Self directed IRAs under attack in proposed tax bill(advantaira.com)
advantaira.com
Self directed IRAs under attack in proposed tax bill
https://www.advantaira.com/blog/urgent-action-needed-to-protect-your-self-directed-ira/
305 comments
Honestly they should close the backdoor Roth and update the Roth income rules to stop requiring the backdoor Roth. It's annoying to use it as is. Getting rid of the mega backdoor seems like a no brainer since it's a clear loophole. Or if you want to keep something similar, change the Roth contribution limits for everyone.
This is what I'm most bumed on with the mega backdoor and backdoor, but closing them and just opening them for everyone would be ideal. Because you can still contribute to Roth regardless on income level if you know about backdoor, so it makes sense just to legalize across the board.
They should close 401k and all other tax advantaged retirement accounts, and just have regular IRA and Roth IRA for everyone, and remove employers from the equation.
This is the best idea. Having employers involved in healthcare and retirement is really crummy. These vestiges of history have been corrupted into massive handouts to the insurance and financial industries, and there is no reason they need to exist.
My #1 problem with the Affordable Care Act was that it tried to mandate universal health insurance coverage while leaving employer-sponsored insurance in place. If they were going to mandate that we urinate our money away to insurance companies (rather than assess an honest tax for single-payer healthcare), they should have prohibited employer-sponsored healthcare benefits to force everyone into the same insurance pool.
“They” tried, but insufficient politicians supported it. Everything about ACA was as that it was a compromise to even get that much. The only other option was to not have had healthcare reform at all. I think ACA will go down in history as a pretty impressive effort that at least did something to increase the number of people with access to healthcare.
They'd need to raise the limits then - the contribution limits on traditional/Roth IRAs are significantly lower than employer plans like 401ks.
I do not mind what the limits are as long as it is fair for everyone and not discriminating against those employed by an employer not offering 401k.
Also increase the contribution limits to the hard maximum including employer contributions (e.g. $64.5k/yr) or eliminate them entirely then just cap the maximum post-tax value of your total tax advantaged accounts and require payouts above the caps.
The maximum value cap should be indexed to your age (and inflation), such that the maximum allowed is enough that if left alone can support a very well funded retirement anywhere in the country with very high probability.
The maximum value cap should be indexed to your age (and inflation), such that the maximum allowed is enough that if left alone can support a very well funded retirement anywhere in the country with very high probability.
The killer is the "The bill also prevents investing in an entity in which the IRA owner is an officer." which is generally how the checkbook IRA is structured (IRA owner is the Manager of the single member LLC that is wholly owned by the IRA).
Sec. 138314. Prohibition of Investment of IRA Assets in Entities in Which the Owner Has a Substantial Interest.
To prevent self-dealing, under current law prohibited transaction rules, an IRA owner cannot invest his or her IRA assets in a corporation, partnership, trust, or estate in which he or she has a 50 percent or greater interest. However, an IRA owner can invest IRA assets in a business in which he or she owns, for example, one-third of the business while also acting as the CEO. The bill adjusts the 50 percent threshold to 10 percent for investments that are not tradable on an established securities market, regardless of whether the IRA owner has a direct or indirect interest. The bill also prevents investing in an entity in which the IRA owner is an officer. Further, the bill modifies the rule to be an IRA requirement, rather than a prohibited transaction rule (i.e., in order to be an IRA, it must meet this requirement). This section generally takes effect for tax years beginning after December 31, 2021, but there is a 2-year transition period for IRAs already holding these investments
Sec. 138314. Prohibition of Investment of IRA Assets in Entities in Which the Owner Has a Substantial Interest.
To prevent self-dealing, under current law prohibited transaction rules, an IRA owner cannot invest his or her IRA assets in a corporation, partnership, trust, or estate in which he or she has a 50 percent or greater interest. However, an IRA owner can invest IRA assets in a business in which he or she owns, for example, one-third of the business while also acting as the CEO. The bill adjusts the 50 percent threshold to 10 percent for investments that are not tradable on an established securities market, regardless of whether the IRA owner has a direct or indirect interest. The bill also prevents investing in an entity in which the IRA owner is an officer. Further, the bill modifies the rule to be an IRA requirement, rather than a prohibited transaction rule (i.e., in order to be an IRA, it must meet this requirement). This section generally takes effect for tax years beginning after December 31, 2021, but there is a 2-year transition period for IRAs already holding these investments
This is the killer, indeed. Checkbook IRAs are amazing retirement tools if you're interested in using some of your retirement money in high-risk, high-reward investments. My retirement fund benefited enormously from the Q3 2020 crypto market gains, which would not have been possible without my LLC. It's hard to see this as anything other than removing all the peasants from the market so that the big dogs can have it to themselves.
I don't think too many "peasants" have LLCs so they can use their IRAs to invest in crypto.
I was thirty when I started making "real" retirement money. I suspect peasant is an exaggeration, but there's a good chunk of highly paid folks that are playing catch up to retirement or have reached retirement but still need to build their own safety nets and cushions as the cost to retire continues to go up, even when retired.
There are companies like Rocket Dollar that handle the paperwork for you for $15/month.
Not mainstream but not a secret either.
Not mainstream but not a secret either.
I don't think too many "peasants" would be able to make $15/month from it, much less any actual gain.
I think many could
No? I think just about any dummy (myself included) with a RD LLC that put money into crypto Q3 of last year paid for centuries of RD fees in a few weeks. The whole point is that it's a casino with some rational guesstimates behind it. You take a chunk of your retirement that wouldn't sting too bad if you lose it and you invest it in something that is wildly speculative but that you think has a high upside. Either you go broke with a small chunk of your total nest egg, or you turn that small chunk into something many times the size of your "main" nest egg.
Trust me, compared to the people moving real money in these markets we are all peasants.
Peasants with LLCs... Sure. And using crypto as an example only strengthens the argument that what you're doing is a tax dodge.
How so? I still have to report value of the account to the IRS by law, which is enforced by the trustee. If I get audited it's stunningly easy for the IRS to trace from dollars in IRA to crypto bought and sold, including profits taken. I think you're overestimating your understanding of the whole process.
This effectively bans you from making a retirement investment in yourself - and takes a great deal of money off the table for innovation. So many companies are seeded with capital of a person putting 401K money into their own company. The retirement fund and the home are really what most people have to use to create businesses. Frankly, this sets the US back 250 years, and bars the middle class from starting businesses.
The traditional IRA and 401k were introduced in 1974, the Roth IRA in 1997. They were never intended for rich or poor people to speculate in risky one-off investments. How does this rule set the US back 250 years?
https://en.wikipedia.org/wiki/401(k)#History :
"Congress [... enacted the ...] Internal Revenue Code Section 401(k) as part of the Revenue Act.[8] This occurred on November 6, 1978."
It doesn't ban anything at all.
It just refuses to give you a tax break when you do it.
It just refuses to give you a tax break when you do it.
This is an effective deterrent, and would likely be enforced with a tax penalty. edit: By not allowing me to have the tax benefit, you effectively reduce the incentive to invest in my own business. This seems like a law that is aimed at fat cats that will miss, largely because fat cats aren't going to be investing out of their own retirement. On the other had, my neighbor just used $80K of his 401K to buy three vans for a new HVAC repair company. Had that been taxed, he would have had enough for one, maybe two vans, and been on a much worse cash flow trajectory.
Deterrent from what, starting a business?
Your theory is that for 250 years America's entrepreneur class has been primarily driven by raiding their own tax-advantaged retirement accounts?
Also if your neighbor story is for real what happened there is he took a loan against his retirement account or did some kind of ROBS transaction. It's already illegal for him to interact with plan assets as part of a self-directed IRA, so he didn't use one to invest in his own business and buy vehicles. Hence this story has nothing to do with the topic at hand.
Your theory is that for 250 years America's entrepreneur class has been primarily driven by raiding their own tax-advantaged retirement accounts?
Also if your neighbor story is for real what happened there is he took a loan against his retirement account or did some kind of ROBS transaction. It's already illegal for him to interact with plan assets as part of a self-directed IRA, so he didn't use one to invest in his own business and buy vehicles. Hence this story has nothing to do with the topic at hand.
> removing all the peasants from the market so that the big dogs can have it to themselves.
Bingo! Wall St wants a monopoly on ALL your retirement funds. Your typical employer 401k plan offers only mutual funds run by Wall St. No investing in alternate assets such as real estate or crypto. The big boys get their cut AND make sure you are not crowding the field in lucrative investments.
Bingo! Wall St wants a monopoly on ALL your retirement funds. Your typical employer 401k plan offers only mutual funds run by Wall St. No investing in alternate assets such as real estate or crypto. The big boys get their cut AND make sure you are not crowding the field in lucrative investments.
> My retirement fund benefited enormously from the Q3 2020 crypto market gains, which would not have been possible without my LLC.
We probably shouldn't encourage the general public to gamble their retirement funds in a casino. I understand many believe this is an "asset class", but there is ample evidence crypto has no place in someone's retirement asset mix. Such investment in a taxable account is reasonable compromise.
We probably shouldn't encourage the general public to gamble their retirement funds in a casino. I understand many believe this is an "asset class", but there is ample evidence crypto has no place in someone's retirement asset mix. Such investment in a taxable account is reasonable compromise.
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while your heart is in right place, Govt should not be allowed to single out a particular asset class from retirement. they should rather be in business to regulate and minimize fraud in that class. if crypto is out the so should gold etfs be.
I like how we are all pretending that mutual and index funds are also not a casino.
They have cash flows and intrinsic value. Crypto does not.
Oh sure, all those tech stocks that are based on PE ratios and real earnings and definitely not wild, sweaty speculation.
Maybe you should just let people do what they want with their own money.
>We probably shouldn't encourage the general public to gamble their retirement funds in a casino.
No? Should we prohibit them from investing in mutual funds since bonds are so much safer? Or maybe mutual funds are OK but individual stocks should be illegal? Or maybe just certain, whitelisted stocks above a certain market cap that the 'professionals' decide are too big to fail?
Or maybe we should let individuals decide the correct mix of yield and risk that suits their age and risk tolerance?
No? Should we prohibit them from investing in mutual funds since bonds are so much safer? Or maybe mutual funds are OK but individual stocks should be illegal? Or maybe just certain, whitelisted stocks above a certain market cap that the 'professionals' decide are too big to fail?
Or maybe we should let individuals decide the correct mix of yield and risk that suits their age and risk tolerance?
There is literally no societal benefit whatsoever to lowering taxes in a way that incentivizes people to invest their retirement savings in crypto speculation.
The entire point of our IRA/401k laws is to give people incentives to save money for retirement in the hopes that they will have a nest egg of stable assets that will allow them to leave their jobs, making room for the next generation and reducing the burden on families and social services.
The whole system was created because penniless old people are a corrosive social problem. These reforms just illustrate how much we've lost the plot on the original idea.
The entire point of our IRA/401k laws is to give people incentives to save money for retirement in the hopes that they will have a nest egg of stable assets that will allow them to leave their jobs, making room for the next generation and reducing the burden on families and social services.
The whole system was created because penniless old people are a corrosive social problem. These reforms just illustrate how much we've lost the plot on the original idea.
> My retirement fund benefited enormously from the Q3 2020 crypto market gains, which would not have been possible without my LLC.
I have a single member LLC and a simplified employee pension plan (SEP), but don't understand how one gets crypto into a SEP without buying something like Grayscale (GBTC) through the open stock market.
I have a single member LLC and a simplified employee pension plan (SEP), but don't understand how one gets crypto into a SEP without buying something like Grayscale (GBTC) through the open stock market.
The LLC creates an account at e.g. Gemini. Talk with your trustee about it first.
trustee? Lol, it is just me. I thought that crypto exchanges don't let business entities open accounts. If they do, if I open an account at Gemini under my LLC how then do I get that into my SEP though?
A SEP, and other retirement accounts, are trusts. The manager of your accounts is the trustee of those accounts. It can't be just you with a retirement account, there is always a trustee.
E.g. Mass Mutual Trust Company, Directed Trust Company, etc
The LLC is owned by the SEP (the trust). Anything owned by the LLC is in the SEP.
E.g. Mass Mutual Trust Company, Directed Trust Company, etc
The LLC is owned by the SEP (the trust). Anything owned by the LLC is in the SEP.
You shouldn't be so quick to jump to assuming someone doesnt know what theyre talking about. Trustee is a technical term with meaning in this context. You should look into self-directed 'checkbook' IRAs.
rocket dollar ( or similar service ) creates a single member LLC with checkbook self-directed IRA fund access. They become your self directed IRA trustee. You then create a bank account in the name of the LLC, followed by an account with coinbase or similar under the taxID of your new LLC. You transfer money from your LLC bank account to coinbase LLC account (being careful to never comingle wallets with personal accounts) and do whatever you need with it. You can pull the crypto out of coinbase and hold it in a wallet if you want as well (as long as you bought that wallet with 401k funds)
This seems… fine? And a lot less FUD-y than the original article. I find that talk of the “freedoms” being taken away often is propaganda by the corporate interest youre paying to exercise the supposed freedom
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Well you can't deny that options are being taken away for a portion of citizens. I stopped doing more than the minimum match into my 401K a long time ago because I could no longer trust that in 30, 40, 50 years nobody wouldn't have come after it as an easy target. It's kind of like gun control (which isn't a good analogy since it's too politically charged) - you're pointing at one restriction and saying "hey, it's not the end of the world, you can still own guns, this probably doesn't even affect you personally", but then a new restriction, law, permit, tax, ruling, regulation, is passed every 6 months from that point on every year for decades on end, every time pointing to the change as just a small little thing that probably only affects a small portion of people. Every time gaining more and more precedence for more restrictions and overall adding them all up having a much more massive impact than just a small change that only affects certain people.
If any restriction is intolerable then what remains?
Liberty.
Not sure, I follow. That doesn't make any sense.
It's pretty obvious. When you don't tolerate any restrictions, liberty is what remains.
This is a common refrain but just false, restrictions and regulations are very often the only thing guaranteeing liberty. We’re often told “free market good, government bad” but the reality is somewhere in the middle (without even getting into the fact that the free market is itself created through government regulation)
I’d recommend checking out Mike Konzcal’s recent book Freedom From The Market https://thenewpress.com/books/freedom-from-market
I’d recommend checking out Mike Konzcal’s recent book Freedom From The Market https://thenewpress.com/books/freedom-from-market
The free market is voluntary exchange without aggression (initiation of violence)–that's the "free" part. Far from being created by government, the free market is utterly incompatible with the claim to "legitimate" initiation of violence, which is the defining characteristic of any government and how it enforces its restrictions and regulations. You can have a market economy with a government, but it won't be a free market.
People are perfectly capable of trading with each other on a voluntary basis without requiring any restrictions or regulations or any other form of violence. And if violence does occur people are perfectly entitled to respond in self-defense without depending on any government to intervene.
People are perfectly capable of trading with each other on a voluntary basis without requiring any restrictions or regulations or any other form of violence. And if violence does occur people are perfectly entitled to respond in self-defense without depending on any government to intervene.
I see what you’re saying, but it’s just not true.
Trade takes the form of exchange of the rights of ownership, and this is a right enforced by government.
For example, if I own a house, the house doesn’t care who does what. The owner is the one with the right to call the cops if a non-owner comes in unwanted. This instantly becomes an appeal to violence and the government.
This is even more true in the modern sense of the free market, financial markets exchange very little actual physical goods, the thing being traded is rights to contracts, rights which are guaranteed by the government regulator.
The only place this isn’t quite true is with blockchain based assets.
Trade takes the form of exchange of the rights of ownership, and this is a right enforced by government.
For example, if I own a house, the house doesn’t care who does what. The owner is the one with the right to call the cops if a non-owner comes in unwanted. This instantly becomes an appeal to violence and the government.
This is even more true in the modern sense of the free market, financial markets exchange very little actual physical goods, the thing being traded is rights to contracts, rights which are guaranteed by the government regulator.
The only place this isn’t quite true is with blockchain based assets.
Re: revenue generated, if this [1] article about Peter Thiel's $5bn Roth is correct, that's $1bn+ in lost long term capital gains tax on him alone!
(That said, I'm guessing the intent of the provision is more about fairness/eliminating a loophole for the wealthy than strictly generating revenue).
[1] https://www.propublica.org/article/lord-of-the-roths-how-tec...
(That said, I'm guessing the intent of the provision is more about fairness/eliminating a loophole for the wealthy than strictly generating revenue).
[1] https://www.propublica.org/article/lord-of-the-roths-how-tec...
Roth IRAs are pre tax so even if this bill passes Peter Thiel won't have to pay any taxes on his $5B.
This comment is factually inaccurate.
Roth IRA's are post-tax, that's the whole point of them. You put money in after paying tax and then you're done, when you withdraw for retirement it's tax free.
If this bill passes as written he would actually be forced to divest assets out of his Roth IRA and then pay taxes on them now. It's a really substantive change, hence the discussion.
Roth IRA's are post-tax, that's the whole point of them. You put money in after paying tax and then you're done, when you withdraw for retirement it's tax free.
If this bill passes as written he would actually be forced to divest assets out of his Roth IRA and then pay taxes on them now. It's a really substantive change, hence the discussion.
> If this bill passes as written he would actually be forced to divest assets out of his Roth IRA and then pay taxes on them now.
He would be forced to sell his current assets in the IRA, yes—but what prevents him from rolling over the proceeds into another asset? As long as all the funds remain in a Roth IRA until retirement age there shouldn't be any taxes due to the reinvestment, now or later.
Or are you implying that he would choose to take the tax hit of losing the Roth status rather than sell the assets?
He would be forced to sell his current assets in the IRA, yes—but what prevents him from rolling over the proceeds into another asset? As long as all the funds remain in a Roth IRA until retirement age there shouldn't be any taxes due to the reinvestment, now or later.
Or are you implying that he would choose to take the tax hit of losing the Roth status rather than sell the assets?
You're right that I mixed up pre and post but that's exactly the point. It's post tax so he's ALREADY PAID TAXs and therefor will pay nothing when the funds are distributed.
If Peter Thiel had contributed the maximum possible with a mega backdoor Roth for every year of his life, that would total roughly $2 million, so Thiel has at least $4.998 billion in untaxed capital gains in his account.
If this passes, it wouldn't go back and make him pay taxes on those, but it would stop other people from replicating that trick and it would greatly reduce the amount of future untaxed capital gains he will get.
If this passes, it wouldn't go back and make him pay taxes on those, but it would stop other people from replicating that trick and it would greatly reduce the amount of future untaxed capital gains he will get.
Thank you for the succinct summary. I agree it all seems reasonable, even too modest.
Having these basic guardrails in place may be a good first step, and in the future the thresholds could be dropped below $10MM and 400K.
Having these basic guardrails in place may be a good first step, and in the future the thresholds could be dropped below $10MM and 400K.
I think you may be wrong on point 3.
> Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021.
This makes it sound like backdoor will be stopped for everyone, since after-tax contributions to a (Traditional) IRA are a necessary step.
> Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021.
This makes it sound like backdoor will be stopped for everyone, since after-tax contributions to a (Traditional) IRA are a necessary step.
If this happens, maybe 401k providers will lose business. People often have reasonably large traditional 401ks, which they don't roll over to traditional IRAs, because having traditional IRAs interferes with the backdoor Roth (and they don't want to do a Roth conversion, because that would be a taxable event). But if backdoor Roths went away, then there'd be no reason not to roll a traditional 401k into a traditional IRA. Brokerages like Fidelity and Schwab would win, as people brought their assets over, and 401k providers would lose, since now people would take their money out as soon as they switched jobs.
The rule of 55 (https://www.thebalance.com/what-is-the-rule-of-55-2894280) may still apply, which relies on a separate 401k balance.
The 401ks will still enjoy better legal protections in states that don't absolutely protect IRAs.
You are right, I missed that. This does mean there's an impact on folks making above the Roth income limit but below $400k. Updated the post, thanks
> 3. Closes the backdoor Roth IRA (https://www.bogleheads.org/wiki/Backdoor_Roth) only for people making over $400k. Closes the mega backdoor (https://www.bogleheads.org/wiki/Mega-backdoor_Roth) for everybody.
Just a nit-pick of your analysis. The proposed legislation closes both the megabackdoor Roth (employee after-tax contributions) and backdoor Roth (prohibition on IRA contributions from being converted) regardless of income level:
"Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level"
...which, depending on what you consider a tax increase, appears to run contrary to President Biden's promise to not increase taxes for anyone making less than $400K. This gutting of IRA conversions seems like the only piece of the pie that hurts the middle class, although arguably the upper end of the middle class who have the means to set aside more than the $19K 401(k) max per year.
Just a nit-pick of your analysis. The proposed legislation closes both the megabackdoor Roth (employee after-tax contributions) and backdoor Roth (prohibition on IRA contributions from being converted) regardless of income level:
"Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level"
...which, depending on what you consider a tax increase, appears to run contrary to President Biden's promise to not increase taxes for anyone making less than $400K. This gutting of IRA conversions seems like the only piece of the pie that hurts the middle class, although arguably the upper end of the middle class who have the means to set aside more than the $19K 401(k) max per year.
Yeah, you're totally right. Updated the post.
I'm curious why would this increase taxes if those contributions that get converted are after-tax anyway and the amount that gets taxed shouldn't change?
It admittedly depends on a rather broad definition of a tax increase. The future gains from those contributions invested today are not subject to taxes due to them being in a Roth account, but with this legislation, one would need to make those gains outside of a Roth, and thus those gains would be subject to taxes.
> I can't imagine there are a ton of people with retirement balances over $10M.
Probably not a ton of people. But there might well be a ton of money in these accounts.
https://www.theatlantic.com/politics/archive/2012/09/whats-r...
Probably not a ton of people. But there might well be a ton of money in these accounts.
https://www.theatlantic.com/politics/archive/2012/09/whats-r...
This just isn't true. The bill also prevents you from investing in any private company of which you are a member, AKA a startup you work at. It also prevents you from any deals requiring you to be an accredited investor which means any Reg D which is how almost all early stage tech companies raise money.
Does it restrict you from doing those things, or only restrict you from doing it in a tax-free/tax-advantaged way?
It restricts you from doing them within retirement accounts. But the purpose of retirement accounts is to effectively save for retirement. Congress is basically saying we want you not to need us but we don't actually want you doing well with your investments.
> It restricts you from doing them within retirement accounts.
I'm not saying it's a good bill (no opinion, not enough info), but it isn't prima-facie crazy for congress to revisit retirement plans if they have evidence they are often being used for other purposes, or ineffectively.
I'm not saying it's a good bill (no opinion, not enough info), but it isn't prima-facie crazy for congress to revisit retirement plans if they have evidence they are often being used for other purposes, or ineffectively.
> the purpose of retirement accounts is to effectively save for retirement
Investing in the company which also pays your wages is a Texas hedge, and as such a terrible way to save for retirement, so this sounds like a good change.
Investing in the company which also pays your wages is a Texas hedge, and as such a terrible way to save for retirement, so this sounds like a good change.
> we don't actually want you doing well with your investments
No, its saying if you do well on certain types of investments you need to pay tax. If you do poorly on your investments and lose money, you'd actually want them in a taxable account (because you can count the losses against other gains).
No, its saying if you do well on certain types of investments you need to pay tax. If you do poorly on your investments and lose money, you'd actually want them in a taxable account (because you can count the losses against other gains).
>and still does require a pretty high income (investing more than ~$20k/year in a 401k)
Nearing retirement, earning low income now and have a significant amount of savings in non-retirement accounts = Closing the megaBD Roth screws me.
What should really happen is that anyone with net worth < a reasonable threshold should be able to simply roth what ever the fuck they want without having to figure out these annoyingly complex tax rules.
Nearing retirement, earning low income now and have a significant amount of savings in non-retirement accounts = Closing the megaBD Roth screws me.
What should really happen is that anyone with net worth < a reasonable threshold should be able to simply roth what ever the fuck they want without having to figure out these annoyingly complex tax rules.
The big thing I heard about is this ends QSBS, which stinks for founders: something like 15-20%+ of your company's value. Worse, it's a retroactive tax, meaning taxing founders who started the journey with that in mind.
Talk about rich senators punching down vs encouraging company formation!
PSA: If you are starting a US company and haven't heard of QSBS.. look into it at the federal + state levels, as that's a good chunk of your potential net worth.
Talk about rich senators punching down vs encouraging company formation!
PSA: If you are starting a US company and haven't heard of QSBS.. look into it at the federal + state levels, as that's a good chunk of your potential net worth.
As a founder I'll certainly take advantage of QSBS if it's relevant to me in the future. But let's not delude ourselves -- it's wildly unfair as a tax break. The primary use of it seems to be allowing angel investors to literally pay no taxes whatsoever on millions of dollars in windfall profits.
I'm not sure why it's unfair for first-time founders. STEM founders are largely better off not innovating and instead helping FB sell ads. Tax incentivizes like QSBS for companies, especially bootstrapped co's, help. Job creation & technology invention is why the gov already has direct programs to give tax money directly to startups (SBIR, R&D tax credit, ...), and this is an extension of that encouragement. We need more, not less -- otherwise it'll push even more to the concentration of VC-funded fintech startups and FAANG.
I would agree that QSBS support for the already-rich can be less effective -- your case of angels. I'd rather see improvements on the capping structure, vs pushing incentives even more (15-30%!) to working for FAANGs.
I would agree that QSBS support for the already-rich can be less effective -- your case of angels. I'd rather see improvements on the capping structure, vs pushing incentives even more (15-30%!) to working for FAANGs.
Self directed IRAs are commonly used with a wholly owned single member LLC to invest IRA funds into real estate related investments such as rental properties or many other types of private investments. The new proposed tax bill seems to remove the ability of the IRA owner to manage that LLC and effectively end the use of checkbook control IRAs.
Is this really an issue for low- to middle-income earners, or is that just a scare tactic?
Most low to middle income earners struggle to hit their 5k or so maximum of a regular IRA versus operate a self-directed or have the additional funds to make it worth it.
Most low income Americans struggle to save any money for retirement at all.
I'd expect people who are actually doing this are rolling over large 401k balances to self directed IRAs rather than saving up a couple thousand a year.
Entrepreneurs can put up to 58k a year into a Solo 401k
Entrepreneurs can put up to 58k a year into a Solo 401k
This has no impact on the average person in the low to middle class income range. This is just a loophole allowing the rich to put a bunch of money into their IRAs and watch it grow in a tax advantaged way.
The average person that's putting the max of $6k (or less) into their IRA is not impacted by this and it's business as usual for them.
I believe this is in response to people like Peter Thiel
https://www.propublica.org/article/lord-of-the-roths-how-tec...
The average person that's putting the max of $6k (or less) into their IRA is not impacted by this and it's business as usual for them.
I believe this is in response to people like Peter Thiel
https://www.propublica.org/article/lord-of-the-roths-how-tec...
So your argument is: the law is restrictive enough that poor people are going to stay poor, thus you can safely ignore the consequences for them and create additional laws to restrict “rich” people. An extraordinary entitled and comfortable perspective shines through strongly here.
Actually, what I'd like to see are better opportunities for low and middle class people. I'm very clearly middle class, I likely make less than virtually every software developer reading this. I am lucky though in that I live in a low cost of living area, and managed to find a house that allows me to afford to put money into retirement accounts.
I also got by reasonably well with college student loan debt.
I'm relatively privileged in the above ways. If I wasn't quite so lucky and set up for success I'd struggle a lot to afford to put money into retirement accounts.
I think the rich should pay their fair fucking share of taxes. It helps society. This loophole they're trying to get rid of actually means that those who are far better off than the rest of us, who are using these loopholes to avoid taxes will have to pay more taxes. Seems like a real win for the low and middle class people here.
I also got by reasonably well with college student loan debt.
I'm relatively privileged in the above ways. If I wasn't quite so lucky and set up for success I'd struggle a lot to afford to put money into retirement accounts.
I think the rich should pay their fair fucking share of taxes. It helps society. This loophole they're trying to get rid of actually means that those who are far better off than the rest of us, who are using these loopholes to avoid taxes will have to pay more taxes. Seems like a real win for the low and middle class people here.
This entirely fails to explain how 1) this a loophole 2) how this has disparate impact, and the sad punchline of your statement is “pay your fucking fair share” which you say to people who have saved and invested successfully, without regard to those who would hope to do so in the future.
How exactly do you hope to create better opportunities for the low and middle income class? Here’s one idea: open up opportunities for them to invest in qualified accounts, like IRAs, silly.
How exactly do you hope to create better opportunities for the low and middle income class? Here’s one idea: open up opportunities for them to invest in qualified accounts, like IRAs, silly.
I don't think you understand how this is being used as a tax loop hole. Please go read here:
https://www.propublica.org/article/lord-of-the-roths-how-tec...
This type of opportunity is NOT available for low to middle class families, never will be. It's simply being exploited by the rich. These families live paycheck to paycheck more often than not, they're not going to have the ability to invest shares of a company or real estate into their IRA. THey're more worried about paying their bills and the next paycheck. They don't have the extra income to make these kinds of investments.
No, seriously, go read the fucking article and I think you'd understand instead of very clearly advocating for the rich like you are.
https://www.propublica.org/article/lord-of-the-roths-how-tec...
This type of opportunity is NOT available for low to middle class families, never will be. It's simply being exploited by the rich. These families live paycheck to paycheck more often than not, they're not going to have the ability to invest shares of a company or real estate into their IRA. THey're more worried about paying their bills and the next paycheck. They don't have the extra income to make these kinds of investments.
No, seriously, go read the fucking article and I think you'd understand instead of very clearly advocating for the rich like you are.
I understand this very well and have know this all well before pro publica showed up. It’s not a loophole. It’s a qualified retirement account. Ho-hum, big time. Find some great ways to enable low income people to become wealthy instead of whining about how they have to eat dirt.
Does the fact that more rich do it mean it's wrong? Or that low and middle income should use it as a model and the practice should be encouraged? I mean, if private citizens can build themselves up without being beholden to social security and Wall Street - why is this bad?
What if - instead of the government keeping us to the lowest common denominator (social security) they encourage, educate, and allow everyone to be their highest common denominator?
What if - instead of the government keeping us to the lowest common denominator (social security) they encourage, educate, and allow everyone to be their highest common denominator?
No one's saying you can't get rich. You have to pay taxes on the gains.
Agree - everyone should pay taxes. What I'm suggesting is leaving the "no taxation on this type of gain [IRA]" and promote it to the entire citizenry as a method of not requiring social security, or not needing to support as many people on social security. The governments job should be to support people being OFF SS based on their own supportive, good choices....
If more people were off SS, then the entire governments budget would go down - which requires less taxation. We've taken the opposite approach.. support consumerism and spending, thus the government taxation and expanding budgets grow higher as our population ages to support a wider group.
If more people were off SS, then the entire governments budget would go down - which requires less taxation. We've taken the opposite approach.. support consumerism and spending, thus the government taxation and expanding budgets grow higher as our population ages to support a wider group.
I'd be fine with this, but the problem is that the rich, who are utilizing these loopholes, are the same people not paying their employees a fair share so that they COULD support themselves and their future better.
The wealth gap is freaking massive and growing. How are low and middle class people supposed to support themselves when they can't even get fair wages to support themselves and plan for retirement?
The wealth gap is freaking massive and growing. How are low and middle class people supposed to support themselves when they can't even get fair wages to support themselves and plan for retirement?
> Or that low and middle income should use it as a model and the practice should be encouraged?
Problem with the low/middle income is that where to begin? Rich people hire lawyers to do the work. Low/middle income like myself knows this is available but can't utilize it as we don't know where to start, how to do it, who to contact and can't afford to hire a lawyer.
Problem with the low/middle income is that where to begin? Rich people hire lawyers to do the work. Low/middle income like myself knows this is available but can't utilize it as we don't know where to start, how to do it, who to contact and can't afford to hire a lawyer.
I'm not sure it's so much about not knowing where to start as it is that complex strategies that require lawyers and accountants above and beyond routine tax filings quickly start costing more than any potential tax savings unless there's a lot of money involved.
I know tons of people who don't invest in 401k because they don't understand.
I know tons of people don't know how our income tax rate bracket works.
I just learned yesterday that you can invest in bitcoin using self directed IRA. I am trying to figure out how to do it, but kind of lost.
I know tons of people don't know how our income tax rate bracket works.
I just learned yesterday that you can invest in bitcoin using self directed IRA. I am trying to figure out how to do it, but kind of lost.
If it's being used to avoid taxes then yes, the loophole should be closed.
Congress did not intend that the Roth IRA, given the rather low annual contribution limit, would allow someone to accumulate essentially unbounded amounts of gain in a tax-free way.
If you read up on what Thiel (and presumably some others did), yes, they successfully invested using their IRA, but yes, they also took advantage of the tax status of a Roth to avoid paying capital gains tax.
They will not be retroactively penalized for this (the law doesn't work this way), but their doing this has now made at least some in Congress want to prevent this from being possible in the future, since it was not what the Roth IRA was intended to allow.
If you read up on what Thiel (and presumably some others did), yes, they successfully invested using their IRA, but yes, they also took advantage of the tax status of a Roth to avoid paying capital gains tax.
They will not be retroactively penalized for this (the law doesn't work this way), but their doing this has now made at least some in Congress want to prevent this from being possible in the future, since it was not what the Roth IRA was intended to allow.
The $6k/yr limit on IRA contributions is a joke. Maybe most "low to middle class people" aren't contributing more than that, but, regardless, if that's all you're doing, you are completely fucked.
The backdoor Roth part of this... basically anybody making even an entry level Tech salary should be doing it. That's not just for the Peter Thiels of the world.
(By "should" I don't mean "I would prefer if policy were this"; I mean "this is what's smart to do right now, at an individual level, under current policy".)
The backdoor Roth part of this... basically anybody making even an entry level Tech salary should be doing it. That's not just for the Peter Thiels of the world.
(By "should" I don't mean "I would prefer if policy were this"; I mean "this is what's smart to do right now, at an individual level, under current policy".)
Using tax advantages to incentivize behavior is not the best way to run a government IMO. Just get rid of taxes for most low and middle income people like <300k/yr/family, this would make things much simpler and then there's no gigantic government bureaucracy administering it all.
Also the government should file your own taxes, right now tutbotax & friends currently only exist due to government lobbying.
Also the government should file your own taxes, right now tutbotax & friends currently only exist due to government lobbying.
high-appreciation residential real-estate of all kinds is attracting "investment" like flies on the beach; its not fake.. if a financial law intended to help low- to middle-income earners is being abused by a few with many multiples of common money amounts, why is that a "scare tactic" ?
It’s a scare tactic. These rules are really aimed at people Peter Thiel, in response to the pro public’s investigation - they don’t even hit other famous IRA (ab)users like Mitt Romney.
But getting you angry enough to defend his wealth is much more difficult than obscuring the fact that you won’t be affected by them, so we instead get vague and scary warnings about the bill.
But getting you angry enough to defend his wealth is much more difficult than obscuring the fact that you won’t be affected by them, so we instead get vague and scary warnings about the bill.
They can easily stop the next Pete Thiel by capping the appreciated IRA balance which they have in fact added a provision for. I don't comprehend the scare tactic of killing the self-directed IRA.
It's an issue insofar as there are companies that have productized the ability to dodge some taxes and rules with a self-directed single-member LLC you invest in via your IRA. This would severely harm those companies, who presumably have low- and middle-income customers.
One example: https://www.choiceapp.io/
One example: https://www.choiceapp.io/
Given the relatively low cap on IRA contributions, it's not directly an issue of income, but rather your access to high-return investments like early-stage stock options.
Of course, someone with lots of investments will have the luxury of just making the highest-payoff ones with their IRA funds.
Independently, in the rest of the bill [1] there are lots of reasonable things like a $10 million IRA cutoff limit.
1) https://www.advantaira.com/wp-content/uploads/2021/09/WM-Tax...
Of course, someone with lots of investments will have the luxury of just making the highest-payoff ones with their IRA funds.
Independently, in the rest of the bill [1] there are lots of reasonable things like a $10 million IRA cutoff limit.
1) https://www.advantaira.com/wp-content/uploads/2021/09/WM-Tax...
401ks can be rolled into IRAs, which people do to avoid poorly-chosen high-fee ETFs often found in 401k plans. For example, my employer's plan had 0.5% annual fee index funds when the same could be found for 0.05%.
401k limits are ~20k/yr -- about 10% of your pre-tax if you are maxing out on a 200k SWE TC (or much less given an employer match). Easily, your 401k (and rolled over IRA) can reach 200k (20k x 10) in a decade with no growth, and much more with growth.
At that point, this bill is relevant -- do you really want all your holdings in public stock that gyrate wildly in value every 7yrs?
401k limits are ~20k/yr -- about 10% of your pre-tax if you are maxing out on a 200k SWE TC (or much less given an employer match). Easily, your 401k (and rolled over IRA) can reach 200k (20k x 10) in a decade with no growth, and much more with growth.
At that point, this bill is relevant -- do you really want all your holdings in public stock that gyrate wildly in value every 7yrs?
401k limits are about $58k per year... You can only personally contribute up to about $20k per year. There are ways to take advantage of the difference such as employer matching and after-tax traditional 401ks (and instantly convert to Roth money).
This is also a way of contributing to a Roth (IRA?) if you don't qualify for a regular Roth IRA (make too much money) or want to contribute more than the $6k limit per year.
This is also a way of contributing to a Roth (IRA?) if you don't qualify for a regular Roth IRA (make too much money) or want to contribute more than the $6k limit per year.
They should remove the ability to invest self-directed IRAs into options. This socializes the risk (i.e. someone with little or no supplementary retirement income is going to be a burden on the rest of us) while privatizing the gains.
How?
In any environment where most people have nearly indistinguishable from $0 in their private retirement accounts, I don't see the risk of someone blowing up their IRA being a material socialized risk.
1 in 4 Americans have no retirement savings: https://news.yahoo.com/1-4-americans-no-retirement-191314425... (same study: 1 in 8 over 60 have $0.)
1 in 4 Americans have no retirement savings: https://news.yahoo.com/1-4-americans-no-retirement-191314425... (same study: 1 in 8 over 60 have $0.)
Related, I joked that a friend of mine was having a "first world problems" moment when he complained that his broker wouldn't let him short-sell GME in his IRA.
Hey everyone: stop talking about your compliant tax strategies!
It’s been nice to want to help people but now, obviously, too many people know of some and their representatives are changing the laws.
It’s back to the way it’s always been: if you can afford good lawyers then you get to know of obscure tax codes. Lets leave it that way.
It’s been nice to want to help people but now, obviously, too many people know of some and their representatives are changing the laws.
It’s back to the way it’s always been: if you can afford good lawyers then you get to know of obscure tax codes. Lets leave it that way.
The modern 401(k) practices emerged from one of these then-obscure tax codes, which I view as an unabashedly good outcome.
Nah, the 401(k) system is a mechanism of wealth extraction for white collar government-adjacent workers. It's a form of repression.
I'd rather be building something than dealing with tax, but I'm very much incentivized to do the latter (though your situation may differ).
I'd rather be building something than dealing with tax, but I'm very much incentivized to do the latter (though your situation may differ).
It is pretty much designed to dump money into the stock market in a magnitude that wouldn't occur naturally. As with ETFs, people are indiscriminately tossing money at investments they have no idea of (under the premise that roboinvestors will take care of everything). I am skeptical that this will work out in the long run, or that the government won't someday find ways to confiscate fractions of 401ks because reasons.
People don't want to hear this because 401ks are silver bullets, and we are all inclined to desire silver bullets over applying rigor. Most people have no idea what part of their paycheck is invested in. Why do we let them lecture us on where to hold and grow our wealth?
That's not to say that 401ks in and of themselves are bad. Their existence doesn't mean that people shouldn't take their own risks and hold assets that keep their wealth liquid rather than locking it up. Personally, I prefer paying more in order to have liquidity. Many would disagree with that. But truth be told, no one knows any one answer that applies to all.
People don't want to hear this because 401ks are silver bullets, and we are all inclined to desire silver bullets over applying rigor. Most people have no idea what part of their paycheck is invested in. Why do we let them lecture us on where to hold and grow our wealth?
That's not to say that 401ks in and of themselves are bad. Their existence doesn't mean that people shouldn't take their own risks and hold assets that keep their wealth liquid rather than locking it up. Personally, I prefer paying more in order to have liquidity. Many would disagree with that. But truth be told, no one knows any one answer that applies to all.
Repression is criminalisation of
Solidarity Strikes, entrenching corporate power.
Everything else is a waste of time, plastic straw ban of lawmaking.
https://en.m.wikipedia.org/wiki/Solidarity_action
Everything else is a waste of time, plastic straw ban of lawmaking.
https://en.m.wikipedia.org/wiki/Solidarity_action
This only works if the employers don't see it coming.
In many countries (like mine) organised labour has a wage negotiation-followed-by-industry-wide-strike season. Every year, come rain or shine.
Industry has long responded by: a) adjusting their 'final price' to accommodate the theatre b) automating whatever they can c) scheduling plant maintenance d) learning which jobs can be eliminated and doing so.
All without paying a cent in wages.
Since they seldom get all this done inside 6 weeks, its takes the labourers years to recover even a 5% increase.
Many (mining, paper, logging, hospitals) even budget for it.
In many countries (like mine) organised labour has a wage negotiation-followed-by-industry-wide-strike season. Every year, come rain or shine.
Industry has long responded by: a) adjusting their 'final price' to accommodate the theatre b) automating whatever they can c) scheduling plant maintenance d) learning which jobs can be eliminated and doing so.
All without paying a cent in wages.
Since they seldom get all this done inside 6 weeks, its takes the labourers years to recover even a 5% increase.
Many (mining, paper, logging, hospitals) even budget for it.
The modern 401k laws are a giveaway to the financial industry. They stipulate extraordinary restrictions on what investors can/must _invest_ in and fundamentally transfer tremendous economic power and influence to “advisors” and the financiers attached to them.
The popularization of 401(k) plans (as well as 529 college savings plans, etc) got Main Street on the same page as Wall Street. My parents couldn't have cared less if the stock market tanked. Dad's retirement was a traditional pension, and their savings was in a money market account. Now if the stock market tanks, I watch my retirement account and the kid's college savings plan tank with it.
Now that so many of us are participating in the stock market (in one way or another), we're more likely to support policies that Wall Street tells us will keep the market booming. Wall Street won by winning over Main Street.
Now that so many of us are participating in the stock market (in one way or another), we're more likely to support policies that Wall Street tells us will keep the market booming. Wall Street won by winning over Main Street.
The alternative perspective on that is that "Main Street" got to collect its interest payments from the local Savings & Loan or from US Government Savings Bonds while Wall Street did whatever fancy stuff it did with exotic investments like equities--which were mostly gated by expensive full-service brokers and other financial people.
This is true. It does align risks much better in the sense that US unions have always been far more antagonist, hyberbolic, and aggressive than their foreign counterparts, which lead to severe impairment/destruction once the protected industries they existed in were exposed to foreign competition. The most powerful unions now, of course, are the public sector unions, which have a similarly deleterious effect but are immune to competition, direct and indirect.
While what you say is true, I think this is something like 7 parts benefit to tens of millions of W-2 employees and 1 part benefit to a much smaller number of financial industry workers. I wouldn’t want to give up the 7 to prevent the 1.
>I view as an unabashedly good outcome
Possibly. I can't complain personally, The shift from defined benefit to defined contribution retirement savings has probably been generally positive for those with the ability/discipline to take full advantage of 401(k)/IRA. The flipside is that relatively few people (mostly public sector) in the US now get a more or less automatic defined retirement payout from a pension.
Of course, the shift isn't just tax code changes. Traditional pensions also largely encoded long-term employment with a single organization.
Possibly. I can't complain personally, The shift from defined benefit to defined contribution retirement savings has probably been generally positive for those with the ability/discipline to take full advantage of 401(k)/IRA. The flipside is that relatively few people (mostly public sector) in the US now get a more or less automatic defined retirement payout from a pension.
Of course, the shift isn't just tax code changes. Traditional pensions also largely encoded long-term employment with a single organization.
401(k)'s started to became popular in the 1970s because they allowed management to increase their tax-advantaged compensation relative to labor, whereas defined-benefit plans had stricter and more effective rules regarding management/labor compensation disparities.
Then during the 1980s as corporate accounting schemes became more sophisticated preference for 401(k)'s and other defined-contribution plans exploded because of how liabilities are calculated.
In every conceivable measure pensions are theoretically better for workers and society as a whole. I say theoretically because that's predicated on employers and pension funds (if employer managed) obeying good (translation: dead simple) accounting practices rather than spending all their time and effort figuring out how to subvert them in order to cook their balance sheets to increase their yearly bonuses. Many corporate merger waves since the 1980s have been driven by schemes to drain pension funds (cost "synergies"), and of course states are notorious for failing to fully fund pensions on a YtoY basis (states, unlike corporations, aren't actually required to fully fund pensions[1]).
All of these downsides to pensions can be easily remedied. But corporate interests have succeeded in selling the narrative that pensions are unreliable and inequitable, while 401(k)'s are more reliable and equitable. In fact pensions are categorically more equitable, and any less reliability (which is a dubious claim, notwithstanding the many high profile pension failures over the years--nobody reports on someone's 401(k) fund vanishing during a recession) is a consequence of lobbyists phenomenal success in killing legislation and enforcement efforts responsive to corporate financial accounting schemes. Overall reliability of private retirement systems has fallen over the past 40 years, but the decline for pensions was more precipitous simply because they were so damned good before CFO offices became profit centers.
Life insurance markets were once dens of fraud and outright thievery, the mortgage backed securities and CDOs of the late 19th and early 20th century. Relatively simple reforms restored the market to nearly unassailable reliability. Though, I suspect the necessary legislation only succeeded after life insurance stopped being the center of growth and profit for financial markets. Legislation regarding private retirement plans likely will only ever make substantial reform once corporations have finished exploiting all opportunities for subverting employee income disparity and asset protections, finally shifting their attention elsewhere.
[1] "Fully fund" does not mean paying in the entirety of a worker's expected retirement disbursements. Rather, it means ensuring that each and every year you pay the full fractional share of expected liabilities. Basically the same thing an individual is expected to do when managing their 401(k) contributions.
Then during the 1980s as corporate accounting schemes became more sophisticated preference for 401(k)'s and other defined-contribution plans exploded because of how liabilities are calculated.
In every conceivable measure pensions are theoretically better for workers and society as a whole. I say theoretically because that's predicated on employers and pension funds (if employer managed) obeying good (translation: dead simple) accounting practices rather than spending all their time and effort figuring out how to subvert them in order to cook their balance sheets to increase their yearly bonuses. Many corporate merger waves since the 1980s have been driven by schemes to drain pension funds (cost "synergies"), and of course states are notorious for failing to fully fund pensions on a YtoY basis (states, unlike corporations, aren't actually required to fully fund pensions[1]).
All of these downsides to pensions can be easily remedied. But corporate interests have succeeded in selling the narrative that pensions are unreliable and inequitable, while 401(k)'s are more reliable and equitable. In fact pensions are categorically more equitable, and any less reliability (which is a dubious claim, notwithstanding the many high profile pension failures over the years--nobody reports on someone's 401(k) fund vanishing during a recession) is a consequence of lobbyists phenomenal success in killing legislation and enforcement efforts responsive to corporate financial accounting schemes. Overall reliability of private retirement systems has fallen over the past 40 years, but the decline for pensions was more precipitous simply because they were so damned good before CFO offices became profit centers.
Life insurance markets were once dens of fraud and outright thievery, the mortgage backed securities and CDOs of the late 19th and early 20th century. Relatively simple reforms restored the market to nearly unassailable reliability. Though, I suspect the necessary legislation only succeeded after life insurance stopped being the center of growth and profit for financial markets. Legislation regarding private retirement plans likely will only ever make substantial reform once corporations have finished exploiting all opportunities for subverting employee income disparity and asset protections, finally shifting their attention elsewhere.
[1] "Fully fund" does not mean paying in the entirety of a worker's expected retirement disbursements. Rather, it means ensuring that each and every year you pay the full fractional share of expected liabilities. Basically the same thing an individual is expected to do when managing their 401(k) contributions.
While it's not an inherent property of defined benefit pensions, they also tended to be structured in a way that tended to primarily benefit long tenure in an organization--US military being one of the most obvious traditional examples.
Switch jobs every few years? You probably weren't going to collect much in the way of a pension.
I'm not sure how much the switch has been about "corporate interests." As people became more mobile (for good reasons and bad), the idea of your retirement savings being tied up with a specific (usually large) company became less attractive to employees as well.
Switch jobs every few years? You probably weren't going to collect much in the way of a pension.
I'm not sure how much the switch has been about "corporate interests." As people became more mobile (for good reasons and bad), the idea of your retirement savings being tied up with a specific (usually large) company became less attractive to employees as well.
The answer to that shift in employee tenure is simple: shift away from employer managed pensions to independent management, same as for health insurance. That shift was incomplete because corporate focus shifted to draining pensions and centering compensation packages around mechanisms that favored management and especially executives (401(k)'s, stock options, etc), not adapting pensions to employment trends.
But, now, if you have a widespread defined benefit pension that's largely independent of employment, don't you now have effectively a shadow version of Social Security?
Yes, except it has less systemic moral hazard since the insurer can't [directly] print money and/or issue endless amounts of debt.[1] I'm not a Social Security cynic; I believe it serves a crucial but limited role in providing economic security.
[1] Not per se a horrible thing, but that ability is better preserved for infrastructure and other discretionary investments rather than retirement.
[1] Not per se a horrible thing, but that ability is better preserved for infrastructure and other discretionary investments rather than retirement.
> But corporate interests have succeeded in selling the narrative that pensions are unreliable and inequitable, while 401(k)'s are more reliable and equitable. In fact pensions are categorically more equitable, and any less reliability (which is a dubious claim, notwithstanding the many high profile pension failures over the years--nobody reports on someone's 401(k) fund vanishing during a recession) is a consequence of lobbyists phenomenal success in killing legislation and enforcement efforts responsive to corporate financial accounting schemes.
Those lobbyists must be doing a terrible job, since the Pension Protection Act of 2006 strengthened the reliability of defined benefit pensions.
The problem is defined benefit pensions are extremely risky for beneficiaries since the existence of an employer decades into the future is a huge risk, as are changes in a world where things change quickly and many people do not stay at the same job for many years.
And they are risky for employers in that expecting every employer to also function as an insurance company selling annuities and survive as long is expensive and ridiculous to execute. That is how you end up with so much corruption and money wasted because so many people have no idea what is going on (and the root cause for taxpayer funded DB pensions being a quagmire since voters have no idea what is going on).
There is zero reason an employer cannot just give the normal cost (the present value of the benefit accrued during the year) to an employee, and the employee put it in VOO rather than the employer doing the same and then having to pay actuaries and fund managers. I am happy I do not need to pay finance people who have been obviated by automation.
Those lobbyists must be doing a terrible job, since the Pension Protection Act of 2006 strengthened the reliability of defined benefit pensions.
The problem is defined benefit pensions are extremely risky for beneficiaries since the existence of an employer decades into the future is a huge risk, as are changes in a world where things change quickly and many people do not stay at the same job for many years.
And they are risky for employers in that expecting every employer to also function as an insurance company selling annuities and survive as long is expensive and ridiculous to execute. That is how you end up with so much corruption and money wasted because so many people have no idea what is going on (and the root cause for taxpayer funded DB pensions being a quagmire since voters have no idea what is going on).
There is zero reason an employer cannot just give the normal cost (the present value of the benefit accrued during the year) to an employee, and the employee put it in VOO rather than the employer doing the same and then having to pay actuaries and fund managers. I am happy I do not need to pay finance people who have been obviated by automation.
> Those lobbyists must be doing a terrible job, since the Pension Protection Act of 2006 strengthened the reliability of defined benefit pensions.
Pensions were already dead long before 2006, and inevitable future pension failures baked into the system years and decades earlier. And in any event the PPA heavily favored 401(k)'s, the price extracted by Republicans for creating the Pension Benefit Guaranty Corporation. And the PBGC itself also favored corporations. Nothing about the PPA directly addressed the underlying reasons pensions were failing; the PPA was about creating a soft landing.
> The problem is defined benefit pensions are extremely risky for beneficiaries since the existence of an employer decades into the future is a huge risk, as are changes in a world where things change quickly and many people do not stay at the same job for many years.
They're not risky at all. A pension is just an annuity, the corporate equivalent of employer-provided health insurance vs open market health insurance. Annuities, like life insurance, are considered some of the most reliable investments possible, precisely because of relatively strict, century-old reform legislation. See my response elsethread regarding fully funding requirements and the difference between employer vs independent management. Again, this notion that pensions are fundamentally risky is a false narrative. To the extent pensions are risky, it's only because the laws don't adequately address what in other insurance markets would be considered systemic accounting fraud.
Pensions were already dead long before 2006, and inevitable future pension failures baked into the system years and decades earlier. And in any event the PPA heavily favored 401(k)'s, the price extracted by Republicans for creating the Pension Benefit Guaranty Corporation. And the PBGC itself also favored corporations. Nothing about the PPA directly addressed the underlying reasons pensions were failing; the PPA was about creating a soft landing.
> The problem is defined benefit pensions are extremely risky for beneficiaries since the existence of an employer decades into the future is a huge risk, as are changes in a world where things change quickly and many people do not stay at the same job for many years.
They're not risky at all. A pension is just an annuity, the corporate equivalent of employer-provided health insurance vs open market health insurance. Annuities, like life insurance, are considered some of the most reliable investments possible, precisely because of relatively strict, century-old reform legislation. See my response elsethread regarding fully funding requirements and the difference between employer vs independent management. Again, this notion that pensions are fundamentally risky is a false narrative. To the extent pensions are risky, it's only because the laws don't adequately address what in other insurance markets would be considered systemic accounting fraud.
> A pension is just an annuity, the corporate equivalent of employer-provided health insurance vs open market health insurance. Annuities, like life insurance, are considered some of the most reliable investments possible, precisely because of relatively strict, century-old reform legislation.
Exactly, but DB pension funds are not regulated by insurance commissioners the way insurance companies that sell annuities are. I wonder why every taxpayer funded pension and private company pension before PPA 2006 would value an annuity at a lower price than an insurance company would…
Since they are the same as annuity, then the employer should just go out and buy people an annuity. Or better yet, give the employer cash and let the employee decide if they want to buy an annuity or not. Insurance companies make single digit profit margins, it is not like having every employer roll their own insurance company was saving anyone any money.
> the corporate equivalent of employer-provided health insurance vs open market health insurance.
It is not quite equivalent since the company is not the one deciding how to do the actuarial calculations, at least not in a way that can be tilted like having their own people on a pension board of trustees would. Most of the health insurance aspects are taken care of by managed care organizations (aka health insurance companies). It would be equivalent if employers offering DB pensions were hiring insurance companies to calculate the cost of their annuities.
But they never would, because annuities are simply very expensive. At the end of the day, compensation for most people in the US was falling or stagnant in real terms for the past few decades (and people were living longer), so offering them properly priced annuities would have made any business untenable, hence businesses jettisoning them in favor of DC plans.
Exactly, but DB pension funds are not regulated by insurance commissioners the way insurance companies that sell annuities are. I wonder why every taxpayer funded pension and private company pension before PPA 2006 would value an annuity at a lower price than an insurance company would…
Since they are the same as annuity, then the employer should just go out and buy people an annuity. Or better yet, give the employer cash and let the employee decide if they want to buy an annuity or not. Insurance companies make single digit profit margins, it is not like having every employer roll their own insurance company was saving anyone any money.
> the corporate equivalent of employer-provided health insurance vs open market health insurance.
It is not quite equivalent since the company is not the one deciding how to do the actuarial calculations, at least not in a way that can be tilted like having their own people on a pension board of trustees would. Most of the health insurance aspects are taken care of by managed care organizations (aka health insurance companies). It would be equivalent if employers offering DB pensions were hiring insurance companies to calculate the cost of their annuities.
But they never would, because annuities are simply very expensive. At the end of the day, compensation for most people in the US was falling or stagnant in real terms for the past few decades (and people were living longer), so offering them properly priced annuities would have made any business untenable, hence businesses jettisoning them in favor of DC plans.
All good points. Except I'd say that a major problem with annuities is one of bargaining power and purchaser sophistication, similar to why employer-based health insurance plans are better deals then open market plans even after Obamacare reforms. (Though HMOs like Kaiser seem to have a smaller gap.)
Annuity return rates suck relative to pensions and especially stock market returns (ignoring potential long-term risk). But I have the impression that if you're rich or if you're part of a group effort, the returns get better, much like any other class of financial instrument. But I don't actually know if that's true; never looked into it.
Similarly, if your annuity terms are bargained by a sophisticated party on your behalf, you'll likely end up with a more optimal cash vs future benefit balance. Whereas if the decision is left up to you, you'll do what the vast majority of people do, which is favor cash. And favoring cash is something even a financially conservative, risk-averse person might do, because to laymen "conservative" means cash in hand. Just a few weeks ago my dad explained to me that he wanted to cash out his old union-provided annuity and stuff the money in a mattress because he was concerned about Biden/Pelosi policies driving higher inflation. I wanted to be like, "WTF!?"[1], but I long ago learned not to argue with cranky old men, though I'm well on my way to becoming one. (It was a tiny annuity, anyhow, started only a few years before he retired. Definitely not worth lecturing anyone over.)
[1] Because almost certainly the annuity was inflation adjusted.
Annuity return rates suck relative to pensions and especially stock market returns (ignoring potential long-term risk). But I have the impression that if you're rich or if you're part of a group effort, the returns get better, much like any other class of financial instrument. But I don't actually know if that's true; never looked into it.
Similarly, if your annuity terms are bargained by a sophisticated party on your behalf, you'll likely end up with a more optimal cash vs future benefit balance. Whereas if the decision is left up to you, you'll do what the vast majority of people do, which is favor cash. And favoring cash is something even a financially conservative, risk-averse person might do, because to laymen "conservative" means cash in hand. Just a few weeks ago my dad explained to me that he wanted to cash out his old union-provided annuity and stuff the money in a mattress because he was concerned about Biden/Pelosi policies driving higher inflation. I wanted to be like, "WTF!?"[1], but I long ago learned not to argue with cranky old men, though I'm well on my way to becoming one. (It was a tiny annuity, anyhow, started only a few years before he retired. Definitely not worth lecturing anyone over.)
[1] Because almost certainly the annuity was inflation adjusted.
> Except I'd say that a major problem with annuities is one of bargaining power and purchaser sophistication, similar to why employer-based health insurance plans are better deals then open market plans even after Obamacare reforms.
Health insurance, like life insurance and annuities, is pretty efficient already with low single digit profit margins.
Average annual employer sponsored insurance is $7,675 for single PPO coverage in 2019:
https://www.kff.org/report-section/ehbs-2019-summary-of-find...
And average lowest cost monthly gold premium on healthcare.gov is $516 ($6k annual) in 2019:
https://www.kff.org/health-reform/state-indicator/average-ma...
> Annuity return rates suck relative to pensions and especially stock market returns (ignoring potential long-term risk).
Ignoring the main risk of an investment certainly makes it cheaper. That is what we have been discussing these past few comments. Once those risks are taken into account, by legislation like PPA 2006, the time shifting of costs into the future becomes more difficult and is one big reason why DB pensions are not tenable.
Although, at this point, I would argue an even bigger reason is that they simply have been obviated (same for annuities by insurance companies). Why pay an insurance company a cut of your investment returns when you can get rock bottom expense ratios on target date funds from Vanguard or buy VOO? That is what all these DB pension fund managers and insurance companies are doing anyway. Same reason why whole life insurance is a scam. All of these products have been automated and their middlemen bypassed.
Health insurance, like life insurance and annuities, is pretty efficient already with low single digit profit margins.
Average annual employer sponsored insurance is $7,675 for single PPO coverage in 2019:
https://www.kff.org/report-section/ehbs-2019-summary-of-find...
And average lowest cost monthly gold premium on healthcare.gov is $516 ($6k annual) in 2019:
https://www.kff.org/health-reform/state-indicator/average-ma...
> Annuity return rates suck relative to pensions and especially stock market returns (ignoring potential long-term risk).
Ignoring the main risk of an investment certainly makes it cheaper. That is what we have been discussing these past few comments. Once those risks are taken into account, by legislation like PPA 2006, the time shifting of costs into the future becomes more difficult and is one big reason why DB pensions are not tenable.
Although, at this point, I would argue an even bigger reason is that they simply have been obviated (same for annuities by insurance companies). Why pay an insurance company a cut of your investment returns when you can get rock bottom expense ratios on target date funds from Vanguard or buy VOO? That is what all these DB pension fund managers and insurance companies are doing anyway. Same reason why whole life insurance is a scam. All of these products have been automated and their middlemen bypassed.
"...Same reason why whole life insurance is a scam. All of these products have been automated and their middlemen bypassed..."
What are the DIY alternatives to whole life?
What are the DIY alternatives to whole life?
There are multiple types of risks in financial instruments. Risk of loss of principal is only one of them. Risk of underperforming inflation is better addressed by equities than annuities. If there was one single "best" investment for everyone, everyone who was well-informed would just buy that.
For me (and I think many others), an annuity that ends at death is not my primary goal when considering how to arrange my investments.
For me (and I think many others), an annuity that ends at death is not my primary goal when considering how to arrange my investments.
The larger debate is fundamentally about how policy should channel people to maximize the public good in which equitable outcomes are a crucial component.
To my mind, Social Security, pensions, 401(k)s, and the like can all play a part. My larger point about pensions specifically is that there's nothing inherently less risky in pensions from a purely accounting perspective. Actuarial tables were astonishingly precise 100 years ago, and our ability to diversify and insure risk through private markets has only grown while at the same time U.S. monetary stability has achieved undreamed of heights, even considering asset inflation. The basic dilemmas and moral hazards, meanwhile, have largely stayed the same, albeit sometimes obscured by increasing technical complexity.
The biggest part of the puzzle concerns public policy. For some reason we keep returning to tired debates about socialist vs private markets or personal freedom vs authoritarianism, like we're still picking sides in an insurgent communist revolution at the turn of the previous century. (The current debates are astonishingly similar to the ones we've had prior, such as over hourly limits, employment disability insurance, and especially Social Security.) It's ridiculous. We have a decent grasp on which basic tools work better in which contexts and why, partly because the science of economics has improved, and partly because the past century saw a large number of social experiments play out at large scales both domestically and especially globally. The immediate question isn't which singular option to chose, it's about how to mix-and-match instruments and incentives. Interactions and second-order effects are still fuzzy, and political cultures do matter, but there are so many tremendous improvements we could make before we hit that next wall.
To my mind, Social Security, pensions, 401(k)s, and the like can all play a part. My larger point about pensions specifically is that there's nothing inherently less risky in pensions from a purely accounting perspective. Actuarial tables were astonishingly precise 100 years ago, and our ability to diversify and insure risk through private markets has only grown while at the same time U.S. monetary stability has achieved undreamed of heights, even considering asset inflation. The basic dilemmas and moral hazards, meanwhile, have largely stayed the same, albeit sometimes obscured by increasing technical complexity.
The biggest part of the puzzle concerns public policy. For some reason we keep returning to tired debates about socialist vs private markets or personal freedom vs authoritarianism, like we're still picking sides in an insurgent communist revolution at the turn of the previous century. (The current debates are astonishingly similar to the ones we've had prior, such as over hourly limits, employment disability insurance, and especially Social Security.) It's ridiculous. We have a decent grasp on which basic tools work better in which contexts and why, partly because the science of economics has improved, and partly because the past century saw a large number of social experiments play out at large scales both domestically and especially globally. The immediate question isn't which singular option to chose, it's about how to mix-and-match instruments and incentives. Interactions and second-order effects are still fuzzy, and political cultures do matter, but there are so many tremendous improvements we could make before we hit that next wall.
> My larger point about pensions specifically is that there's nothing inherently less risky in pensions from a purely accounting perspective.
For the recipient of an earned pension, there is substantially less volatility in future payout (as compared to defined contribution plans). There is some value in that for the individual. For people who are capable to save more than the minimum required in a personal account, an annuity is on-average worse than their own diversified portfolio of mostly equities. But for people saving/earning the minimum pension, capping downside risk has a pretty large benefit and, at least in that sense, I would say pensions are "inherently less risky".
For the recipient of an earned pension, there is substantially less volatility in future payout (as compared to defined contribution plans). There is some value in that for the individual. For people who are capable to save more than the minimum required in a personal account, an annuity is on-average worse than their own diversified portfolio of mostly equities. But for people saving/earning the minimum pension, capping downside risk has a pretty large benefit and, at least in that sense, I would say pensions are "inherently less risky".
Any vehicle which gives me more control I find preferable. A pension is great if it's competently managed and the entity it's tied to is stable. The problem is that it exposes you to counter party risk you can't reasonably mitigate.
Is the pension fund making sound investments? Will the city, state, or corporation be sound decades from now or will they be bankrupt or struggle to pay obligations made by their priors that were maybe inflated?
Private investment vehicles are independent of your employer. If they go bust your balance is sound if it wasn't in their securities, which is again ultimately the investor's choice. If I make bad investment decisions I can live with it. I can't live with promises others couldn't keep, I'm at their mercy.
I would prefer eliminating 401ks entirely and expanding IRAs. IRAs allow choice of broker and much wider investment options. If I know what I'm doing I can take more risk. Otherwise I can play it safe with mostly index funds and sensible asset allocation. If I don't know where to start I can hire an advisor or multiple of my choosing to handle it for me. It also would eliminate vesting periods which keep people in jobs they're unhappy with.
> nobody reports on someone's 401(k) fund vanishing during a recession
Recession dips are temporary. If you're well diversified and don't panic sell the balance should recover. Whatever balance you're relying on near term should not be in something volatile like the stock market.
Is the pension fund making sound investments? Will the city, state, or corporation be sound decades from now or will they be bankrupt or struggle to pay obligations made by their priors that were maybe inflated?
Private investment vehicles are independent of your employer. If they go bust your balance is sound if it wasn't in their securities, which is again ultimately the investor's choice. If I make bad investment decisions I can live with it. I can't live with promises others couldn't keep, I'm at their mercy.
I would prefer eliminating 401ks entirely and expanding IRAs. IRAs allow choice of broker and much wider investment options. If I know what I'm doing I can take more risk. Otherwise I can play it safe with mostly index funds and sensible asset allocation. If I don't know where to start I can hire an advisor or multiple of my choosing to handle it for me. It also would eliminate vesting periods which keep people in jobs they're unhappy with.
> nobody reports on someone's 401(k) fund vanishing during a recession
Recession dips are temporary. If you're well diversified and don't panic sell the balance should recover. Whatever balance you're relying on near term should not be in something volatile like the stock market.
> The modern 401(k) practices emerged from one of these then-obscure tax codes, which I view as an unabashedly good outcome.
That's exhibit A of what I'm talking about!
This is an article about IRAs being heavily restricted, 401k's are in the same 400-section of the tax code. IRAs are subsection 408, 401k's are subsection 401(k).
Literally just stop talking about it, stop trying to get a personal finance blog going, stop trying to get youtube views funnelled over to a personal finance discord server, just let unaware people run around like chickens with their heads cut off because when you tell them whatsup they try to get the laws changed when they fail to take advantage of it adequately
Ignorance is bliss and convenient, this is where we are. Just get the tax breaks you have because of your superior reading comprehension skills and eventually your ability to outsource and augment those skills to experienced lawyers and accountants with the same skills.
That's exhibit A of what I'm talking about!
This is an article about IRAs being heavily restricted, 401k's are in the same 400-section of the tax code. IRAs are subsection 408, 401k's are subsection 401(k).
Literally just stop talking about it, stop trying to get a personal finance blog going, stop trying to get youtube views funnelled over to a personal finance discord server, just let unaware people run around like chickens with their heads cut off because when you tell them whatsup they try to get the laws changed when they fail to take advantage of it adequately
Ignorance is bliss and convenient, this is where we are. Just get the tax breaks you have because of your superior reading comprehension skills and eventually your ability to outsource and augment those skills to experienced lawyers and accountants with the same skills.
>Under these provisions, you would no longer be allowed to invest your IRA into private placements and single-member LLCs, regardless of your level of income or wealth.
Huh. So under current law, you can take your IRA money and "invest" it in a single-member LLC? Wild. Does that let you circumvent the proscription against living in properties you own through your IRA? Since in that case, the "owner" would be the LLC, rather than yourself per se?
Huh. So under current law, you can take your IRA money and "invest" it in a single-member LLC? Wild. Does that let you circumvent the proscription against living in properties you own through your IRA? Since in that case, the "owner" would be the LLC, rather than yourself per se?
The tax code (as written) doesn't even let you personally make repairs to property owned in a self-directed IRA. (Otherwise, you'd be able to work tax-free to improve an asset in your IRA.)
I’ve never known anyone to own a property as an IRA holding. Is that possible??
People definitely own rental properties in self directed IRAs. You have to be completely hands off - must hire property management, can't fix anything, etc.
I think you can get non-recourse mortgages, but it's more like 50% down instead of 20% like most non-owner occupied mortgages.
I think you can get non-recourse mortgages, but it's more like 50% down instead of 20% like most non-owner occupied mortgages.
Absolutely. You can own almost all kinds of assets in your IRA today excluding collectibles.
No it doesn't as that would fall under the rules for prohibited transactions of which there are strict rules and penalties. See https://www.irs.gov/retirement-plans/plan-participant-employ... .
It says that those types of transactions are prohibited between the plan and a disqualified person.
Does it prohibit those same transactions between an investment within the plan (like an LLC) and a disqualified person?
I mean, if I own Apple stock, I can buy things in the Apple store.
Does it prohibit those same transactions between an investment within the plan (like an LLC) and a disqualified person?
I mean, if I own Apple stock, I can buy things in the Apple store.
No, the LLC is the same as the plan in terms of rules against prohibited transactions. Apple thought experiment works, but if you are personally generating revenue that moves the needle on a IRA investment that would be a no-no.
Huh. Under current tax laws you can literally dodge paying taxes using a totally unintended loophole in something called 401k. Wild.
Same as with an IRA, though, it's intended for retirement savings and there are penalties for early withdrawal. The issue here (right or wrong) is self-directed IRAs being effectively usable for things other than growth investments.
The income has already been taxed. The economics are identical to other qualified retirement plans. This is simply more about restricting freedoms and making excuses for targeting Peter Thiel personally.
Restricting the freedom to dodge taxes...
... taxation is theft.
To be fair, taxation is useful for everyone and the common good. What can be considered.... wrong is EXTRA taxation. Meaning the governments job should be to operate as leanly as possible by being most efficient. To me that means, highly systems efficiently, low personnel overhead, large reduction in programs supported.
Instead - the name is big and bloated. Expanding budget deficits mean expanded spending, which can never go down.
Instead - the name is big and bloated. Expanding budget deficits mean expanded spending, which can never go down.
Couldn't agree more, I would be happy to pay taxes if the government represented me. However under the republic we have, it has fallen extremely short in representing my interest. I vote in every election, write letters to my representatives and attend town halls.
No, it's payment for goods and services. If you want to live in a stateless utopia, you don't get any of the benefits of the state. That's the social contract.
You can move to a different country if you disagree with the voters of this one.
Democracy is tyranny. Voting is for children. Contractual representation is an acceptable solution.
>"Democracy is tyranny"
War is peace. Freedom is slavery. Ignorance is strength.
War is peace. Freedom is slavery. Ignorance is strength.
I'm pretty sure minors are legally prevented from voting.
There is no theft in Somalia, just law of the jungle
Same exact $ amount as in a 401(k). This is only about power and control.
The problem is that he sold himself hundreds of thousands of dollars of stock for $5000. Yes, he wouldn't be able to do that with a 401k, but the point isn't about power and control, it's the fraud he commited.
> The income has already been taxed
This is not true - traditional IRA contributions are made pre-tax.
This is not true - traditional IRA contributions are made pre-tax.
Not in the US. IRA contributions are post tax. 401k contributions are pre-tax. Depending on where you live this may be semantics as they may be the same program with different names.
This is wrong. Both 401k and Ira have roth variants which are post tax. The normal variants are pre-tax.
Non-Roth 401ks can have before-tax and after-tax contributions, though I'm not certain I see the point of making after-tax contributions since the gains will be taxed at ordinary income rates (not as capital gains) when distributed and you won't be able to make withdrawals without penalty until you reach "retirement age". You might as well just open a brokerage account and invest on your own. The one selling point for after-tax 401k contributions was that you could roll them over into a Roth IRA later, but that won't be an option any more if this proposal passes. Which is too bad for anyone who was counting on a Roth IRA conversion as part of their retirement strategy.
You’re wrong and confusing people here. Roth’s are post-tax at investment, not taxed later. Traditional and 401k are pre-tax at investment, taxed on distribution. Economically equivalent.
There are Roth 401ks.
> You’re wrong and confusing people here
I'm sorry, but I made a factual statement. The money placed into a traditional IRA is a pre-tax contribution. The treatment of distributions is not relevant here; I am responding to a GP claim that money used in self-directed IRAs is strictly money that has been taxed.
I'm sorry, but I made a factual statement. The money placed into a traditional IRA is a pre-tax contribution. The treatment of distributions is not relevant here; I am responding to a GP claim that money used in self-directed IRAs is strictly money that has been taxed.
I’ve never understood why we tax income rather than wealth. Taxes pay for a stable society (army, police force, etc), which has more value for the wealthy.
Taxing tends to remove incentive to do something by increasing the cost. We want people to be productive (get paid an income)
Taxing wealth rather than capital gains and income seems far better, once you set aside the enforcement part of the conversation.
Once you bring that part in, you’re basically arguing we should o what’s easy, not what’s right.
Taxing tends to remove incentive to do something by increasing the cost. We want people to be productive (get paid an income)
Taxing wealth rather than capital gains and income seems far better, once you set aside the enforcement part of the conversation.
Once you bring that part in, you’re basically arguing we should o what’s easy, not what’s right.
This simple answer is it's easier. Income is mostly cash-denominated, so it's very easy to value. Wealth is often illiquid, so it's hard to know how much to tax.
Look at property tax, for example. It's a wealth tax and it requires a very complicated apparatus to generate ok-ish numbers every year. But that mostly works because houses are a moderately liquid market, so appraisers can mark to the existing market. And even then there's a lot of dubious stuff around the margins, like the way Trump was giving different valuation numbers depending on whether he wanted a loan or to brag (high valuation number) versus paying taxes (low valuation number).
Look at property tax, for example. It's a wealth tax and it requires a very complicated apparatus to generate ok-ish numbers every year. But that mostly works because houses are a moderately liquid market, so appraisers can mark to the existing market. And even then there's a lot of dubious stuff around the margins, like the way Trump was giving different valuation numbers depending on whether he wanted a loan or to brag (high valuation number) versus paying taxes (low valuation number).
The income has not been taxed. Thiel purchased securities inside the Roth IRA, and they gained value. Being inside a Roth protects those gains from being taxed. Roth IRAs were not intended to allow unlimited (or even "huge") gains to remain untaxed, which is why they had a low contribution limit.
What Thiel did was (and is) not illegal, but it is viewed as an abuse of the intent of a Roth IRA that (some in) Congress want to restrict in the future.
What Thiel did was (and is) not illegal, but it is viewed as an abuse of the intent of a Roth IRA that (some in) Congress want to restrict in the future.
This is just flat wrong. The income contributed to a Roth IRA is post-tax. It is a retirement account that is economically equivalent to a 401k. The only differences are 1) timing on when the gains are taxed and 2) whether you can self-direct it or not. Saying “not intended to allow” is simply nonsense that covers for the abusive 401k system that fleeces individuals at the benefit of the finance industry.
The "income" in this case is the gains on the stock purchased as part of the Roth IRA, not the income contributed.
Nobody cares about Thiel spending a few post-tax dollars on some wierdly cheap stock. The issue is that this stock grew to be worth US$5B within the Roth.
Nobody cares about Thiel spending a few post-tax dollars on some wierdly cheap stock. The issue is that this stock grew to be worth US$5B within the Roth.
That’s also incorrect. If he could have done this in a 401k he would have Exactly the Same amount of money.
He would owe taxes on the amount when he withdrew it from the 401k or traditional IRA. He will not owe taxes on it the gain occured while the stocks are in a Roth IRA.
Yes. Again, he will have the exact same amount of money in both cases at the end of the day. Somehow you envision that finding opportunities to return 10.000x on investment are a tax loophole. If have such “loopholes” available simply let me know and I will fund them on a pre- or post-tax basis. Perhaps society should allow more people the freedom to find these lottery tickets on their own and grow instead of demanding the funds and investing them in things like abandoned military equipment in foreign countries.
Also, I don't know the full scope of 401k's but the one I have is absolutely not post-tax and is equivalent to a traditional IRA, not a Roth.
You’re missing the point. In all accounts you are either taxed now or later. The exact same amount of $ value in incremental capital gains are untaxed in all qualified accounts, by design and intent.
One of us is clearly not correctly informed about this.
Traditional IRA: contributions are pre-tax, tax paid upon withdrawal. Theory is you will contribute more to avoid taxes while earning, compound growth works to your benefit, but now pay taxes on the full amount in the IRA as you withdraw it.
Roth IRA: contributions are post-tax, no tax paid on withdrawal. Conventional theory for typical earnings level is that you will be in a higher tax bracket when you start withdrawing then when contributing, so pay the taxes up front, let compound growth do its thing, then take out the entire amount with no taxes.
Ergo, if you can get contributions into a Roth that you know will show enormous amounts of gain, you're going to be able to pull that out entirely tax free. That would not be true for a traditional IRA or 401k, where you will pay taxes as you withdraw.
Traditional IRA: contributions are pre-tax, tax paid upon withdrawal. Theory is you will contribute more to avoid taxes while earning, compound growth works to your benefit, but now pay taxes on the full amount in the IRA as you withdraw it.
Roth IRA: contributions are post-tax, no tax paid on withdrawal. Conventional theory for typical earnings level is that you will be in a higher tax bracket when you start withdrawing then when contributing, so pay the taxes up front, let compound growth do its thing, then take out the entire amount with no taxes.
Ergo, if you can get contributions into a Roth that you know will show enormous amounts of gain, you're going to be able to pull that out entirely tax free. That would not be true for a traditional IRA or 401k, where you will pay taxes as you withdraw.
I agree with this. If you do the math, you will recognize that the end amount that you have in your pocket, given the same tax rate, is the same. That is true irrespective of the rate of return.
That's missing the point entirely.
If Thiel had been unable to place that stock into a Roth IRA (i.e. buy it with funds already in the Roth), then the gains on it would end up being subject to taxation. Instead, he will be able to withdraw the $5B or whatever it is without paying any taxes on those gains.
For example, had he done this with a traditional IRA, then as he eventually withdrew the money, he would pay tax on the full amount in the IRA.
Put pseudo-graphically:
Roth: 1: invest $1 of post-tax income in the IRA 2: direct the IRA to purchase $1 of some stock 3: wait N years 4: IRA now worth $5B 5: withdraw $5B tax-free
Traditional/401k: 1: invest $1 of pre-tax income in the IRA/401k 2: direct the IRA/401k to purchase $1 of some stock 3: wait N years 4: IRA/401k now worth $5B 5: withdraw $5B and pay income tax rate on $5B - $1
Difference in total benefit: whatever the tax is on $5B - $1
If Thiel had been unable to place that stock into a Roth IRA (i.e. buy it with funds already in the Roth), then the gains on it would end up being subject to taxation. Instead, he will be able to withdraw the $5B or whatever it is without paying any taxes on those gains.
For example, had he done this with a traditional IRA, then as he eventually withdrew the money, he would pay tax on the full amount in the IRA.
Put pseudo-graphically:
Roth: 1: invest $1 of post-tax income in the IRA 2: direct the IRA to purchase $1 of some stock 3: wait N years 4: IRA now worth $5B 5: withdraw $5B tax-free
Traditional/401k: 1: invest $1 of pre-tax income in the IRA/401k 2: direct the IRA/401k to purchase $1 of some stock 3: wait N years 4: IRA/401k now worth $5B 5: withdraw $5B and pay income tax rate on $5B - $1
Difference in total benefit: whatever the tax is on $5B - $1
>The income has already been taxed
Uhh... have you heard of capital gains tax? (And capital loss deductions).
Uhh... have you heard of capital gains tax? (And capital loss deductions).
The income contributed to a Roth is post-tax. This is economically equivalent to a 401k. Equivalent.
So? There are limits to Roth contributions(and 401Ks) which have been abused by finding loopholes, which the proposed law closes. The fact that it's post-tax has nothing to do with it. Something being post tax doesn't magically make it an untouchable investment. For example capital gains tax is applied to post-tax investments.
I really hope this doesn’t go away. My self directed IRA in Bitcoin has led me to prosperity. There was no other way to do it with my retirement funds really.
I need to subscribe to your newsletter. Mine has mostly reminded me that I'm not a skilled investor.
You've already won then. Why complain?
What's wrong with winning? Why not let people keep winning?
Because Bitcoin is a negative-sum enterprise. For the average speculator, total number of dollars out will be less than the total number of dollars in. That's exactly the opposite of what we want people to be doing with tax-advantaged retirement accounts.
The purpose of tax advantaged retirement accounts is to reduce the number of destitute people in retirement. It achieves this goal by providing a tax incentive on regular investment for people who would not otherwise invest.
If you won the lottery on crypto then you aren't going to be destitute in retirement. Pay the capital gains and enjoy your wealth.
Similarly, if you are a high earner and can afford to take advantage of things like the megabackdoor then you aren't going to be destitute in retirement. Pay the capital gains and enjoy your wealth.
If you won the lottery on crypto then you aren't going to be destitute in retirement. Pay the capital gains and enjoy your wealth.
Similarly, if you are a high earner and can afford to take advantage of things like the megabackdoor then you aren't going to be destitute in retirement. Pay the capital gains and enjoy your wealth.
> The purpose of tax advantaged retirement accounts is to reduce the number of destitute people in retirement. It achieves this goal by providing a tax incentive on regular investment for people who would not otherwise invest.
The purpose of tax advantage retirement accounts when originally introduced by ERISA was to give employees of private companies a safety net in cases where their pension defaulted or when a pension wasn't offered in the first place. There's really no mention of it being specifically for people who are destitute or would not otherwise invest. Traditional IRAs are available for everyone, even high earners, no gatekeeping.
> Pay the capital gains and enjoy your wealth.
Traditional IRAs are taxed on withdrawal and function much like other investments.
The purpose of tax advantage retirement accounts when originally introduced by ERISA was to give employees of private companies a safety net in cases where their pension defaulted or when a pension wasn't offered in the first place. There's really no mention of it being specifically for people who are destitute or would not otherwise invest. Traditional IRAs are available for everyone, even high earners, no gatekeeping.
> Pay the capital gains and enjoy your wealth.
Traditional IRAs are taxed on withdrawal and function much like other investments.
If there is no benefit to the IRA, then why are you upset?
Tax breaks exist to promote prosocial behavior. Getting people who are struggling to be able to afford to save for retirement is good for society. Giving people who made it big with a lucky gamble a benefit is just good for that individual.
Tax breaks exist to promote prosocial behavior. Getting people who are struggling to be able to afford to save for retirement is good for society. Giving people who made it big with a lucky gamble a benefit is just good for that individual.
You know that some people care about how policies affect people other than themselves, right? They may even care about society as a whole.
I really don't see how enabling people to make wild fortunes in tax advantaged accounts if they get lucky in cryptocurrency is good for society as whole.
The default is taxable accounts. Things like IRAs and 401ks are exceptions carved out to encourage the population to invest so that they don't end up eating cat food at age 80. People building huge fortunes in their IRAs isn't achieving this goal.
The default is taxable accounts. Things like IRAs and 401ks are exceptions carved out to encourage the population to invest so that they don't end up eating cat food at age 80. People building huge fortunes in their IRAs isn't achieving this goal.
Because he feels that it's wrong that he made a lot of money doing something that other middle income earners could reasonably do, but now the ladder is getting pulled up behind him?
This is no skin off the back of the wealthy. They'll find another trick and life will go on. For those of them that actually care about "normal" Americans being able to do the same thing they did, it feels a little wrong that it requires an ever increasing amount moving parts and money to do what they did.
This is no skin off the back of the wealthy. They'll find another trick and life will go on. For those of them that actually care about "normal" Americans being able to do the same thing they did, it feels a little wrong that it requires an ever increasing amount moving parts and money to do what they did.
> This is no skin off the back of the wealthy
it is overly simplistic in USA - real people lose their "wealthy" status every day. You think a "wealthy" restaurant or bar owner is having a good day in 2021?
this class-baiting comes from the previous century, and IMO detracts from real problems right now
it is overly simplistic in USA - real people lose their "wealthy" status every day. You think a "wealthy" restaurant or bar owner is having a good day in 2021?
this class-baiting comes from the previous century, and IMO detracts from real problems right now
"Wealthy" in the context of most of the discussion surrounding this change are those with millions or billions in Roth IRAs. Those people's accountants will figure out a new strategy where they might have to pay a negligible amount in tax (if any at all). This change will be a few weeks of headache before it's largely forgotten. The only thing this will do for a struggling restaurant or bar owner in 2021 is ensure that they can't use money from their IRA to support their business.
I don't entirely understand what you're construing as class baiting. You don't have to have any contempt for the incredibly wealthy to acknowledge that they're going to walk away from this with extremely minimal losses, while your average person with a Roth IRA account won't be able to use it for starting or supporting their own business.
I don't entirely understand what you're construing as class baiting. You don't have to have any contempt for the incredibly wealthy to acknowledge that they're going to walk away from this with extremely minimal losses, while your average person with a Roth IRA account won't be able to use it for starting or supporting their own business.
I’d like others to win.
Why shouldn't you pay taxes on profits made speculating?
Is not all investment speculating? Very few investment classes provide 100% guaranteed returns.
You pay capital gains taxes on the majority of gains made via investment.
This change is intended to prevent the abuse of Roth IRAs as a way to shield potentially enormous capital gains from taxation.
This change is intended to prevent the abuse of Roth IRAs as a way to shield potentially enormous capital gains from taxation.
If that was true then they could simply cap the amount that was exempt from taxation.
I agree that this would be an alternate approach to tackling the issue, and to be honest, from what I've read so far, would be my preference.
Anytime you see politicians avoid a straight forward, transparent solution, for an opaque one, assume there are political games being played resulting in winners and losers.
Just like why a person working for a company offering 401k is allowed to save $19k in a tax advantaged retirement account, but a person working at a small sandwich shop not offering a 401k is only allowed to save $6k in a tax advantaged retirement account.
Just like why a person working for a company offering 401k is allowed to save $19k in a tax advantaged retirement account, but a person working at a small sandwich shop not offering a 401k is only allowed to save $6k in a tax advantaged retirement account.
The taxes are paid during the distribution. No distribution means no tax liability.
Presumably meant to address high net worth individuals completely dodging taxation on huge gains by using their IRAs for investments like exercising early-stage stock options.[1]
I kind of wish they'd go with just capping the gains, but would I still say that if I wasn't planning to use mine to "fund" high-return cryptocurrency arbitrages?
1) https://www.forbes.com/sites/sarahhansen/2021/06/24/peter-th...
I kind of wish they'd go with just capping the gains, but would I still say that if I wasn't planning to use mine to "fund" high-return cryptocurrency arbitrages?
1) https://www.forbes.com/sites/sarahhansen/2021/06/24/peter-th...
That may be the case but they are casting a very wide net. The numbers I've seen say there are on the order of 100k-1MM self directed IRA accounts that exist. Approximately 0% of which are lucky enough to be Peter Thiel and invest in founders stock of Paypal.
Assume this is meant to capture the Mitt Romney scenario.
https://www.theatlantic.com/politics/archive/2012/09/whats-r...
https://www.theatlantic.com/politics/archive/2012/09/whats-r...
Peter Thiel has a $5 billion Roth IRA
More recently, ProPublica showed that Peter Thiel (and others) did the same thing. Thiel amassed $5 Billion into an IRA that's nominally capped at $6k/year in contributions.
https://www.propublica.org/article/lord-of-the-roths-how-tec...
https://www.propublica.org/article/lord-of-the-roths-how-tec...
Did he use the mega-backdoor contribution thing, or did he grow it from a tiny amount?
He invested the entire amount ($1700 at the time, iirc) into his new startup before they'd raised any money: Paypal.
Then used the proceeds from that to invest in variety of things, including an early (angel?) investment in Facebook.
It's all detailed in the Propublica story where they described his Paypal investment as a "sweetheart deal".
Then used the proceeds from that to invest in variety of things, including an early (angel?) investment in Facebook.
It's all detailed in the Propublica story where they described his Paypal investment as a "sweetheart deal".
There's a huge survivorship bias with this. He put his IRA on 00 and it hit, but most of the time, it won't, and most people wouldn't take that bet. This is a lot of effort to solve a non-problem that got press coverage.
It seems strange to describe it as a "non problem" when he's successfully evaded something like a billion dollars in taxes. Romney did the same. Certainly many others have as well.
Thiel bought his shares at $0.001/share in the same round where the company was valued at $0.20/share. At very least, he should've been capped at 10,000 shares in the IRA but instead he contributed 1.7 million ($2k/year IRA contribution limit at the time).
It's like describing a software bug as a non problem since it only lead to two intrusions.. that you know of.. that cost your company a ton of money.
Thiel bought his shares at $0.001/share in the same round where the company was valued at $0.20/share. At very least, he should've been capped at 10,000 shares in the IRA but instead he contributed 1.7 million ($2k/year IRA contribution limit at the time).
It's like describing a software bug as a non problem since it only lead to two intrusions.. that you know of.. that cost your company a ton of money.
Romney's was in a regular IRA. He delayed taxes. Withdrawals are taxable as regular income. If he was really smart, he would have done it outside his IRA and paid the taxes on the lower capital gains rate.
> Thiel bought his shares at $0.001/share in the same round where the company was valued at $0.20/share.
The strike price and the "fair market value" are often different so there's nothing exceptional or even unique there. Odds are, half the people reading this thread have had the same situation in their careers. The difference is that this company (Paypal) ended up working so those shares became valuable.
If you or I did it, we'd pay the strike price, it'd be reported to the IRS at the FMV, and we'd pay the tax on the difference. In this case, it would be some percent (22? 25?) of 1.7M*(0.20-0.001) or ~$338k.
Of course, from there you get into the "unrealized gains" battle that screws over people with illiquid shares.
The strike price and the "fair market value" are often different so there's nothing exceptional or even unique there. Odds are, half the people reading this thread have had the same situation in their careers. The difference is that this company (Paypal) ended up working so those shares became valuable.
If you or I did it, we'd pay the strike price, it'd be reported to the IRS at the FMV, and we'd pay the tax on the difference. In this case, it would be some percent (22? 25?) of 1.7M*(0.20-0.001) or ~$338k.
Of course, from there you get into the "unrealized gains" battle that screws over people with illiquid shares.
What I like about Congress - is instead of saying "this provision can allow you to do well for retirement by investing in private companies self directed with an IRA and you might not need social security". Instead they act: "we're not rich, we're mad at the few who are - so instead of teaching you how to do this, we're going to make it illegal"
> we're not rich
Yes they are.
Yes they are.
To them they're not rich because Bezos has more money than them. "Taxing the rich" is normally defined as tax the people who make more than me
A few are... of course. Most senators could be above average - but they aren't Romney, Thiel, Powell rich. This is jealousy wrapped in political motive.
Both statements are false.
I'm actually pretty fiscally conservative but I think it's ridiculous that someone abused the intent of a Roth IRA by accumulating $5 billion into it.
The whole purpose of IRAs is to encourage regular people to save for retirement. It was not meant to provide billionaires tax loopholes to avoid paying millions or even billions of dollars in taxes.
It's kind of like playing a game with someone. 99% of the people are following the rules and then some weisenheimer comes up with an idea that while technically not breaking a rule goes against the spirit of everything that the game stands for. What happens in that instance is the other players of the game will say, "Nice try, but no." This is what Congress is doing.
The whole purpose of IRAs is to encourage regular people to save for retirement. It was not meant to provide billionaires tax loopholes to avoid paying millions or even billions of dollars in taxes.
It's kind of like playing a game with someone. 99% of the people are following the rules and then some weisenheimer comes up with an idea that while technically not breaking a rule goes against the spirit of everything that the game stands for. What happens in that instance is the other players of the game will say, "Nice try, but no." This is what Congress is doing.
Congress is preventing all people from investing in private companies within retirement accounts, not just rich people. Adding the cap is fine but preventing private company investment is asinine.
Preventing all people from investing in private companies or closing a loophole that the law was never intended to allow?
Because anyone can continue to invest in private companies. You just can’t get tax free growth from them.
Because anyone can continue to invest in private companies. You just can’t get tax free growth from them.
Ignoring rather or not you should be able to use an IRA to invest in private companies for a moment:
>anyone can continue to invest in private companies.
is a very bold claim.
>anyone can continue to invest in private companies.
is a very bold claim.
I meant to imply within retirement accounts. But the intention of retirement accounts is to get you to save for retirement through investments. Private companies are arguably the most effective way to grow wealth. Congress is saying they don't want you doing this they only want you to have access to stocks and bonds because private investments do to well.
Making a lucky investment is “abusing the intent”?
yes
It wasn't luck. He sold himself assets at below market value to launder them into his IRA under the contribution limit.
Wait, you’re accusing Thiel of money laundering?
I do not believe this behavior meets the definition of criminal money laundering, if that's what you're asking.
I think you should be able to invest in your IRA however you like, but there really should have been a limit on how much is tax advantaged. Or perhaps just a limit in terms of how large disbursements can be while still being tax advantaged?
Oh actually, if you go and read the bill text they link, there is in fact a cap at $10m along with other measures to close up loopholes. Starting at section 138301.
https://www.advantaira.com/wp-content/uploads/2021/09/WM-Tax...
https://www.advantaira.com/wp-content/uploads/2021/09/WM-Tax...
The whole article is predicated on the lie that low and middle income earners are buying private placements and LLCs in their IRAs. They are not. Full stop.
The whole deal is a 'we are spending tons of cash, so we need to take it from someone' plan. This isn't a "watching out for the average person" deal.
Or maybe it's trying to close loopholes around having to pay taxes.
>The whole deal is a 'we are spending tons of cash, so we need to take it from someone' plan
Funny how spending tons of cash is a problem only if it benefits poor and middle class people. I never saw this outrage on trillions spent on endless wars, since that benefits rich people. But if something helps poor or middle class and hurts rich people a little, there is a big outrage.
>The whole deal is a 'we are spending tons of cash, so we need to take it from someone' plan
Funny how spending tons of cash is a problem only if it benefits poor and middle class people. I never saw this outrage on trillions spent on endless wars, since that benefits rich people. But if something helps poor or middle class and hurts rich people a little, there is a big outrage.
I don't believe they're the same. Specifically on wars... the lack of 'outrage' is because people have been smart enough to tie "war" to nationalism, patriotism, and "watchdog for the world" which instills a sense of pride in a majority population nationwide; instead of seeing it as a drag on prosperity, nation mongering, and self interest dealing.
If they wanted to specifically get rid of loopholes, they would scrap The whole employer requirement of 401k and let anyone contribute to an IRA up to the same limits for everyone.
But, of course, politicians want to let big businesses maintain their competitive advantage by making 401k have higher limits than IRAs.
> I never saw this outrage on trillions spent on endless wars, since that benefits rich people.
Tons of people have been outraged by the war, but it was politically unpopular across all income classes to be against the war in early 2000s.
But, of course, politicians want to let big businesses maintain their competitive advantage by making 401k have higher limits than IRAs.
> I never saw this outrage on trillions spent on endless wars, since that benefits rich people.
Tons of people have been outraged by the war, but it was politically unpopular across all income classes to be against the war in early 2000s.
>Tons of people have been outraged by the war
I am not talking about the war itself. I am talking about the outrage over spending on wars. For example, there is barely any debate in the public sphere about 'where to get money to spend on wars', but if it helps poor or middle income people, like say increased welfare payments, or healthcare or college, suddenly there is a huge outcry over "how do we pay for it".
I am not talking about the war itself. I am talking about the outrage over spending on wars. For example, there is barely any debate in the public sphere about 'where to get money to spend on wars', but if it helps poor or middle income people, like say increased welfare payments, or healthcare or college, suddenly there is a huge outcry over "how do we pay for it".
I meant spending on wars. I have seen many, many editorials and popular publications talk about how we can spend $x billion in Iraq and Afghanistan but not $x billion at home for various reasons.
What is "Full stop"? I'm seeing it used more and more in political internet discussions
It's a way to end a statement that you feel so strongly about that you're indicating to others no amount of arguing or talking with change your opinion on it. Your mind's made up and you believe in that statement so strongly that you believe it to be unequivocally universally true.
Announcing closed mindedness.... not something I would ever want to do but I can see how its helpful in letting people know not to waste their time. Is there a reverse of this? As in, I have an opinion but am open to hearing others and their rational
I think “announcing closed mindedness” is pretty reasonable when it’s something that’s just a fact. 2+2=4, full stop.
It's the British English term for "period", as in the punctuation mark.
I don't mean it to indicate closemindedness. I do mean it to indicate that there aren't a whole bunch of exceptions and clauses to come. Take it as a contrast to an article that spent a lot of time and words on an argument that was based on what I believe to be a very flawed assumption. IMO so flawed as to be intentionally deceitful.
That's a massive flex on your part, I know a co-worker who did this and he earns less than 185k a year.
Not sure if this is a joke but I’m pretty sure that’s not low or middle income.
$185k/year would be 95th percentile in income for the US.
The median income in the US was $67,251 in 2020 per the US Census Bureau. Low income would be much less than that, and middle income would approximate it. How many people making $70k/year do you think are investing in a private placement in their IRA?
That's false. I know for a fact that tens of thousands of middle class people are doing this today.
definitions of middle class are very fluid here.
Care to expand on this?
This rule is directed at a single prominent individual who put founding shares of their company (Paypal) into a IRA, which then let them be an early investor in Facebook and a long list of other well known companies, so that IRA is now worth billions
some additional information
(see page 10, part 3 for Retirement Account provisions) https://waysandmeans.house.gov/sites/democrats.waysandmeans....
https://www.irafinancialgroup.com/learn-more/podcast/self-di...
(see page 10, part 3 for Retirement Account provisions) https://waysandmeans.house.gov/sites/democrats.waysandmeans....
https://www.irafinancialgroup.com/learn-more/podcast/self-di...
One of my more controversial opinions is that tax advantaged retirement accounts should be eliminated entirely.
Almost all of the advantages of them accrue to the top decile of income earners. Why should we have exceptions in the tax code just to help richer people amass more money?
Almost all of the advantages of them accrue to the top decile of income earners. Why should we have exceptions in the tax code just to help richer people amass more money?
I have a product idea to take roths mass market. Might help with what you’re describing.
Their assertion that this affects low and middle income people is absurd.
> Under these provisions, you would no longer be allowed to invest your IRA into private placements and single-member LLCs, regardless of your level of income or wealth.
> This will result in significant tax consequences for many people, including low and middle-income investors.
BS! In order to legally invest in private placements, you must be a "accredited investor" which means you earn over $200k individually or $300k jointly. If you're making over $200k, you're not middle class AT ALL. You're solidly in the top 10% of the country and likely much higher. This provision will have almost zero impact on middle class America
> This will result in significant tax consequences for many people, including low and middle-income investors.
BS! In order to legally invest in private placements, you must be a "accredited investor" which means you earn over $200k individually or $300k jointly. If you're making over $200k, you're not middle class AT ALL. You're solidly in the top 10% of the country and likely much higher. This provision will have almost zero impact on middle class America
That's certainly middle class lifestyle in many states in the US if you have a family with kids and have never had a windfall from parents, inheritance, startup luck, etc. Trying to figure out retirement on top of that is a challenge.
Earning > $300k when married filling jointly is very much not a middle class income & lifestyle. I certainly won’t disagree that figuring out money and retirement at that income level is hard, but 95% of America has it harder.
So I’ll say that then saying this impacts the middle class is disingenuous at best. On top of that, private placements usually require bare minimum investments of $50k and realistically $100k min investment is not uncommon. If you have that sort of cash to put into higher risk deals, middle class you are not.
So I’ll say that then saying this impacts the middle class is disingenuous at best. On top of that, private placements usually require bare minimum investments of $50k and realistically $100k min investment is not uncommon. If you have that sort of cash to put into higher risk deals, middle class you are not.
So, progressively since probably the 1980s (maybe earlier?) Australia has introduced a system called "superannuation" (or just "super" for short). There are two parts to this:
1. Mandatory contributions: currently 10% of your income; and
2. Voluntary contributions: you can contribute more and get a lower tax rate for doing so. By comparison, 401k contributions are tax free. Voluntary super contributions are not.
This is intended to fund people's retirements to alleviate the upcoming strain on the Aged Pension just like the issues with Social Security. That is, in 10-20 years there'll be <3 working people per retired person.
Australia's super requirements are stricter (eg currently you cannot withdraw before 65; 401k is 59.5). There are other differences.
Anyway, super is generally in mutual funds and the like. But there is an option for Self-Managed Super Funds (SMSFs).
This is where you can basically run your own fund. You need to get audited, pay fees, have an investment strategy, etc. Generally these are used to invest in things you can't through mutual funds. And this is abused to invest in residential real estate (because, you know, it always goes up).
I generally think this system has been a disaster and shouldn't be allowed. It's to protect people from themselves, basically.
For example, super investments can't be leveraged but through SMSF shenanigans I've seen balances wiped out by effective leveraging.
Also, you'll see marriages where one spouse's super balance is used by another in a bad manner and then the marriage breaks down and this just adds to the financial disadvantage and stress of that spouse. I imagine this is particularly an issue in the case of psychologically abusive marriages.
So I'm for any reform that restricts IRAs and 401ks from these one man shops.
1. Mandatory contributions: currently 10% of your income; and
2. Voluntary contributions: you can contribute more and get a lower tax rate for doing so. By comparison, 401k contributions are tax free. Voluntary super contributions are not.
This is intended to fund people's retirements to alleviate the upcoming strain on the Aged Pension just like the issues with Social Security. That is, in 10-20 years there'll be <3 working people per retired person.
Australia's super requirements are stricter (eg currently you cannot withdraw before 65; 401k is 59.5). There are other differences.
Anyway, super is generally in mutual funds and the like. But there is an option for Self-Managed Super Funds (SMSFs).
This is where you can basically run your own fund. You need to get audited, pay fees, have an investment strategy, etc. Generally these are used to invest in things you can't through mutual funds. And this is abused to invest in residential real estate (because, you know, it always goes up).
I generally think this system has been a disaster and shouldn't be allowed. It's to protect people from themselves, basically.
For example, super investments can't be leveraged but through SMSF shenanigans I've seen balances wiped out by effective leveraging.
Also, you'll see marriages where one spouse's super balance is used by another in a bad manner and then the marriage breaks down and this just adds to the financial disadvantage and stress of that spouse. I imagine this is particularly an issue in the case of psychologically abusive marriages.
So I'm for any reform that restricts IRAs and 401ks from these one man shops.
seems similar in concept to an i401k in the US for self employed people. Its pretty much the only option they have though besides IRA's which are capped at an annual contribution of ~6k per year depending on your age.
Related, but I'm a US citizen that's moving over to Australia for work shortly. If you have a superannuation balance and you leave the country you can get it all as a lump sum, minus ~30%.
Just so people are aware, high income individuals can’t use IRAs. This is a direct action against middle to low income individuals.
https://www.irs.gov/newsroom/new-income-ranges-for-ira-eligi...
https://www.irs.gov/newsroom/new-income-ranges-for-ira-eligi...
You can contribute to a traditional IRA at any income. You can only take the deduction at certain income ranges though.
Also, you can “use” an IRA after you contributed to it, so you could be high income now but contributed to an IRA when you weren’t.
Also, you can “use” an IRA after you contributed to it, so you could be high income now but contributed to an IRA when you weren’t.
[deleted]
Oh? Then how did Peter Thiel shelter billions in a Roth IRA?
https://www.propublica.org/article/lord-of-the-roths-how-tec...
This is direct action against rich people abusing a middle-class retirement account. What percentage of actual middle-class people are investing in "private placements and single-member LLCs"? I'd guess it's close to zero. And it probably should be. The whole reason governments create retirement accounts with special advantages is to make sure people are self-supporting in old age and don't need additional state support. That means they should be investing in a broad spectrum of low-risk stuff, not exotic, hard-to-value instruments.
https://www.propublica.org/article/lord-of-the-roths-how-tec...
This is direct action against rich people abusing a middle-class retirement account. What percentage of actual middle-class people are investing in "private placements and single-member LLCs"? I'd guess it's close to zero. And it probably should be. The whole reason governments create retirement accounts with special advantages is to make sure people are self-supporting in old age and don't need additional state support. That means they should be investing in a broad spectrum of low-risk stuff, not exotic, hard-to-value instruments.
No. The income phase outs only apply if you or your spouse is also eligible for a workplace 401k plan. If you don't work somewhere that offers a 401k plan, there is no income level limit for contributing to a traditional IRA.
Not true.
>The backdoor Roth IRA conversion is a technique where investors who earn too much to contribute directly to a Roth IRA make after-tax contributions to a traditional IRA and then convert the contributed amount, and perhaps other money in the account, to a Roth IRA.
https://www.thinkadvisor.com/2021/09/22/what-to-do-if-congre...
>The backdoor Roth IRA conversion is a technique where investors who earn too much to contribute directly to a Roth IRA make after-tax contributions to a traditional IRA and then convert the contributed amount, and perhaps other money in the account, to a Roth IRA.
https://www.thinkadvisor.com/2021/09/22/what-to-do-if-congre...
Then why do Warren Buffet and Peter Thiel have billions in them?
More complicated: they can contribute to IRA and pay taxes on it, and then they can convert to Roth IRA and have tax free appreciation of the assets, and tax-free withdrawals.
IANAL, IANA tax lawyer, TINALA
IANAL, IANA tax lawyer, TINALA
They can't contribute to a Roth IRA, but they can contribute to a Traditional IRA, just without a deduction.
https://www.irs.gov/retirement-plans/plan-participant-employ...
https://www.irs.gov/retirement-plans/plan-participant-employ...
Untrue in practice. High income individuals have several loopholes they can use to make Roth IRA contributions.
https://www.nerdwallet.com/article/investing/backdoor-roth-i...
https://www.forbes.com/advisor/retirement/mega-backdoor-roth...
https://www.nerdwallet.com/article/investing/backdoor-roth-i...
https://www.forbes.com/advisor/retirement/mega-backdoor-roth...
This is such a blatant misrepresentation of the facts it's scary.
Good. Capital is under-taxed.
On the contrary, I think we're being taxed too much.
This change effects actually zero people who aren't millionaires many times over - this website is literally a conservative think tank.
this change effects literally zero people who aren't millionaires many times over. The change effects high net worth individuals who are trying to game the system and not pay taxes. This is not even complicated.
This is not the tax loophole that needs closing. Policymakers are still refusing to tax the ultra high net worth elites.
It's not everything, sure.
But it does (attempt to) say "you cannot avoid paying tax on gigantic capital gains by shielding it inside a Roth IRA". It is absolutely directed at ultra high net worth elites.
There is an argument that simply capping the gains inside a Roth IRA that can be tax-exempt would be a more efficient way to do this.
But it does (attempt to) say "you cannot avoid paying tax on gigantic capital gains by shielding it inside a Roth IRA". It is absolutely directed at ultra high net worth elites.
There is an argument that simply capping the gains inside a Roth IRA that can be tax-exempt would be a more efficient way to do this.
[deleted]
Peter Thiel has entered the chat.
This will force hundreds of thousands of people who own shares of small businesses within their retirement accounts to disgorge them.
They can't sell them to themselves because that's against the rules. If they distribute them then they have to pay a 10% tax penalty in addition to any income tax.
These are small thinly traded assets. What will very likely happen in practice is big wall street firms will come in and buy up thousands of American small businesses (retirees best assets) at a major discount similar to what Blackstone is currently doing with single family homes.
They can't sell them to themselves because that's against the rules. If they distribute them then they have to pay a 10% tax penalty in addition to any income tax.
These are small thinly traded assets. What will very likely happen in practice is big wall street firms will come in and buy up thousands of American small businesses (retirees best assets) at a major discount similar to what Blackstone is currently doing with single family homes.
> has $5 billion socked away in a tax free Roth IRA
How? You can only contribute a maximum of $7,000/year to all IRAs you own.
How? You can only contribute a maximum of $7,000/year to all IRAs you own.
He invested in paypal with it right when he started it and it was worth like nothing. After that IPO, he then doubled down and invested the paypal returns into facebook with it. It's talked about in this article.
https://www.propublica.org/article/lord-of-the-roths-how-tec...
https://www.propublica.org/article/lord-of-the-roths-how-tec...
Highlights:
1. You can't add new contributions to tax-advantaged accounts if their total value exceeds $10 million and you make over $400K for single filers, amounts indexed to inflation.
2. There are required minimum distributions if you have tax-advantaged accounts over $10M and make over $400k. There's a more rapid drain if you have over $20M.
3. Closes the backdoor Roth IRA (https://www.bogleheads.org/wiki/Backdoor_Roth) only for people making over $400k. Closes the mega backdoor (https://www.bogleheads.org/wiki/Mega-backdoor_Roth) for everybody.
4. Prohibits you from using a tax advantaged account to invest in securities that require "accredited investor" status (hedge funds, etc). You also can't use the tax advantaged account to invest in businesses where you have 50% or more of an interest.
Unless you're super rich, were using a tax advantaged account to invest in your business, or were using the mega backdoor, which isn't available to everyone and still does require a pretty high income (investing more than ~$20k/year in a 401k), this doesn't really impact you. You can also still do whatever you want in a taxable account, so to me this just seems like a roundabout way of increasing taxes on wealthy people's investments.
I do wonder how much revenue this will raise, though. I can't imagine there are a ton of people with retirement balances over $10M. Maybe the expectation is that revenue will compound over time as more and more assets are held in taxable accounts.
EDIT: I think I was wrong about the backdoor Roth still being available to folks making under $400k (point 3) since you can't convert any after tax funds to a Roth with the proposal. So, this does affect people above the Roth ceiling ($140K single income, $208K married), if you were maxing out pretax contributions and making after-tax conversions to a Roth. I think pretax contributions to a traditional IRA for 401k can still get converted to a Roth.