A new tax provision meant to target ‘Mega Roth’ owners would merely undermine Americans’ trust in retirement savings.
A new tax provision meant to target ‘Mega Roth’ owners would merely undermine Americans’ trust in retirement savings.
‘B uild Back Better,” the federal spending plan recently passed by the House, has a provision in it that is clearly a piece of political theater. Among other things, the bill sets out to change the rules surrounding Roth IRAs, including a strong retrospective element, which seems to have been inspired by one particular person for whom the Left has — how to put it — very little affection: Peter Thiel.
Before anyone asks: No, I do not have any business or other financial ties with Mr. Thiel. We are friends, but not business associates. I did interview Thiel for my podcast on the Salem Podcasting Network in May.
Earlier this year, private IRS tax information on some of the nation’s billionaires — think Jeff Bezos, Warren Buffett, and Peter Thiel — was leaked to the liberal news site ProPublica. According to the reports, Thiel had the foresight to put roughly $1,700 worth of his early ownership shares in PayPal into his Roth IRA in 1999. At the time, the shares were valued at pennies — if that. Later, PayPal exploded in value. Thiel then did something similar with other early-stage stocks such as Palantir and Facebook. The extremely high returns on those high-risk and eventual high-reward investments left him with a Roth worth billions.
Of course, the whole thing was audited by the IRS. That’s how there was so much information to leak to a politically hostile media outlet. According to ProPublica, this audit happened during the Obama administration, which wasn’t known for having a politically balanced IRS. (Remember all those Tea Party groups with charitable-status applications caught in bureaucratic purgatory until after the election?) And yet, after the audit, Thiel was apparently not found to owe any additional taxes.
That’s because what he did was legal. There were no limits under the rules governing Roth accounts as to how successful an investor was allowed to be. It didn’t matter if Thiel had succeeded beyond the wildest nightmares of the tax takers, because it’s the law that matters, not whether an individual taxpayer outplays the IRS on the IRS’s own rules. No taxpayer is obligated to pay more than the law requires, whether the government likes it or not.
But sometimes the government really, really doesn’t like it, which can lead to what we’ve witnessed over the past six months: private information gets leaked and a willing press acts as a carrier for illegally leaked data. Worse yet, in this case, immediately afterward Senator Ron Wyden (D., Ore.), chairman of the Senate Finance Committee, proposed revisiting the law in a way that would crack down on “Mega Roth” owners. When initially constructed, the law essentially took the form of a deal. The government basically said, “Trust me. Pay the tax up front when you put it in the Roth and we won’t take it later.” Every single person I have ever discussed a Roth with has always harbored some doubts about that deal. While Roths are funded with “post tax” money, would the government really be able to resist the temptation to come back and take another bite later? In the case of this new provision in Build Back Better, the answer is no.
As business professor Luke Burgis has outlined, the attempted scapegoating of Thiel really got rolling after Thiel endorsed Trump in 2016. It reached a high-water mark this year with the (coincidental?) leaking of IRS data, and a very hostile biography from Max Chafkin. Moreover, this attempt by Democrats to rewrite the Roth rules will, if successful, hit him hard. To some it might look as if this is not about mega reform but about MAGA revenge.
“But I’m not a billionaire!” you say. Well, neither was Thiel when all this started. But the bigger point here is that this stuff starts with billionaires who have the nerve not to toe the expected political line — or perhaps with those who have made themselves very rich. It starts with the easy target, then works its way down to the rest of us. Recall, for instance, that the original income-tax proposal was touted as being only for the very wealthiest.
The set of Roth restrictions is detailed and broad: limits on conversions from regular IRAs to Roths based on income; restrictions on use of private equity by qualified investors; limits in how large Roths can get and forced distributions on high-value Roths. That last point is the most damaging because it’s the one that changes the deal retroactively. If this change gets through the Senate it will do irreparable harm to any aspect of the tax code that involves a similar bargain for taxpayers. Any provision that effectively says “pay now and we won’t come back for a second chunk later” will heighten skepticism, and not just among billionaires. At a time when Americans need to be encouraged to save more for their retirement, anything that tarnishes the credibility of Roth plans is, to say the least, counterproductive. Aging Americans need more, not fewer, retirement assets.