Will the Roth IRA be subject to estate taxes in the future?

In our last blog entry we discussed some of the ways that the tax regulations are likely changing in the upcoming months.  All of this depends on the various parts of the current infrastructure bill and whether certain parts of the infrastructure bill is passed.  This bill will have a massive impact on the legal landscape, particularly in that of estate planning and administration matters, and among other regulations coming into enforcement.  Looking at the entirety of the infrastructure bill is well beyond the scope of this blog entry, but we can look at some of the arguments, particularly those focused towards estate planning.

The Roth IRA is a very useful vehicle for retirement, but also is tremendously useful for estate planning purposes.  Under Virginia law, retirement plans, including the Roth IRA, do not typically enter into the probate process.  This is because retirement plans have a listing of beneficiaries included.  However, when the beneficiary list is not completed, or has not been updated to reflect the then living beneficiaries, then the retirement plan must enter the probate process.  This is particularly important because a Roth IRA can have a substantial amount of funds located within it, and if these funds were subject to probate, then there would likely be a substantial tax.

As the tax framework changes, previously settled areas are reviewed for whether individuals are using the provisions and benefits of the tax laws as was originally envisioned.  For example, Roth IRAs are becoming increasingly popular, especially with the President’s proposed changes.  One of President Biden’s proposals in the infrastructure bill includes a tax credit for retirement contributions that will likely result in an approximate twenty percent reduction for all taxpayers. See: https://www.cnbc.com/2021/04/07/biden-tax-plan-may-spur-boost-in-roth-retirement-accounts.html

However, there are others that believe that Roth IRAs are not being used in the originally intended manner by the creators of the Roth IRA.  (The original legislation was by Senator William Roth, See: https://en.wikipedia.org/wiki/William_Roth).  The allegations are that people of high net worth are using the “backdoor Roth” conversion to change the normally taxed funds in a traditional IRA into funds that are typically immune to taxation according to the legal framework of Roth IRAs.  Additionally, there are claims that people are holding large sums of assets in the Roth IRA.  For example, Peter Theil (founder of Paypal) bought interests in smaller companies costing him only pennies on the dollar.  Since the time of purchase, the value of the shares that he owns in his Roth IRA have ballooned to over five billion dollars in net worth.  See: https://www.propublica.org/article/lord-of-the-roths-how-tech-mogul-peter-thiel-turned-a-retirement-account-for-the-middle-class-into-a-5-billion-dollar-tax-free-piggy-bank.  Some are concerned with the large amount of money being kept in Roth IRAs and wish for an overhaul of the entire structure, such as Sen. Ron Wyden, chair of the Senate Finance Committee.  See: https://www.propublica.org/article/the-ultrawealthy-have-hijacked-roth-iras-the-senate-finance-chair-is-eyeing-a-crackdown.

Even so, there are many arguments as to why the Roth IRA will not be taxed in the future.  See: https://www.investopedia.com/will-roth-ira-withdrawals-be-taxed-in-the-future-4770847. 

One of the proposed changes to the Roth IRA is to setup a limit that can be included in the Roth IRA.  The idea is that the limit would still allow the average person to make use of the Roth IRA.  Anything over the limit would be taxed and would furthermore likely be included in probate.  This would have major implications in the estate planning and administration field and would require careful planning to adjust an estate plan so as to avoid additional estate taxes.  (The process of probate is explained in one of our previous articles here).

It is highly advisable to discuss with a competent attorney when dealing with your Estate Plan or Trust. Call our office today at 540-443-9255, or email at [email protected] to discuss your estate planning needs with an experienced estate planning attorney.