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I’m a big fan of tax-advantaged retirement accounts. They really incentivize planning for the future, and are a phenomenally good deal if utilized appropriately, especially Roth IRA and Roth 401(k) accounts. If you start saving and investing early, you are going to slash your tax bill by literally hundreds of thousands of dollars over your lifetime. You could have a nice little retirement on your tax savings alone.
But keep in mind that 401(k)s and IRAs were never really intentionally designed to be the middle-class retirement investment vehicles that they have become today. 401(k)s came about in 1980 through fortunate happenstance, and once the IRS issued new rules to make them a bit more accessible, their popularity soared. Roth IRAs came about as a result of the Taxpayer Relief Act of 1997, and Roth 401k(s) followed a few years later in 2006. Today, we have a robust suite of retirement savings options for forward-thinking workers of any age or income level.
Even so, anything that was not intentionally engineered from the beginning, and that came about in a piecemeal fashion over many years, is going to have flaws. As helpful as 401(k)s and IRAs have been in allowing millions of Americans to retire comfortably, well, they have also helped people who really were not in need of assistance to retire a bit too comfortably. A pending legislative proposal from House Democrats seeks to change that.
The House Ways and Means Committee released an outline of new tax legislation this week which would bar those with retirement accounts valued at more than $10 million from making extra contributions. Additionally, this legislation would reform required minimum distributions for wealthy savers and repeal the availability of Roth conversions in IRA and 401(k) accounts for those making in excess of $400,000 per year. The proposed legislation would also clean up a number of other retirement account loopholes used by the very rich to achieve highly advantageous tax treatment, including closing the so-called “mega-backdoor Roth” loophole.
The proposed retirement account reforms are meant in part to generate additional tax revenue as Democrats pursue the means to pay for their pending $3.5 trillion infrastructure plan. But these reforms are also a way of ensuring basic fairness in the retirement system. Democrats were outraged to find out, after reading a recent ProPublica report, that PayPal co-founder Peter Thiel owned an IRA valued at $5 billion as of 2019 thanks to some of the retirement account loopholes the new legislation seeks to change.
Right now, Thiel is apparently earning investment gains tax-free on his $5 billion IRA. Assuming a fairly conservative 7 percent rate of return, that’s about $350 million in annual investment income that Thiel, a multibillionaire, does not have to pay a dime of taxes for under the current legal framework as long as he waits to withdraw any of his investment gains until spring of 2027, when he will be 59 ½ years old.
One out of every four working-age Americans does not have anything saved for retirement, according to a 2020 Federal Reserve study, and keeping the rich from achieving huge tax windfalls through the retirement system won’t necessarily help any of those people directly. But it would mean a lower tax burden overall for medium- and low-income people as the ultra-rich picked up more of the slack. It would help ensure the integrity of the IRA and 401(k) savings systems that middle income taxpayers have come to rely on too.
If you don’t have an eight-figure retirement account, or an annual income over $400,000, you have nothing to worry about in these new retirement account reform rules. You do have a lot to think about, however: namely whether the ultra-wealthy need the same favorable tax treatment you do in order to achieve a comfortable retirement. Assuming they don’t, we all might as well get behind these proposals and try for a fairer system of retirement savings. Plus the taxes on even one $5 billion investment account could sure build a lot of roads and bridges.
Jonathan Wolf is a civil litigator and author of Your Debt-Free JD (affiliate link). He has taught legal writing, written for a wide variety of publications, and made it both his business and his pleasure to be financially and scientifically literate. Any views he expresses are probably pure gold, but are nonetheless solely his own and should not be attributed to any organization with which he is affiliated. He wouldn’t want to share the credit anyway. He can be reached at jon_wolf@hotmail.com.
Chris Williams became a social media manager and assistant editor for Above the Law in June 2021. Prior to joining the staff, he moonlighted as a minor Memelord™ in the Facebook group 
