Bloomberg Tax
Feb. 28, 2023, 9:45 AM

Roth IRAs Have Transformed Into Big Tax Shelters for the Wealthy

Andrew Leahey
Andrew Leahey
Hunter Creek Consulting

I know you’re shocked to be reading that the tax code is being exploited by some gazillionaire to avoid paying their fair share. But let’s look at how a Roth IRA has turned into the go-to vehicle for sheltering billionaires’ billions in appreciation.

Turning a traditional retirement account into an empire-building Roth requires access to stock options that aren’t available to the general public. The solution is trivial in theory but is political poison: stricter income caps, limits on appreciation, and a tailor-made tax on Roth IRA withdrawals beyond a certain threshold.

First, a quick review of Roth IRAs. Whereas traditional IRAs provide the tax benefit at the time of contribution, Roth IRAs provide a tax benefit at the time of withdrawal. Since growth in Roth IRAs is tax-free, index funds and bonds are common choices for more conservative investors. For investors who are more interested in sheltering growth, higher-risk investments are the obvious target.

Solutions to the tax shelter Roth IRAs require returning to its original intent. When the Roth IRA became law through the Taxpayer Relief Act of 1997, it was intended as a retirement vehicle for the middle class who believed they may not be in a lower tax bracket at the time of retirement. It was meant to assure account holders that they would receive at least what they contributed—without a big chunk being owed in taxes.

From a quid pro quo perspective, the benefit that the government is receiving the tax proceeds upfront. With a traditional IRA, the government would need to wait until disbursement to receive its cut. It’s Economics 101 and the time value of money—a dollar on Monday is worth more than a dollar on Tuesday, because the former carries the possibility of collecting a day’s worth of interest before the latter is even paid. But to see $2,000 appreciate to $5 billion considering only the earning potential of time, you’d be looking at something like Tutankhamun’s retirement account.

The so-called backdoor Roth IRA— where taxes are paid upfront on contributions to a traditional IRA and then converted into a Roth—uses the lack of income restrictions on traditional IRAs and should be done away with. It isn’t a tax dodge at the time of conversion per se, but it does permit higher earners to get more money in a Roth than they otherwise could.

In a similar vein, forcing mandatory distribution at 59 1/2 ensures at least the term of the contract between society and the account holder is known. That places temporal bounds on the amount of time the account can appreciate tax-free and prevents Roths from being used as multi-generational estate planning.

Gold bars are displayed inside the Denver Mint on Oct. 28, 2015.
Photographer: Luke Sharrett/Bloomberg via Getty Images

With billionaire status come two things: money and access. The ultra-wealthy obviously have the ability to max out their annual contributions to their retirement accounts using only their coffee creamer budget. The most you can contribute to a Roth IRA in a year is $6,500 ($7,500 if you’re 50 or older), so money alone isn’t what’s helping billionaires in Roth IRA bingo.

Of course, Roth IRA regulations have some guardrails. There are income limitations beyond which you can’t make any contributions, and there are restrictions on so-called “stuffing”—using retirement account funds to purchase investments for less than their market value. All of this can be circumvented through a backdoor Roth.

The notion here is that the account holder has foregone the benefit of deducting their contribution to the account and thus has purchased the right to their appreciation tax-free. And that seems like a reasonable trade-off on paper, but the deal starts to look a bit lopsided when the taxable amount going into the traditional IRA is $2,000, and the amount coming out tax-free is $5 billion.

The backdoor Roth itself isn’t where the real advantage comes in. Billionaires gain their advantage over the middle class by combining the backdoor Roth IRA with access. Take Peter Thiel, for example, who managed to turn $2,000 in 1999 money into $5 billion in 2027 money—when he will be 59 1/2 and able to withdraw his investments tax-free.

So, doing some quick math, has Thiel been contributing to his Roth IRA for 714,285 years and some months? He is a noted life-extension and cryogenics enthusiast, but the numbers don’t seem to add up.

As it turns out, the trick is much simpler and doesn’t involve time travel or liquid nitrogen. If you can obtain preferential treatment in purchasing shares of a company for pennies or less using your retirement account, you can obtain huge swaths of startups at the ground floor and simply bet on one or more of them taking off. When one of them is a success and skyrockets in value, you can sell your interest tax-free under the auspices of your IRA. You’re then free to park your billion-dollar IRA with less risky investments and steadily build your “retirement account.”

The freeze-out for you and me comes from access, or lack thereof. We aren’t talking about “buying the dip”—consider Thiel’s purchase of millions of shares of PayPal in 1999 for $0.001 per share. How’d he get such a deal? He was a co-founder.

A simple ceiling on the amount that can be held in a Roth IRA may be the remedy for these billionaire tax shelters. Beyond a given threshold, say $10 million, the value would be taxed, perhaps even on a mark to market basis. This isn’t a hard cap on how much can be held in the account, but merely on how much can be held tax-free.

This ceiling can be adjusted with inflation and as the market requires. This is the final piece of the information puzzle to create at least the bare bones of a contract: Society will permit the account holder to enjoy tax-free appreciation up to a set limit in time and limit in total value, in exchange for the account holder foregoing an earlier tax benefit.

That sounds like something closer to a fair deal.

This is a regular column from tax and technology attorney Andrew Leahey, principal at Hunter Creek Consulting and a sales suppression expert. Look for Leahey’s column on Bloomberg Tax, and follow him on Mastodon at

Learn more about Bloomberg Tax or Log In to keep reading:

Learn About Bloomberg Tax

From research to software to news, find what you need to stay ahead.

Already a subscriber?

Log in to keep reading or access research tools.