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

[ERICOPOLY]

Another question is...

 

What if you make a real estate investment in a Roth IRA?  Do you mark the valuation at the price you paid and then reduce its value each year as you depreciation it?

 

 

 

[ERICOPOLY]

Need long life appreciating assets that depreciate on paper.

[aws]

There wouldn't be any place to report depreciation deductions if the assets were owned directly, nor any benefit from doing so. You would report the value on form 5498, and they want you to report fair market value. So just like you would report the current market value of stocks, not original cost basis, you would report the current fair market value for real estate and not some cost minus depreciation calculation like you might do for a partnership or individual tax return. This is a snippet from the instructions to the form 5498:

 

"Trustees and custodians are responsible for ensuring that all IRA assets (including those not traded on established markets or not having a readily determinable market value) are valued annually at their FMV"

 

 

[ERICOPOLY]

How do you do that in practice? 

 

Tax assessed value?  My parents' home is assessed at about 5% of market value.

 

Or do you have to order an appraisal every 12 months?

[Munger_Disciple]

2 hours ago, ERICOPOLY said:

 

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

 

 I am pretty sure the valuation of the "in-kind" asset distribution needs to be performed by an independent valuation company. I believe it is currently the case for small business pension plans. 

[aws]

I would say you could use any reasonable method for the annual value reporting since it doesn't really matter for anything. If it were me I'd probably just use something like a zillow estimate or something as it wouldn't take any work and would be at least somewhat reasonable. It's when you take it out of the IRA that you would want to have something like an appraisal to support your value, because then it actually affects your income.

 

Valuation issues come up all the time. There can be very wide discrepancies between what someone reports and what the IRS would agree to. For a dramatic example just look at the Estate of Michael Jackson court case that was recently wrapped up. The Estate claimed a value of something like $5 million, the IRS said it was more like $1 billion and whacked them with massive taxes and penalties, but in the end they won in court and got all the penalties thrown out and only paid tax on about $100 million.

 

In my experience, if you start with something reasonable, then even if you get audited it's likely going to sail right through. It's when you claim something egregiously low that they go after you hard. Claiming zero is as low as you can get, but at least you can support it, there's no clear alternative value, and I assume it's not a huge dollar figure unlike the MJ case, so I doubt you would have issues if it comes to that.

 

While this law may add a new reason people may be forced to take money out of IRAs, required minimum distributions have been around a long time and they are essentially the same thing. I imagine there must be some court cases in which people have held those types of assets in an account subject to RMDs where this issue came up. There you would need to not only figure the value, but you'd need to do so every year and it would affect both how much you need to take out of the IRA and how much you pay tax on. I'd look for how the court and the IRS handled that issue since it will basically be exactly what you are talking about now.

Edited September 21, 2021 by aws

[ERICOPOLY]

37 minutes ago, aws said:

It's when you take it out of the IRA that you would want to have something like an appraisal to support your value, because then it actually affects your income.

 

 

 

 

I was thinking of the case where it matters what account value you report to them annually because of these new $10m and $20m account thresholds.  They may accuse you of self-dealing or whatever if you don't have them independently valued annually. 

 

They want you to withdraw half of your gains above $10m, or all of the account value above $20m.  So if they argue that you're misreporting those values, heaven help you when they strip away your IRA status and tax the entire account.

 

 

 

[aws]

Yeah, that will be more of a headache if it comes to pass. Presumably they will issue guidance by the time it becomes effective so we would know more than we know now about what they would consider reasonable.

 

And if you think that's bad just imagine the accounting nightmare that would happen if some type of wealth tax were ever passed. There every asset of every person would need to be valued every year no matter how it is held. And of course they'd need to supplement it with a million rules to avoid you shifting assets to relatives to get under the taxable threshold, so you would need to look at not just your assets but also the aggregate assets of your family to determine the tax base.

Edited September 21, 2021 by aws

[ERICOPOLY]

Roth IRAs do have the rather HUGE disadvantage in that they grow INSIDE of your estate.  You cannot move your Roth IRA assets into a trust without first withdrawing the assets from the Roth.

 

So, trapping billions into a Roth IRA means that the money WILL be in the taxable estate.

 

Not allowing more money in the Roth IRA will put it back into trusts where they'll avoid estate taxes.

Edited September 22, 2021 by ERICOPOLY

[ERICOPOLY]

The Treasury may be better off with billionaires like Peter Thiel being trapped in the Roth IRAs because 40% estate taxes will apply to almost the entire thing when he dies.

 

He could have instead put those assets into trusts where the Treasury would see nothing when he dies.

[scorpioncapital]

i don't know trusts very well, but can anyone invest or put their wealth into a trust and the tax man won't be able to get it at death? Does it mean that if you don't do this you are pretty much just volunteering to give your money back to the state when you pass on? 

[ERICOPOLY]

5 hours ago, scorpioncapital said:

i don't know trusts very well, but can anyone invest or put their wealth into a trust and the tax man won't be able to get it at death? Does it mean that if you don't do this you are pretty much just volunteering to give your money back to the state when you pass on? 

you can put assets into the trust up to your lifetime gift tax exemption which is 11.7m this year or 23.4m per married couple.  That will likely decline to 5m/10m on January 1st, 2022.

 

Peter Thiel was limited to contributing $2,000 a year to his Roth IRA so gift size to a trust would not have been an issue. he made the mistake of not putting it in a trust.

 

So now treasury will likely swipe 40% of it in income tax by forcing him down to $20m before he reaches age 59.5.

 

so crazy… after estate taxes, Treasury will be getting about 2/3 of his account.

The Thiel family:   1/3

 

Had he put it in a Trust it would all belong to the trust and none would go to Treasury.

3/3, or 1/3?  You tell me, is a Roth IRA the way to go?  So crazy.

 

 

 

 

 

 

 

Edited September 23, 2021 by ERICOPOLY

[ERICOPOLY]

And Peter Theil would be paying capital gains tax, not income tax rates, if he had just held it in a taxable account instead of the Roth.

 

Applying an income tax to this is completely unjust because he is being forced to withdraw the money.

[scorpioncapital]

wow, well one has to be critical of a system that you have to do all these complex things so the state don't trick you out of 2/3 of your wealth. Maybe he was sloppy but the system needs to be much simpler too.

[TwoCitiesCapital]

8 minutes ago, scorpioncapital said:

wow, well one has to be critical of a system that you have to do all these complex things so the state don't trick you out of 2/3 of your wealth. Maybe he was sloppy but the system needs to be much simpler too.

 

Eh, the estate stuff isn't "tricking" YOU

out of your wealth. As long as you're alive, you can spend the proceeds of the IRA tax-free. That's not tricking YOU out of anything. Spend what you want, when you want, tax-free. Seems like a good deal to me!

 

It's the family who didn't earn it, didn't save it, and didn't grow it, but still feels entitled to it that is "tricked"... and they're still receiving a hefty chunk for  nothing by virtue of the ovarian lottery. 

 

Ultimately agree that this shouldn't be applied retroactively. It's unfair to change the rules of the game after you've won. But I don't mind there being a reasonable cap on Roth IRA allowances in the future.

 

I'm also ok with getting rid of backdoor IRA contributions. I've used the strategy myself the last 2 years, but it is clearly an abuse of the intended limitations given the income restrictions they have on direct contributions. As long as it's legal, I'll do it - but  absolutely in favor of closing this loophole. 

Edited September 23, 2021 by TwoCitiesCapital

[Gregmal]

Yea what these sons of bitches(or in some cases, just "bitches") are doing is effectively stealing from Peter Thiel, who happens to have been a critic of many of them. There is no argument that Thiel is 100% the reason for this new "rule", nor is there any doubt that his money is the target....Outrageous. 

[SharperDingaan]

Keep in mind that if the withdrawal is to fund a charity, there will be a reduced tax bite  

Put an animal shelter on the side of your barn, have the charity pay for it, and hire your kids to do some of the work (nothing says you cannot be a main beneficiary). Even have the charity pay to send one to veterinary school, conditional of concurrent care of the animals in your shelter ....  

 

Lots of possibilities - but if you want a luxury vessel to document coral destruction in the carribean, expect some 'resistance'. You'll need to have at least 1-2 researchers on your boat, at least every 6 months or so - but the rest of the time, she's yours! 

 

SD

[ERICOPOLY]

I believe Peter Theil can always take the after-tax $3,000,000,000 in cash and loan it long term to his kids so that they can grow it in their names.  Or they can in turn turn around and lend it to their own kids so that it's invested under the names of Peter Thiel's grandchildren.

 

If Theil lives another 30 or 40 years inflation will have eroded the value of the $3 billion he lent out.

 

At the moment, the IRS makes you charge a minimum of 1.74% interest for such loans if they are of long term duration (longer than 9 years).

 

[scorpioncapital]

On 9/23/2021 at 11:59 PM, SharperDingaan said:

Keep in mind that if the withdrawal is to fund a charity, there will be a reduced tax bite  

Put an animal shelter on the side of your barn, have the charity pay for it, and hire your kids to do some of the work (nothing says you cannot be a main beneficiary). Even have the charity pay to send one to veterinary school, conditional of concurrent care of the animals in your shelter ....  

 

Lots of possibilities - but if you want a luxury vessel to document coral destruction in the carribean, expect some 'resistance'. You'll need to have at least 1-2 researchers on your boat, at least every 6 months or so - but the rest of the time, she's yours! 

 

SD

 

why should the government make me jump through hoops about how i should structure my life to avoid tax.

GET GOVERNMENT out of human life is my motto. It is destroying the world almost everywhere but the Westersn socialist 'democracies' are the worst.

[SharperDingaan]

The reality is that every libertarian has to live in the 'real' world, and every year he/she gets older. When you have nothing to lose, and the energy of youth, libertarianism is easy. However, once our libertarian has something to lose, and is tired - he/she has to make a bed, and live in it. Gretting old sucks! 

 

Ultimately he/she picks a location, then plays within the local rules/regs to their advantage. Sure, he/she might not like all the individual rules/regs - but usually it is not enough to cause a permanent move to another country with different rules/regs.

 

 In NA, individuals are generally free to choose what they will/will not do

.... in most other locations, that just isn't true.

 

SD

Edited September 25, 2021 by SharperDingaan

[TwoCitiesCapital]

On 9/25/2021 at 8:41 AM, SharperDingaan said:

The reality is that every libertarian has to live in the 'real' world, and every year he/she gets older. When you have nothing to lose, and the energy of youth, libertarianism is easy. However, once our libertarian has something to lose, and is tired - he/she has to make a bed, and live in it. Gretting old sucks! 

 

Ultimately he/she picks a location, then plays within the local rules/regs to their advantage. Sure, he/she might not like all the individual rules/regs - but usually it is not enough to cause a permanent move to another country with different rules/regs.

 

 In NA, individuals are generally free to choose what they will/will not do

.... in most other locations, that just isn't true.

 

SD

+1 

 

I generally identify well with the Libertarian idealogy, but I also like roads, and bridges, and defense, and the internet, and etc. 

 

I agree that taxes are necessary and I value the services the government provides. Even if I don't drive on every bridge or road in my city, I'm the beneficiary of the economic activity they bring to the area. Even if I don't have children, I support programs that help children of those in need bec society is better for it. Etc. Etc. 

 

Why must we raise taxes? Because, we the people have had multiple opportunities to support candidates who could've lowered spending over the last 21 years, but we as a country always chose not to. So if we're not gonna cut spending, higher taxes it is.