“Another newer concept that has been discussed is limiting the amount a person can keep in a retirement account,” said Jason Field, financial advisor at Van Leeuwen & Company in Princeton, N.J.
Media reports that PayPal co-founder Peter Thiel grew his Roth IRA from barely four figures to billions in just 20 years fueled the proposal in Congress. “This [proposal] has been dubbed the ‘Peter Thiel Rule’ due to his enormous amount of wealth in a Roth IRA that will never be taxed again,” Field said.
“The proposed limit would be $10 million. If the account is in excess of $10 million, the government wants them to withdraw half of the value each year until the account is under $10 million. This would help accelerate tax paid on these large retirement accounts,” he added.
Though details are still coming on the legislation, clients can take some mitigating steps now and in the future, advisors said.
Taxpayers above the income threshold and below the aggregate retirement account threshold will have 10 years to perform Roth conversions (the proposed measures take effect in 2032), according to a primer from Robertson Stephens Wealth Management in New York and Mallon FitzPatrick, managing director and principal.
It’s logical that if Roth use is curtailed for wealthy clients, other tax-advantaged retirement plans will crop up by the time legislation is enacted or soon after. The hunt for accounts friendly to tax situations will likely lead some to health savings accounts.
Still, it’s a good idea to complete backdoor Roth conversions before year-end and to begin Roth conversions this year to take advantage of currently lower income tax rates, and consider adding more to employer plans starting in 2022, FitzPatrick said.
Harmon’s top priority for clients is reviewing 401(k) balances to learn if after-tax contributions exist and to determine “what level of flexibility the plan offers to address a Roth conversion while a plan participant is still employed,” she said.