Here is a tip that you can easily copy from the richest people in the world. After all, it was designed for you in the first place.
Tycoons like Warren Buffett and PayPal founder Peter Thiel have racked up millions if not billions of dollars in tax-sheltered retirement accounts, according to a recent report from ProPublica.
Leaked tax documents show that individual retirement accounts (IRAs), originally created to help the middle class save for a comfortable retirement, are now helping the ultra-rich become ultra-rich.
While lawmakers promise to fill loopholes in the tax code, working Americans should heed: If a tax strategy is attractive enough for billionaires to borrow, be sure to take advantage of it yourself.
Lawmakers find thousands of ‘mega’ IRAs
Following the ProPublica report, a few lawmakers asked the Joint Committee on Taxation to find out exactly how many “mega IRAs” were out there with balances of $ 5 million or more.
The answer: almost 25,000 in the 2019 tax year, three times more than in 2011. Almost 500 accounts hold more than $ 25 million.
Buffett, who has always supported a tax hike on the rich, had a Roth IRA valued at $ 20.2 million at the end of 2018. Ted Weschler, one of his deputies at Berkshire Hathaway, held $ 264.4 million in his.
Meanwhile, Thiel owns a Roth IRA worth $ 5 billion.
“It is shocking, but not surprising, to see how the use of mega-IRA accounts by mega-millionaires and billionaires has exploded,” said Senate Finance Committee Chairman Ron Wyden, one of the lawmakers investigating a crackdown, in a statement.
“IRAs were designed to provide retirement security for middle-class families, not to allow the super rich to avoid paying taxes.”
What exactly are billionaires exploiting?
Traditional IRAs allow people to save and invest a portion of their income before it gets taxed, potentially giving them a good payback. Your savings and investments can grow tax-free in the account until you cash them in and get taxed in retirement.
Roth IRAs – the type billionaires use – work the other way around. Your income is taxed before it goes into your account, but after that, you will no longer be taxable on your income once you start making withdrawals later in life.
For most people, contributions are capped at $ 6,000 per year. Thiel’s Roth account started with a balance of just $ 2,000 in 1999.
The key is that anything you can accomplish with the money will be completely tax free.
Suppose you use that money to invest in a promising new tech startup and that business takes off. Even if you end up selling those stocks for a million times their original value, you won’t owe any tax on that growth.
Now you can turn around and invest your profits in more businesses. As long as everything goes in a Roth IRA account and you wait to cash out until you are 59 and a half, you won’t owe the government a dime.
How to make these benefits work for you
All things considered, there is little the average taxpayer can do to stop billionaires from exploiting the tax code. This is a problem for lawmakers like Wyden.
What average individuals can do is build yourself a little tax shelter, too.
This year, taxpayers earning less than $ 125,000 (or $ 198,000 for married couples filing jointly) can contribute the entire $ 6,000 to a Roth IRA. If you are over 50, the maximum is $ 7,000. Since IRAs can hold all kinds of investments, what you do with the money after that is up to you.
Most banks and brokerage firms offer these accounts. And if you don’t want to make the big investment decisions yourself, you can always open an IRA through a robot advisor who will manage your retirement account for you.
A popular robo advisor will even allow you to increase your account by investing your “spare”.
Your account might not reach $ 5 billion, but by the time you’re ready to retire, you should be a little closer to living like the 1%.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.