IRA’s With Alternative Assets And The IRS Crackdown

You may have seen headlines recently about proposals to crack down on IRA’s with large balances and alternative assets. More specifically, Paypal founder Peter Theil has really been in the spotlight with his ROTH IRA balance of $5 billion due to the appreciation of his Paypal stock and then subsequent investments. How did his balance grow to $5B when the contributions are limited to a very small amount each year? According to a ProPublica article, he purchased Paypal shares at $0.001 per share-yes, one tenth of a penny. In 1999, the ROTH contribution limit was $2,000 and the income limit was $110K. Paypal paid their executives a small salary with large stock grants. This is how Peter Theil was able to get 1.7 million shares of Paypal in his ROTH IRA purchasing them for a total of $1700-less than the ROTH IRA limit for that year.

Theil was not the only wealthy person to take advantage of this, he was just an early adopter. Eventually private equity firms discovered this and were using ROTH and Traditional IRA money to amass large fortunes with stocks from startups-essentially the same thing Peter Thiel did-virtually worthless stock at the beginning then watching it explode over time. Don’t forget, that once the money is in the ROTH and grows, you have more money to work with while still keeping it under the tax-free ROTH umbrella. Once Theil’s Paypal shares grew, he then had more capital to invest in other startups-such as Facebook.

If you have a ROTH IRA, you may have noticed that you get a tax form (5498) after the April 15th deadline. This Form 5498 is for informational purposes only and does not need to be filed with your taxes. The form is submitted to the IRS showing contributions, required minimum distributions and balances. This is how the IRS started seeing these retirement accounts balloon without any additional contributions.

Currently, there is a proposal to force distributions out of accounts with $10M balances at the end of the year for those with incomes over $400,000/$450,000 MFJ (“Ed Slott Weighs in on House Democrats’ Proposed Mega IRA Crackdown”).

Just to put things in perspective, if you go to ProPublica’s article (referenced below) you will see the value of Peter Theil’s ROTH IRA over time compared with that of the same dollar amount invested in the S&P 500. In 2019, when Theil’s ROTH IRA passed the $5B mark, the same dollar amount invested in the S&P 500 was worth $258,477. Now you can see why the IRS is making a fuss. The amount of tax revenue lost from this situation alone is huge.

References:

Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted. Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.

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