A new bill in Congress would crack down on wealthy Americans who use 401(k) retirement accounts and IRAs as tax shelters for billions of dollars in wealth.
The 401(k) and IRA were designed to offer tax breaks to help Americans save enough money for a comfortable retirement.
At a certain point, however, a swelling retirement account isn’t really about retirement.
The bill would effectively cap IRAs and 401(k)s at $10 million, a sum far beyond the basic retirement needs of most Americans. The legislation would prohibit IRA contributions beyond that threshold for individual taxpayers earning more than $400,000, and it would require savers to draw down the accounts.
“Tax-preferred retirement accounts are not supposed to be a loophole for the ultra-rich
to shelter immense fortunes,” said Sen. Ron Wyden, D-Oregon. He introduced the legislation on July 22 with Rep. Richard E. Neal, D-Massachusetts.
Wyden has sponsored similar bills before, to no avail. But the idea of rich people abusing retirement tax breaks has traction among researchers on both sides of the political aisle.
IRAs and 401(k)s allow Americans to save money for retirement with a considerable tax advantage. In a traditional plan, you pay no tax on contributions. In a Roth IRA, you pay no tax on earnings. Research consistently shows higher-income Americans reap most of those benefits.
“The retirement tax preference probably doesn’t do much to increase retirement savings, but it’s a ton of money that flows mostly to high-income households,” said Andrew Biggs, a senior fellow at the libertarian American Enterprise Institute.
More than 32,000 taxpayers have IRAs worth $10M or more
Bill sponsors say more than 32,000 taxpayers have amassed $10 million or more in tax-favored retirement accounts. The average balance: $17 million.
At the top of the wealth heap, 208 taxpayers have $85 billion saved in IRA-type accounts, with an average balance of $409 million.
At that level of saving, “you’re basically amassing wealth for hereditary purposes, not for your own well-being,” said Monique Morrissey, a senior economist at the left-leaning Economic Policy Institute.
One might wonder how any American, no matter how wealthy, could amass $10 million in a tax-sheltered retirement account.
Those accounts have annual contribution limits. At its most generous, the federal government allows some older Americans to contribute as much as $35,750 to a 401(k) in 2026. IRA limits are lower.
“I’m just amazed people can do this,” said Jean-Pierre Aubry, associate director of research at the Center for Retirement Research at Boston College, on the proliferation of “mega” retirement accounts. “I don’t know how people get there.”
With a Roth IRA, Peter Thiel grew $2,000 into $5 billion
But wealthy people find ways around the guardrails. Avoiding mountains of tax is especially easy with a Roth IRA, Biggs said, because none of the investment returns are taxed.
The classic example is Peter Thiel. The PayPal co-founder famously (or infamously) invested less than $2,000 in a Roth account and watched it grow to $5 billion, tax-free.
Ultra-wealthy Americans fill Roth IRAs with shares in tiny startups, then watch their accounts multiply in value as the companies take off. If they wait until age 59½ to withdraw the funds, there’s no tax on the earnings.
"Certainly, the Peter Thiels of the world don't need a tax subsidy to save," said Norman Stein, professor emeritus at Drexel University's Thomas R. Kline School of Law. Stein has written extensively about capping wealth in tax-favored retirement plans.
Wyden’s bill, whatever its fate, is part of a larger conversation about the future of tax-sheltered retirement savings plans. Research suggests the tax perks mostly benefit wealthier Americans.
For households in the top 10% by income, the median retirement account held $559,000 in 2022, according to the federal Survey of Consumer Finances. An overwhelming 93% of those households held retirement plans.
For middle-income Americans, those in the 40th to 60th percentile by income, the median retirement plan held just $39,000, and nearly half of that group had no retirement savings.
"You think about who's going to have trouble saving for retirement on their own, the system is just backward," Stein said.
Should IRAs and 401(k)s be abolished?
Biggs has suggested the federal government should abolish the 401(k) and IRA, which cost the nation hundreds of billions in lost tax dollars, and use the proceeds to shore up the underfunded Social Security program.
“If I were in charge, I wouldn’t have the tax preference at all,” he said.
A better plan, Biggs and others have said, might be to enroll all workers automatically in retirement savings accounts.
Past experience has shown that auto-enrollment can work better than tax incentives in encouraging retirement savings.
When the United Kingdom introduced auto-enrollment for private-sector employees over several recent years, participation more than doubled.
Access to tax-favored retirement plans in the United States is widening as more states introduce automated savings programs, prodding companies to offer retirement plans and enrolling workers automatically.
Starting in 2025, most new 401(k) plans had to automatically enroll workers, rather than leave the decision to them.
Earlier this year, President Donald Trump signed an executive order that will broaden access to retirement savings for workers whose employers don’t offer 401(k)-type plans.
This article originally appeared on USA TODAY: Rich Americans use IRAs to make tax-free millions. Is that fair?
