Congress Wants To Ban Retirement | Roth IRA Under Attack

What's up, you gram? It's guys here! So, what if I told you that there's an account that you could start up today where all the profit you make is completely tax-free? And even better, you could potentially make hundreds of millions or billions of dollars doing this without having to owe the IRS a single cent. Oh, and it's also completely legal too, as long as you don't break a few very simple rules.

So, do I have your attention yet? Well, this is exactly how Peter Teel was able to turn what most people would consider to be a modest Roth IRA, available for anyone to set up with a few minutes of spare time, into a $5 billion tax-free fortune with a few basic strategies that anyone could use today. And he's not the only one! Even Romney was able to accumulate a million-dollar tax-free fortune by doing this one quick life hack the IRS hates.

But, like you would assume, not everyone is celebrating. That is because the other day, articles began to circulate about the potential end of the Roth IRA as we know it. Instead, Congress would move to ban and limit contributions that would place restrictions in terms of how much you're able to save and invest for retirement, lower the amount that's considered tax-free, and therefore close the opportunities that stand to make some people a lot of money.

So let's not waste any time! Whether you're just learning about this for the first time today and you want to make tax-free millions—I mean, who doesn't?—or you want to hear about these loopholes that were able to make some people a lot of money and why Congress wants to get rid of them, just hear me out. I promise by the end of the video you'll either be able to set up one of these accounts for yourself or you'll be fully aware of the benefits and be able to set yourself up on a tax-free retirement as well.

But first, it would mean a lot to me if you retired that like button for the YouTube algorithm by taxing it until it turns blue. It helps out the channel a ton, and best of all, if you tax the like button in the next 5 seconds, I'll show you a picture of a baby headshot, right?

So first, in order to understand exactly what's going on and how some people are able to make a lot of money completely tax-free, we need to talk about one of my all-time favorite accounts out there that everyone should be investing in, and that would be a Roth IRA. Think of it this way: just like you have a bank account that gives you access to a checking and savings account, you could go and open up a Roth IRA that gives you access to your investments that can grow completely tax-free.

Now, the term Roth just means that you've already paid taxes on the money you contribute to the account. So, for example, if you have a paycheck of $1,000 a week, chances are your taxes have already been taken out of that paycheck, and what's left over is called your post-tax money or, more simply put, it's after-tax. So, with some of that jargon out of the way, here's how a Roth IRA works: you're able to open up one of these accounts and deposit up to $6,000 a year if you're under the age of 50. If you're over the age of 50, you can put up to $7,000 a year, as long as you fall within certain income brackets.

The massive advantage to doing this is that all the money you contribute to that account can grow completely tax-free. That means if you invest $6,000 in the account, then it grows to $1,000,000, while in any other scenario, you would be forced to pay taxes on that when you sell, and that would be a bad time. But, in a Roth IRA, you could have all of that profit completely tax-free, as long as you wait until the age of 59 and a half. And hopefully, by then, we're talking about a lot of money here, completely tax-free!

And by the way, I'll send $50 to the first person who comments with how many times I've said "tax-free" in this video, because I realize it's probably going to be a lot. But anyway, just to show you guys how much money this could add up to over time: if you start contributing $400 a month to a Roth IRA starting at the age of 18, averaging a 7% return on your money, that will add up to nearly $1.2 million, completely tax-free, at the age of 59 and a half, all from $400 a month.

The other huge advantage to doing this is that you're able to withdraw whatever money you contribute to that account at any point without any penalty, without paying any additional tax. So, for example, if you deposit $6,000 into a Roth IRA and it grows to $2,000, you could still take out that original $6,000 investment at any time without any penalty, even before the age of 59 and a half.

Now, here's the thing: even though this all sounds simple enough, you're probably thinking to yourself, "$2.1 million is nice, but if the contribution limit is $6,000 and you contribute if you make more than $10,000 a year, how does somebody like Peter Teel use it to make $5 billion? And most importantly, can I do that too?" And the answer is yes, you can do that too! Well, kind of. Let me explain.

Well, here is where things get interesting. You're allowed to set up what's called a self-directed Roth IRA, which means that you get to invest your money however you see fit. If that includes buying 2023 GameStop call options for pennies on the dollar, there you go! In fact, under certain conditions, you can even invest in real estate within a Roth IRA, and really, the options just go on from here.

Which is where we get into the good stuff. In Peter's case, in 1999, he opened up a Roth IRA when he was 32 years old, not making a lot of money and working for a tiny little company you may have heard of—PayPal. He then invested $2,000 of his own money to buy PayPal stock at a value of $0.11 of $1 cent each, giving him 1.7 million shares of PayPal in his Roth IRA. Sure enough, PayPal became wildly successful, its share price ballooned to the moon, and he did what anyone would do: he sold some of those shares within the Roth IRA to invest in other companies, including Facebook.

After a series of well-performing investments, he was able to turn that $2,000 initial investment into now more than $5 billion within the account. As you would assume, that is now bringing a lot of attention to just how many people are doing this. Like Romney, who accumulated a million-dollar tax-free fortune using a Roth IRA; his ownership has carried interest. Ted Weschler from Berkshire Hathaway was also able to grow his to $264 million, and the hedge fund manager Rand Smith's account was recently at $252 million! All of this is done through the use of a self-directed Roth IRA, buying up shares of private non-public companies at an insanely low price, and then either IPOing the company or growing it to the point where you’re eventually a billionaire.

However, once news started getting out that some people were able to accumulate hundreds of millions or even billions of dollars tax-free, that inevitably drew criticism from Congress, who now wants to shut down certain aspects of this account and change the way the Roth IRA is structured.

All right, so now as far as potential changes to the Roth IRA, multiple bills are currently being drafted by Congress that would alter exactly how it works. The first one would limit the total amount of money that could be saved in tax-preferred retirement accounts, meaning once your account grows beyond a certain point, anything beyond that threshold would be taxed as normal.

Now, the second proposal would ban the purchase of privately held companies within a Roth IRA, which would eliminate the strategy that Peter Teel used when he was making billions of dollars. The issue they say is that privately held companies have no easily discernible market value, so it's unclear if those PayPal shares were really worth $0.11 of $1 cent each or if they were drastically undervalued at the time he took ownership. In fact, Congress is considering reforms such as banning the use of IRAs to purchase non-public investments, calling it a good starting point while protecting IRAs for everyday Americans to save for their retirement.

There's also a movement that will stop IRAs from being exploited. Now, on the other hand, those changes become very difficult to follow through with. For example, if you disallow account balances above a certain level, then you also disincentivize risk-taking, which means newer companies end up getting less investment. Or by disallowing investment in non-public companies, does that also apply to any other investment that's only available to accredited investors? What about off-market real estate or any other alternative investments that aren't publicly traded with no clear market value?

Although proponents of the current Roth IRA say that, contrary to all the stories about Teel's massive Roth IRA, what he did was absolutely legal. He followed the Roth IRA and tax contribution rules and did nothing wrong. He just happened to have a lottery ticket investment in his Roth IRA. I wish that for everyone! It really wouldn't be that much different from investing $2,000 a year in Amazon stock back when the Roth IRA was first introduced in 1997 and now having $25 million from what started off as a $1,000 initial investment.

Other members of Congress say that this is the very spirit of the Roth IRA and that earning a return is exactly the intention of making any investment, and if you could do this in a tax-free account like a Roth IRA, that's even better. That's just good tax planning and all perfectly legal. They also argue that because Roth IRA contributions are taxed up front, that leads to more immediate tax revenue because you're paying taxes now instead of paying it later. Plus, it's also worth noting that these enormous Roth IRA accounts are the exception and not the rule. Like it was found that fewer than 0.0007% of all IRAs have more than $25 million in them, and that only 791 IRAs have an account balance between $10 and $25 million. The vast majority of Roth IRAs—over 98%—have less than $1 million in them, arguing that overall large individual account balances have no impact whatsoever on Americans’ ability to save for their retirement.

Others even argue that Peter's investment could have easily gone the other way, noting that the majority of startups end up failing. It's also worth noting that his entire account is going to be subject to estate taxes when he passes away. So, even though it might be tax-free now, it doesn't mean it's always going to be tax-free.

So, in terms of what you could do about this, the likelihood that these changes would be made by Congress and how you could use this to your advantage, regardless of how much money you're making, to end up earning tax-free profits, here's what you need to know: on the surface, the easiest way to take advantage of this is to simply start a Roth IRA. Pretty much every brokerage offers a retirement account, so anything like Charles Schwab or Vanguard would work perfectly well.

Then once you open the account, you'll have the option to make investments within the account. Remember, the Roth IRA is not the investment itself; it is just the account that you can make investments within. Now, in terms of which investments to make, I personally just prefer a broad index fund because historically they return about 7% adjusted for inflation. But there's also nothing that says you can't start up a self-directed Roth IRA and throw it into call options or invest in pre-IPO startups. Maybe you could turn that $6,000 into tens of millions of dollars like Peter Teel! You just got to make sure you follow a few very simple rules.

The first one being, as of 2021, you're limited to a contribution of $6,000 a year, or $7,000 a year if you're older than 50. The second, even though you're able to withdraw contributions at any time without a penalty, once you take the money out, it's very difficult to put it back in. Now, third, if you take out any of your profit from this account before the age of 59 and a half, you're going to have to pay a 10% penalty and end up taxes on that money. So, just assume that if you put money in the account, it's going to stay there until 59 and a half.

Fourth, if you make more than $10,000 a year as a single person or $193,000 as a married person, that makes you ineligible for a normal Roth IRA contribution. But thankfully, there is something called the backdoor Roth IRA that you could use instead. This is done by contributing to a traditional IRA first and then immediately converting that to a Roth IRA instantly.

And then even better than that, there's something called a mega backdoor Roth IRA, which involves you contributing to a traditional 401(k) and then converting that over to a Roth 401(k). By doing that, you're able to contribute up to $40,000 a year that could grow tax-free.

Although overall, in terms of how likely Congress is to make changes to the Roth IRA, here's what I have to say: technically, Peter Teel or anybody else using a Roth IRA to accumulate hundreds of millions or even billions of dollars didn't do anything wrong. Peter Teel followed all guidelines; he invested his money in a company that very well could have gone bankrupt and it worked out well for him. He didn't own the majority of PayPal; it was considered a valid arms-length transaction, and he used the tax code to his advantage.

Now, the only part of the story that is not available to the average American is the ability to purchase private equity within a Roth IRA as an accredited investor, meaning you either make over $200,000 a year or you have a net worth above a million dollars. That allows you the opportunity to invest in highly liquid, risky startups where most likely you're going to lose all of your money.

And if you don't meet that threshold, well, then you're not allowed the same opportunities as Peter Teel. Personally, I believe that if investors could get instant access to margin on Robinhood or be able to trade options with little to no experience in a matter of minutes, then they should be able to access private equity deals without a high barrier to entry.

Even though it's certainly risky, it would level the playing field for so many people and bring a lot more money to new companies, which might continue to grow the way it's structured right now. It's inhospitable to growth, and if anything needs to be changed, it should be that.

But, in terms of the Roth IRA, the only concern that I have is if Peter falsely and knowingly underreported shares of PayPal for the purpose of stuffing them in a Roth IRA for tax avoidance. I see no issue investing $2,000 in PayPal at $0.11 per share, if that's what they were actually worth. But if that was a significant and intentional discount for the purpose of being able to stuff it in a Roth IRA, then yes, that's suspicious, and I don't blame Congress for wanting to investigate that even further.

But even so, the issue then becomes, how do you define the value of a startup with no definitive market value when it has a high likelihood of eventually failing? Realistically, there's just not going to be a way to do that, especially if no other companies have come before it. Not to mention, if you cap profits above a certain threshold, that just disincentivizes risk, and if you remove private equity investments, then that unfairly gives an advantage to publicly traded companies which get even more investment.

There's really no easy solution to this, but from the way I see it, these really large accounts are far from the norm. Very few of them exist, and I'm sure far more people have done something like this and lost money than have seen their accounts grow to a point where they're featured on Forbes. That's why I believe that the biggest risk right now to the Roth IRA is most likely going to be the elimination of the backdoor Roth IRA contribution, which allows high-income people to get around the income limitations.

I really wouldn't be surprised if that were to disappear at some point, which, if that happens, makes the Roth IRA even more valuable to the people who do qualify. But, in terms of capping the amount of money that you can make within the account or disallowing certain investments that are publicly traded, I just can't see that happening.

So, I would say we should do more to encourage people to save and invest for their retirement. There should be more education and awareness to incentivize people to take advantage of the resources available to them and understand that Peter's $5 billion Roth IRA account balance does not take away from the average American's ability to save for retirement.

Now, it does highlight that private equity deals are high-risk, high-reward and they should be available to more Americans. But really, at the end of the day, the best thing that we could do is bring more awareness around personal finance, saving money, and investing.

And then, adding up how many times I've said "tax-free" in this video because, like I said, the first person to comment with exactly how many times I said "tax-free" in this video gets $50! So, good luck, and let me know how many times I said it!

So, with that said, guys, thank you so much for watching! I really appreciate it. As always, make sure to destroy the like button, subscribe button, and notification bell. Also, feel free to add me on Instagram; I post pretty much daily. So if you want to be a part of it there, feel free to add me.

There’s my second channel, the GR Steffan Show. I post there every single day I'm not posting here. So if you want to see a brand new video from me every single day, make sure to add yourself to that.

By the way, just to throw some people off: tax-free, tax-free, tax-free, tax-free, tax-free, tax-free. So you better include all of those tax frees in that comment, and this is ensuring that only the people who watch into the very end can actually get the right answer. So good luck and enjoy!