Democrats can change the rules for “mega” IRAs of more than $ 5 million

Democrats can change the rules for individual “mega” retirement accounts with more than $ 5 million to help fund their expansion of the country’s safety net.

“Mega retirement accounts” fall into about two dozen tax categories, Congress Democrats are looking at to help raise money for a $ 3.5 trillion spending measure, according to a CNBC mailing list .

The policy “would require taxpayers to distribute the balances of retirement accounts that exceed certain thresholds,” according to the list, which is a draft of ideas that lawmakers gather before formally presenting them to the House or Senate.

This rule would function essentially as a new type of mandatory minimum distribution tied to account value rather than age.

The list does not specify an exact account threshold, but suggests that the limit may be $ 5 million. (Indicates that the number of mega IRAs with more than $ 5 million has tripled in the last decade, while the average balance of the middle-class account is $ 39,000.)

The political idea is part of a broader issue of raising taxes on the rich to pay for education, the climate, paid leave, childcare and other measures.

It also emerges from a recent ProPublica report that Peter Thiel, co-founder of PayPal, owns a Roth IRA that grew to $ 5 billion in 2019, from less than $ 2,000 in 1999.

Some Democrats used this report as proof that the rich use IRAs as a tax haven instead of an account where to build a nest egg. Others, however, do not believe that account owners should be punished for accumulating wealth within the legal railings of the retirement system.

“[Democrats] have this general idea that the rich take advantage of the system and do not pay their fair share [of taxes]”According to Albert Feuer, attorney in employee benefits and estate planning in Forest Hills, New York.” obviously, this is a matter of your sense of fairness and fairness. “

The Democrats ’draft list does not provide some key details, such as how a proposal would require account holders to withdraw funds or whether it would apply to both traditional and Roth accounts.

Mandatory distribution from a pre-tax account would require account owners to pay taxes for withdrawal. Roth IRA distributions would be tax-free, but future income from these funds (dividends, for example) will incur taxes.

More than 28,600 taxpayers had IRAs in excess of $ 5 million in 2019, according to an analysis by the Joint Committee on Taxation released in July.

They account for less than one-tenth of 1% of the approximately 70 million taxpayers with a traditional IRA or Roth, according to the latest IRS statistics.

These mega accounts have a total of $ 280 billion, according to the Committee’s report, or about 3% of the IRA’s $ 8.6 trillion.

Nearly 500 people have IRAs in excess of $ 25 million; accounts have an average of about $ 150 million.

Limiting the size of large retirement accounts is not a new concept.

President Barack Obama proposed limiting IRAs to $ 3 million in his annual budget. Senator Ron Wyden, D-Ore., Who currently chairs the Senate Finance Committee, proposed legislation in 2016 that would require the Roth IRAs to distribute 50% of the balances above $ 5 million each year.

Wyden’s proposal is a good guide for IRA distributions in case Democrats get enough support for the idea of ​​the final legislation, Feuer said.

“Roth is great [financial] planning tool, “said Leon LaBrecque, certified accountant and financial planner at Sequoia Financial Group in Troy, Michigan.” That would reduce it to some extent. “

New distribution rules may make some financial strategies more popular, such as donating withdrawn funds to charities to reduce the tax bill.