Why it’s Time to Convert Mega-IRAs to Mega-Roth IRAs

By Stephen J. Silverberg
New York Elder Law Attorney

Congress is in session, with Democrats working to create a social policy plan with a $3.5 trillion price tag. Where’s the money coming from? CNBC reports that a new type of required distribution from individual retirement plans, based on the account’s value and not the owner’s age, is on a discussion list.

Specifics are meager, but the general idea is to tap “mega” IRAs – tax-deferred retirement accounts over several million dollars, and $5 million is one level under consideration. The number of mega IRAs worth more than $5 million tripled in the past ten years, while the average working American owns barely $39,000.

The goal is to find funds to support the public policy programs. It’s not the first time government funding has put large tax-deferred accounts in its sights. As someone who watches the history of taxes the way other people watch football stats (although I watch those too), I am not at all surprised.

Tax-deferred individual retirement accounts never were meant to be used as tax shelters for the ultra-wealthy. They were created in 1974 to encourage salaried employees to save for their retirement by deferring taxes on contributions. For several years, IRAs were only available to employees without the benefit of an employer’s pension plan. They could contribute up to $1,500 per year and deduct the contribution on their income tax return.

Fast forward to today when multi-billionaires put tax-deferred dollars into IRAs. A Joint Committee on Taxation analysis published in July 2021 showed that over 28,600 taxpayers owned IRAs larger than $5 million in 2019. The mega-IRA accounts hold about $280 billion, according to the Committee report. About 500 people have IRAs larger than $25 million, with the average account about $150 million. As a young lawyer, I worked for the largest pension law firm in New York City. No one contemplated the amount in these mega-IRAs.

These mega IRAs account for less than one-tenth of 1% of the approximately 70 million taxpayers who own traditional or Roth IRAs. A lot of money is sitting in a relatively small number of accounts.  Changing the law and collecting funds from 70 million taxpayers would be more work than an aggressive push to 500 people.

There are many Americans whose IRAs have between $40,000 and $5 million. Regardless of what form this legislation eventually takes, the bottom line is that the money for the social policy program must come from somewhere and that somewhere involves taxes.  The Roth IRA, funded with after-tax dollars, is about to become a lot more popular.

Besides paying taxes upfront, there are (as of this writing) no requirements for withdrawals from a Roth account, and converting a traditional IRA to a Roth IRA is relatively easy. Income Tax is due upon the conversion, but if income tax rates go up, as we expect, then paying taxes now is a better choice than paying after there are any increases.

For wealthy households concerned with increasing tax levels and the possibility of the government taking bites from a mega-IRA, converting a traditional IRA to a Roth IRA could be the right move for right now.

About the Author
Stephen J. Silverberg is nationally recognized as a leader in the areas of estate planning, estate administration, asset preservation planning, and elder law. He is a past president of the prestigious National Academy of Elder Law Attorneys (NAELA), and a founding member and past president of the New York State chapter of NAELA.