Use our new AI tool to find the right Self-Directed IRA!

IRA Financial Blog

Capping The Roth IRA – Episode 299

Adam Talks

In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses a proposal to cap Roth IRA balances at $5 million, on the heals of the news of Peter Thiel’s $5 billion Roth IRA.

With all the talk about Peter Thiel’s $5 billion Roth IRA, this has led many to believe the government will start capping the Roth IRA. It’s been about five years since Senator Wyden of Oregon first introduced a plan to cap the Roth. The government may look to limit how much the wealthy can shelter from taxes.

What’s the Deal with the Roth IRA?

If you haven’t heard of the Roth IRA, you may be missing out on the best retirement plan around. The beauty of the plan is that all qualified withdrawals are tax free! Unlike a traditional IRA or 401(k) plan, there is no upfront tax break. However, so long as any Roth IRA has been opened for at least five years, and you are age 59 1/2 or older, all distributions from the plan are tax free.

The Roth is for those that don’t need the immediate tax break. Remember, anything you put in a traditional IRA is before taxes. You don’t pay tax on those contributions. However, the tax break is not huge, as you can only contribute $6,000 to an IRA (or $7,000 if at least age 50).

Plus, the younger you are, the more you can take advantage of the tax breaks from the IRA. Traditional distributions, including earnings, are taxed at your current income tax bracket. Fund in the Roth IRA will never be taxed, assuming you follow the criteria mentioned above.

Capping the Roth IRA

Why does the government want to cap the Roth IRA? The Roth was created to bring the government more tax dollars quickly. Since traditional plans are funded with pretax funds, this was a way to encourage savers to pay their taxes first. The did put an income restriction on direct Roth contributions for high earners. However, one can convert traditional IRA funds to a Roth, no matter how much money you earn.

As we stated earlier, Senator Wyden tried to cap the Roth five years ago. However, the plan didn’t get much traction. When we learned about Peter Thiel’s massive Roth IRA, politicians are quick to bring up the cap. As it stands, the original plan called for a $5 million limit to Roth IRA accounts.

The idea is to keep the super wealthy from sheltering hundreds of millions from taxes. But what about the smart people who made sound financial decisions and amassed a good nest egg? Should they get penalized because the super rich are doing dodgy things to avoid taxes?

As it stands, capping the Roth IRA might not happen as is. As Adam talks about in the podcast, the cap is simply too low, and he doesn’t think it will garner enough support.

What Can You Do?

There may be some kind of cap in the future for Roth IRA. In fact, they may change how the plan works entirely. Limiting conversion may be back on the table. Required distributions may also find it’s way on a bill. No one knows for sure. Obviously, you should speak with a financial planner or advisor whom you trust.

But, Adam has always talked about diversification. Yes, they usually means your investments. However, it also means the way your retirement funds are taxed. It’s always a good idea to save in both traditional and Roth plans. You can pay taxes on a known rate, and also delay them until the future. Taxes are based on your earned income. Of course, once you stop working, your tax bracket will be a lot lower.

Any way you look at it, a Roth IRA cap may be coming in the not-too-distant future. Plan accordingly!

Thanks for listening, and be sure to keep up with Adam Talks on our SoundCloud page. In an upcoming podcast, Adam will revisit the Roth IRA cap. A lot has changed since the original air date of this podcast and this writing! Stay tuned!


Latest Content

Send Us a Message!