Feds Consider Limiting Large IRAs
November 20, 2014 by Arthur D. Postal
WASHINGTON – The Government Accountability Office (GAO) is suggesting that Congress should revisit the issue of how much money individuals should be allowed to keep in individual retirement accounts (IRAs).
The GAO said that is necessary because a small number of taxpayers have accumulated huge sums in IRAs. Added to that, the government is forgoing millions of dollars in tax revenue because there is a total limit on IRA accumulations.
The accumulation of these large IRA balances by a small number of investors “stands in contrast to Congress’s aim to prevent the tax-favored accumulation of balances exceeding what is needed for retirement,” according to the GAO.
An estimated 43 million taxpayers had IRAs with a total reported fair market value of $5.2 trillion in the 2011 tax year – the most recent year in which statistics were available – the GAO reported.
Few taxpayers had aggregated balances exceeding $5 million as of 2011, the GAO said. Taxpayers with IRA balances greater than $5 million are most likely to have adjusted gross incomes greater than $200,000, have joint tax filing status, and are likely to be age 65 or older.
The report found that 314 taxpayers had IRAs worth more than $25 million, and that 791 had IRA accounts of between $10 and $25 million. The GAO said the “taxpayer” it is referring to reflects a taxpaying unit that includes individuals as well as couples filing jointly, which may have more than one IRA owner. The IRA balance aggregates the value of all IRAs owned, including inherited IRAs.
Accumulating an IRA balance of more than $5 million would require large individual and employer contributions sustained over decades and rolled over from an employer plan, according to the GAO. There is no total statutory limit on IRA accumulations or rollovers from employer defined contribution plans, the report said.
The small number of taxpayers who have accumulated larger IRA balances probably did so by investing in assets unavailable to most investors, the GAO said. These assets would initially be valued very low and offer disproportionately high potential investment returns if successful.
“Individuals who invest in these assets using certain types of IRAs can escape taxation on investment gains,” the report said. For example, the holders of jumbo IRAs are likely founders of companies who use IRAs to invest in non-publicly traded shares of their newly formed companies. “They can realize many millions of dollars in tax-favored gains on their investment if the company is successful,” the GAO said.
To deal with the issue, the GAO is recommending that the Internal Revenue Service (IRS) establish a means to improve its ability to find information on non-publicly traded investments, which the GAO believes is the primary source of funds for super-jumbo IRAs.
The GAO said the IRS has enforcement programs covering specific aspects of IRA noncompliance, such as excess contributions and undervalued assets. The GAO recommended that the IRS and the Treasury should develop a legislative proposal to expand the statute of limitations on IRA noncompliance. This would help the IRS pursue valuation-related misreporting and prohibited transactions that may have originated outside the current statute’s 3-year window.