Peter Thiel's $5B Roth Forces Congress...

[Gregmal]

You are focusing on the hand waving. The bottom line is that any dollar THEY can get their hands on they will try to. Especially if you dont have the numbers at your back. The more the numbers skew, IE income inequality, the more abusive they can be to the haves. The more haves or have offspring they turn into have nots, the more reliance on the system, the more reliance on the system, the better off THEY are. 

[ERICOPOLY]

Why don't they get outraged about billionaires having no limit to how many tax-exempt bonds they can purchase?

[ERICOPOLY]

Oh right... yah, forgot.  They need to spend more on their social programs than they can afford so they need the wealthy to buy their bonds.

[ERICOPOLY]

One point is that it isn't "tax free" -- it is "already taxed".

[LC]

I wonder (I don't have the $$$ nor the time...yea the time... to have explored this) but let's say I have a $5B IRA.

 

Can I make a deal with some financial institution headquartered in Panama or Poland or whatnot such that I carve out $1B of my IRA into a completely separate account and allow them to fully manage it, with the agreement that when I am able to redeem my tax free distributions, they own the full distribution of that entire account, in exchange for a $1B interest-free loan today?

Edited September 16, 2021 by LC

[aws]

I've always been somewhat afraid that someday Roth IRAs would be retroactively taxed. I thought it was pretty dangerous to put too many eggs in this basket as you have to count on congress never needing some new revenue source for a particular budget and for whatever reason deciding to target Roths. They were too new of a vehicle, being around only a few years when I first started mine, and I had 40+ years to go before I could actually reap the benefits.

 

In theory I don't mind capping benefits, as there's probably little social benefit to giving a tax deduction or exemption to people with over 10 million in an IRA, but any retroactive changes to the rules just feel wrong. It punishes people for being responsible and planning ahead to get the most out of the accounts, and can disrupt plans decades in the making. The benefits I would be ok with them limiting are removing the backdoor Roth, income capping Roth conversions again, and restrict new contributions for people with accounts above a certain limit. It's annoying, but prospective rather than retroactive changes are easier to swallow.

 

It sounds like this proposed law will be the first retroactive taxing of the accounts, as if you're under 59.5 and they force a withdrawal, then they likely are forcing you to take a taxable distribution, as the tax-free aspect doesn't kick in until 59.5. Who knows what they are going to think of next. I know that 30 years ago they penalized you if you took too much money out of an IRA, like over 150k in a year then there was a penalty surtax on that, So it was taxed, and possibly subject to both an early withdrawal penalty and this large distribution penalty. And if you had a big account and were over 70, then the required minimum distributions would kick in and they would be forcing you to take out that money they could tax and penalize.

 

 

[fareastwarriors]

The Hottest Tax Break for the Rich Is a Middle-Class Retirement Account

 

More than $279 billion sits in IRAs with at least $5 million each. They allow the wealthy to avoid taxes and pass on their fortune.

 

https://www.bloomberg.com/news/articles/2021-09-16/roth-ira-how-the-richest-americans-use-retirement-accounts-to-avoid-taxes?srnd=premium

[Castanza]

14 minutes ago, fareastwarriors said:

The Hottest Tax Break for the Rich Is a Middle-Class Retirement Account

 

More than $279 billion sits in IRAs with at least $5 million each. They allow the wealthy to avoid taxes and pass on their fortune.

 

https://www.bloomberg.com/news/articles/2021-09-16/roth-ira-how-the-richest-americans-use-retirement-accounts-to-avoid-taxes?srnd=premium

That article is pure class warfare propaganda. Sorry, but this attack on savings, family money, private property, assets and financial classes is sickening. It’s the same language the USSR used and it’s being used by OUR journalists and politicians alike. 

[boilermaker75]

Why don't they just confiscate all retirement accounts (IRAs, Roths, 401ks, etc) into the social security system and just give us the money they think we need in retirement?

[ERICOPOLY]

So... they are disallowing any investment that requires "accredited" investor status:

 

The bill prohibits an IRA from holding any security if the issuer of the security requires the IRA owner to have certain minimum level of assets or income, or have completed a minimum level of education or obtained a specific license or credential, Slott said.

“For example, the legislation prohibits IRAs from holding investments which are offered to accredited investors because those investments are securities that have not been registered under federal securities laws. IRAs holding such investments would lose their IRA status.

https://www.thinkadvisor.com/2021/09/13/ed-slott-weighs-in-on-house-democrats-proposed-mega-ira-crackdown/

 

So I take it Dhandho Holdings shares must be taken out of the IRA because Dhandho was offered only to accredited investors..  

 

One thing that I've read is that such a holding can be removed "in kind" from the Roth IRA before the Dec 2023 deadline.  Did they think about this?  How can I establish a value for the "in kind" distribution for tax purposes when I report tax on the early distribution?  And won't they accuse me of "self dealing" if I hand waive a value, or claim "book value" or something?

 

 

[SharperDingaan]

The enterprising lad would simply remove Dhandhro at an "in kind" valuation of zero, and argue that there is NO market for them. As the IRA is a deferred tax account, the resultant decline in the value of the IRA account - will also reduce tax paid when the funds are withdrawn. Get paid to take the junk out of your account 

 

SD

Edited September 23, 2021 by SharperDingaan

[ERICOPOLY]

I hold my Dhandho shares in my Roth IRA.  I have already paid the tax on them when I did my IRA to Roth IRA conversion over 10 years ago.

 

Now, if I take an in-kind distribution I owe a double tax.  And likely a 10% early withdrawal penalty since I'm 48.

Here's a logical idea:  taxes and penalties for early withdrawal from Roth IRA should ONLY be levied on accounts that are not yet large enough to support a retirement.  If you are age 48 (like me), and already have enough in the Roth IRA, why am I being discouraged from drawing it down?  They want me to keep growing it until I'm 59 1/2 at which time all withdrawals will be tax-free.  That's nonsensical.  Suppose it's worth $5m and I can live on that comfortably:  what's the point of strongly encouraging me (with tax penalties) to continue to grow it untouched until 59 1/2 when they bitch about that very thing at the same time?

 

[aws]

To the extent you have basis in the Roth IRA, like from the amount you were taxed on in the conversion, the distribution itself would not be taxable. It's only when you take out more than the sum of all your contributions and/or taxable conversions that anything starts to be taxed.

[Gregmal]

Well thank God we got Biden in there. I'm sure he'll fix this. LOL Voting has consequences. 

 

Jokes aside, I dont see how you can start going down a very slippery slope of retroactive taxes which is effectively what this is. It would be one thing to grandfather existing stuff in, but people have literally planned their whole lives with these type of things and now its like "oh you were too good give it up". Same thing with the 1031 exchanges. The groveling for new dollars to fund this ridiculous new budget is disgusting. 

[aws]

1 hour ago, ERICOPOLY said:

 

 

One thing that I've read is that such a holding can be removed "in kind" from the Roth IRA before the Dec 2023 deadline.  Did they think about this?  How can I establish a value for the "in kind" distribution for tax purposes when I report tax on the early distribution?  And won't they accuse me of "self dealing" if I hand waive a value, or claim "book value" or something?

 

 

 

The valuation issue is somewhat murky, but that's not a situation that is unique to Roth IRAs. It comes up all the time when valuing closely held businesses and real estate for things like gift and estate tax returns. You pick a value, usually apply a bunch of discounts for things like lack of marketability and lack of control, and then pay tax on the discounted amount. If the return isn't audited then it doesn't really matter, if it is, then what the agent would do probably depends on how egregious the calculation was. When I was in practice usually if you did anything that wasn't completely blatant, it sailed through an audit.

[ERICOPOLY]

1 minute ago, aws said:

 

The valuation issue is somewhat murky, but that's not a situation that is unique to Roth IRAs. It comes up all the time when valuing closely held businesses and real estate for things like gift and estate tax returns. You pick a value, usually apply a bunch of discounts for things like lack of marketability and lack of control, and then pay tax on the discounted amount. If the return isn't audited then it doesn't really matter, if it is, then what the agent would do probably depends on how egregious the calculation was. When I was in practice usually if you did anything that wasn't completely blatant, it sailed through an audit.

 

Currently the penalty for the crime of self-dealing is losing IRA status.  So full tax on entire Roth IRA is due.

[ERICOPOLY]

Peter Thiel won't have to give up his Roth IRA anyhow according to the reporting that I've been reading.  The $20 million limit only applies if you have over $400k of income, or over $450k of income for married couples.

 

So if he simply needs to quit his job and dispose of any income-paying investments outside of his Roth IRA.  Or generate enough losses to avoid any reporting of income. 

[aws]

I'd have to reread what they consider self-dealing, but I can't imagine how a valuation issue would trigger that. It's things like using assets owned by the IRA for your benefit, like staying in a rental property the IRA owns, or controlling a company the IRA owns. I still think Peter Thiel's initial Paypal windfall was shady, and could have easily been self-dealing, but most of the gains came after that, and he had other legal ways of bulking up his IRA if he really wanted so he probably could have replicated the same results legitimately.

[ERICOPOLY]

5 minutes ago, aws said:

I'd have to reread what they consider self-dealing, but I can't imagine how a valuation issue would trigger that. It's things like using assets owned by the IRA for your benefit, like staying in a rental property the IRA owns, or controlling a company the IRA owns. I still think Peter Thiel's initial Paypal windfall was shady, and could have easily been self-dealing, but most of the gains came after that, and he had other legal ways of bulking up his IRA if he really wanted so he probably could have replicated the same results legitimately.

 

Here's the thing... Dhandho for years now (insiders at Dhandho) has been buying back its shares at book value.  That values the GP at $0.

 

That's my only valuation input.  I just tell the IRS that the GP is worth $0?

 

Edited September 21, 2021 by ERICOPOLY

[ERICOPOLY]

Four years ago now, Dhandho said they were winding it up and investors could either exit at book value and stick around for the liquidation and hold only the GP interest in the end.

 

So it would be interesting if that were to occur by the end of 2023 and if I could then withdraw Dhandho from my Roth IRA at a $0 value.

[aws]

Sometimes a value of zero is reasonable. It happens a lot with start-ups. People have unvested equity awards and they can elect to pay tax on them early (called an 83(b) election), and there's usually some piece of paper the company gives them that values them at zero or a penny or something. Whether that's reasonable or not is another question, but when you have something you can point to like a piece of paper from the company or those buybacks then zero is probably ok. 

 

Incidentally, I'm hoping to claim zero value on some stock I did a conversion on. I owned stub shares of a company in a traditional IRA, that may or may not have a payout of up to 50 cents per share in a year or something, but Fidelity immediately marked them to zero. And I then rolled those shares into a Roth IRA at zero, and if I don't know for sure I am going to get any payment I think it's reasonable, especially if the payment happens in a subsequent year.

[ERICOPOLY]

4 minutes ago, aws said:

Sometimes a value of zero is reasonable. It happens a lot with start-ups. People have unvested equity awards and they can elect to pay tax on them early (called an 83(b) election), and there's usually some piece of paper the company gives them that values them at zero or a penny or something. Whether that's reasonable or not is another question, but when you have something you can point to like a piece of paper from the company or those buybacks then zero is probably ok. 

 

Incidentally, I'm hoping to claim zero value on some stock I did a conversion on. I owned stub shares of a company in a traditional IRA, that may or may not have a payout of up to 50 cents per share in a year or something, but Fidelity immediately marked them to zero. And I then rolled those shares into a Roth IRA at zero, and if I don't know for sure I am going to get any payment I think it's reasonable, especially if the payment happens in a subsequent year.

 

So people who want to withdraw their entire Traditional IRA accounts free of income tax can invest today in startups.  Then by 2023 remove those shares at a $0 valuation.  Then hold the shares in their taxable accounts and one day pay capital gains taxes which are lower tax rates than the income tax rates levied on Traditional IRA accounts.

[aws]

Well an unvested equity award is certainly a different animal than a venture capital investment done through a self-directed IRA. Obviously you couldn't mark the shares to zero without any reasonable basis, and it's such a niche situation that I couldn't imagine you could build a strategy around it.

[ERICOPOLY]

So with regards to the rules on withdrawing 100% above the $20m IRA limit or 50% above the $10m IRA limit. 

 

What's up with caveat that says this only applies to "high income" people?  Those with $400k income for single filers or $450k income for married. 

 

1.  People can just get divorced so that their combined can be up to $800k, or just never get married

2.  Doesn't this encourage earlier retirement for those with big IRAs, or encourage their companies to pay fewer dividends, etc...  In other words, won't they pay even less tax than they do now?

Edited September 21, 2021 by ERICOPOLY

[aws]

I agree it's a weird carve out. If no one changed their behavior at all as a result of the rule, then it probably benefits like a dozen people in the whole country. Mega IRAs are quite rare, and probably rarer still among those without a regular income above 400k. The few people it hits will certainly be incentivized to lower their income, if the alternative is they are forced to pay more tax due to these rules than the amount of money they otherwise would have made. 

Edited September 21, 2021 by aws