRAs of this size includes both traditional and Roth IRAs.) The total value of these Roth IRAs was more than $ 40 billion.
Democratic senators call for investigation into tax avoidance of the ultra-rich
Both Wyden and Neal said in their statements that the new numbers show the need for reform. Neal said that “IRAs are designed to help Americans achieve long-term financial security, not to enable those already of extraordinary wealth to avoid their fair share of taxes and deepen existing inequalities in our nation,” Neal said Earlier this month, following the ProPublica article that the Ways and Means Committee would draft a bill to “stop the exploitation of IRAs”.
For his part, Wyden said, “As the Finance Committee continues to develop proposals to make tax law fairer, closing these loopholes will be a top priority.” Wyden first proposed a revision of the IRA rules a few years ago to prevent the accounts to be used as large tax havens. A discussed reform would prohibit investors from putting assets that are unavailable to ordinary Americans, such as startup company stocks, into retirement accounts.
Wydens and Neal’s drive for reform comes as Congress considers bipartisan pension legislation. The bills are designed to help ordinary Americans save for retirement, including by proposing that workers be automatically enrolled in employer-funded retirement plans. But they also include perks for the annuity and finance industries, such as relaxing rules that are seen as a boon for insurers. And buried deep within the two complex bills are provisions that could make it difficult for the IRS to take action against the ultra-rich who evade tax regulations.