Backdoor Roths might be going away

[raangoli]

Americans who are using this “backdoor Roth” tax strategy may be out of luck as the House Ways and Means Committee legislative tax proposals would prohibit some of its uses. The provision is part of the tax increases aiming to partly fund the $3.5T economic reconciliation bill.

finance.yahoo.com/news/back-door-retirement-strategy-goes-133830627.html

This would only impact households with taxable incomes over $400K - so definitely high earning households.

But I can't help but be annoyed that jerks like Peter Thiel can hide massive amounts of wealth and enjoy tax-free gains. Can we focus on why that is allowed to happen?

www.propublica.org/article/lord-of-the-roths-how-tech-mogul-peter-thiel-turned-a-retirement-account-for-the-middle-class-into-a-5-billion-dollar-tax-free-piggy-bank

[puppylove64]

I am not for or against this, so don’t flame me. But please explain to me why he didn’t just pick good investments to get that high of a balance? When he made the contributions he was under the income threshold. It is the investments that he picked that exploded to give him the wealth.

[dutchgirl678]

From the article:

"Using stock deals unavailable to most people, Thiel has taken a retirement account worth less than $2,000 in 1999 and spun it into a $5 billion windfall."

"Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value. Pay just fractions of a penny per share, a price low enough to buy huge numbers of shares. Watch as all the gains on that stock — no matter how giant — are shielded from taxes forever, as long as the IRA remains untouched until age 59 and a half. Then use the proceeds, still inside the Roth, to make other investments."

So yeah he picked investments that exploded but as it says in the article, not every American has those options. And should we really just let the wealth go unchecked like that? $5B tax-free?

[raangoli]

The options available to him for investments are not the same options that are available to people like you and I. And that’s what rubs me about the Thiel situation. He took advantage of what is a middle (or really upper class) retirement system and played it to his advantage.

I mean kudos to him I guess for being smart but thanks for potentially ruining it for others.

[puppylove64]

Thanks for the explanation. I had read a previous article that didn’t say he essentially had insider info. I will read this article now 😆

[jwright]

Sept 30, 2021 17:37:47 GMT -5 puppylove64 said:

Thanks for the explanation. I had read a previous article that didn’t say he essentially had insider info. I will read this article now 😆

Didn't he contribute Twitter stock pre-IPO, when Twitter was still private and not available to the public?  He was betting on the shares being worth a lot more, but as an insider he also knew better than anyone the chances of success of the stock. 

[niq]

I swear I posted about this ... but the House bill would at least kinda sorta stop this gimmick. They want to cap IRAs at $10 million; after that you can't contribute and you have to take RMDs.

I don't know how big of a problem it is. Like yes it's bad that venture capitalists and private equity managers can play these games to get huge gains without paying taxes. But we're not going to fund social democracy this way.

I agree with PPs that Thiel (and allegedly Mitt Romney) exploited information not available to ordinary investors to put investments in their IRA that are riskier than a Vanguard fund, but not something where they'd lose their shirt.