Proposed new Rules for IRAs and Roth IRAs

New rules are being proposed by the US House that could impact IRA and Roth IRA owners. In what appears to a response to billionaire Peter Thiel’s accumulation of $5 billion in a Roth IRA, the US House is targeting individuals’ large IRA balances with legislation that could result in new required taxable distributions and regulations. Two decades ago, Mr. Thiel, a founder of PayPal, funded a $2,000 Roth IRA with shares of the then privately held start-up company. That initial investment has now grown to approximately $5 billion. As a reminder, Roth IRAs are funded with after-tax dollars, if held for 5 or more years the growth is tax-free and after age 59 ½ distributions are tax-free. But making $5 billion in tax-free appreciation has raised some eyebrows in Congress for those seeking to help fund government projects.

In the latest proposal, individuals with high income and large IRA balances will be impacted the most. For individuals with income in excess of $400K and combined IRA, Roth IRA and employer retirement plans such as 401(k)’s, values in excess of $10 million will be required to make significant distributions. For example, an individual with $20 million in aggregate account values would be required to distribute 50% of the portion above $10 million ($5 million), in 2022. This would be taxed at the highest ordinary income tax rate. Individuals with over $20 million in combined account values, could be required to distribute 100% of the balance in excess of the $20 million level.

The new bill also seeks to close the door for those who wish to duplicate Mr. Thiel’s success, by prohibiting IRAs from holding shares of a private business owned or managed by the IRA account holder. Provisions would also prohibit investing in private placements of stocks, hedge funds, private equity, and other private partnerships in IRAs.

It is important to note that these changes are still in the proposal stage and will likely be modified before getting through the House, the Senate, and then signed into law by the President.

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