Most Americans rely on retirement accounts as a way to eventually stop working without falling into poverty. For the rich, they’ve become something more — a powerful tool to avoid taxes and pass on wealth to heirs.

More than $279 billion sits in mega-IRAs, individual retirement accounts with at least $5 million each, according to Congress’s nonpartisan Joint Committee on Taxation. Despite rules designed to limit IRA contributions by the wealthy, almost 29,000 Americans hold these giant accounts, and nearly 500 of them somehow managed to get $25 million or more into their IRAs.

Democrats in Washington are trying to thwart the trend of ever-larger IRAs. A tax plan approved by the House Ways and Means Committee on Wednesday includes limits on their use by the wealthy, including a provision that would impose restrictions on retirement accounts whose value exceeds $10 million.

Before Congress floated these new rules, the once-humble IRA was getting a lot of attention from the wealthy, their advisers say, thanks to Democrats’ and President Joe Biden’s other proposals to hike taxes on the rich, and especially on their investment gains. That’s because an IRA, particularly the coveted Roth IRA, creates a pool of assets that can be bought, sold and spent with zero tax consequences.

“You get tax-free growth and tax-free distributions for the rest of your years,” Nicole Gopoian Wirick, a financial planner who is president of Prosperity Wealth Strategies, said of Roth IRAs. Converting assets into the accounts “has become a really hot topic these days.”

Favoring the Rich
The new rules on IRAs would slow the flow of assets into mega-IRAs — if the changes survive the legislative process and become law. Senate Democrats have signaled they’re considering similar plans. The lawmakers’ concern, shared by some tax experts, is that a system created to help the middle class retire now lavishes too many perks on the richest of the rich.

“These tax-favored vehicles deliver a windfall to individuals at the very top of the income distribution, exacerbating already wide inequalities,” Urban-Brookings Tax Policy Center senior fellow Steven Rosenthal and University of Chicago law professor Daniel Hemel wrote in an analysis for the Senate Finance Committee last month. “Mega-IRAs are a symptom of an even more serious disease: a retirement savings system that disproportionately favors the rich.”

The retirement gap between the affluent and everyone else has steadily widened over the last 30 years. In 1989, the richest tenth of Americans held 6.5 times more in IRAs and other retirement accounts than savers in the 50th to 75th percentile by net worth. By 2019, according to the Federal Reserve Survey of Consumer Finances, the gap between the richest 10% and the middle had ballooned to 12 times.

Getting more than a few million dollars into an IRA used to be difficult, if not impossible, for all but extraordinarily lucky investors. The U.S. retirement system was built with strict limits on how much can be contributed to an IRA or a similar 401(k) account.

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