When individual retirement accounts (IRAs) were first introduced almost half a century ago, they were intended to help everyday Americans set some money aside for their retirement years. But the tax incentives that the new accounts provided weren’t lost on the rich or their accountants.

In recent decades, with the advent of the Roth IRA and relaxed restrictions on IRA rollovers, ultrawealthy Americans have reportedly built tax-sheltered accounts worth many millions—or even billions—of dollars. Here is how that happened. 

IRAs Were Controversial from the Start

IRAs first became available in the early 1970s, made possible by the Employee Retirement Income Security Act (ERISA) of 1974. Workers could put up to $1,500 of their income into an IRA each year and pay no tax on the money until they later withdrew it.

Initially, IRAs were limited to people without retirement plans at work, but that changed in 1981, when the Economic Recovery Tax Act opened them up to all workers and their spouses. The Tax Reform Act of 1986 then tightened the rules, setting income limits for tax-deductible contributions, based on whether the employee had access to a retirement plan at work. The new rules significantly reduced the number of people who could, and did, contribute to IRAs. 

As commonplace as they seem today, IRAs were controversial in those early decades. Opponents argued that they gave a needless tax break to middle- and high-income Americans at the general public’s (and the U.S. Treasury’s) expense. As The Washington Post summed up the argument in 1989, IRAs “simply rewarded people pretty far up the income scale for doing something they would have done anyway.”

Enter the Roth IRA

By 1991, however, lawmakers had begun to discuss adding a second kind of IRA: the back-loaded or “Super IRA,” which—unlike existing IRAs—would provide no immediate tax deduction but allow for tax-free withdrawals in future years. Perhaps not surprisingly, that concept was controversial, too.

Six years later, however, the Taxpayer Relief Act of 1997 introduced just such an IRA. It came to be known as the Roth IRA, in honor of longtime IRA advocate William V. Roth Jr., then a Republican U.S. senator from Delaware.

Americans could open a Roth IRA in two ways: through annual contributions, much like a traditional IRA (but without a tax deduction), or by converting all or part of an existing traditional IRA into a Roth (and paying tax on the amount that they converted). In both cases, the law set income limits on who was eligible.

In 2010, however, the income limits on IRA conversions were lifted.

Anyone, no matter how wealthy, could convert a traditional IRA into a Roth if they were willing to pay the taxes. That led to the invention of the backdoor Roth IRA. Taxpayers who had too much income to contribute directly to a Roth could contribute to a traditional IRA, then roll over the money into a Roth. (There are no income limits on contributing to a traditional IRA today, although the extent to which a contribution is deductible depends on both the person’s income and whether they’re covered by another retirement plan at work.)

Multimillion-Dollar Roth IRAs

A 2014 Government Accountability Office (GAO) report delivered the surprising news that, as of 2011, some U.S. taxpayers had managed to accumulate $5 million or more in their IRAs. “A small number of individuals have found IRAs, and in particular Roth IRAs, to be an advantageous investment vehicle for purchasing disproportionately profitable assets at a low initial value, or transferring such assets from employer-sponsored plans, without paying more than a nominal amount of tax on their gains,” the GAO explained.

The report added, “The use of IRAs permits these individuals to accumulate far more in resources, under favorable tax treatment, than may be reasonably necessary to support them in retirement.”

In response, the Senate Finance Committee in 2016 proposed the Retirement Improvements and Savings Enhancements (RISE) Act, which would have, among other things, eliminated all Roth IRA conversions—not only from traditional IRAs but also from employer-sponsored plans like 401(k)s. Sen. Ron Wyden (D-Ore.), the committee’s ranking member, said, “It’s time to face the fact that our tax code needs a dose of fairness when it comes to retirement savings, and that starts with cracking down on massive Roth IRA accounts built on assets from sweetheart, inside deals.”

The RISE Act failed to get off the ground, but the idea of restricting Roth IRA conversions lived on.

A $5 Billion Roth IRA

In July 2021, the Senate Finance Committee released a report showing that as of 2019, the number of taxpayers with at least $5 million in their IRAs had more than tripled since the 2014 GAO report. The numbers were still relatively small—about 28,000 taxpayers—but revealing. Of the 497 individuals with IRAs worth $25 million or more, the average account balance was greater than $150 million. The report called the accounts “mega IRAs.”

The Senate committee report came in the wake of a June 2021 ProPublica article based on what it said was tax return data from “thousands of the country’s wealthiest people.” It singled out tech investor Peter Thiel as an example, saying that over 20 years, he had managed to build a Roth IRA worth $5 billion.

ProPublica maintained that Thiel and others had “made an end run around the rules,” and it explained how that could be accomplished:

“Open a Roth with $2,000 or less. Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value. Pay just fractions of a penny per share, a price low enough to buy huge numbers of shares. Watch as all the gains on that stock—no matter how giant—are shielded from taxes forever, as long as the IRA remains untouched until age 59 and a half. Then use the proceeds, still inside the Roth, to make other investments.”

The article’s headline crowned Thiel “Lord of the Roths.” It also showed that the back door isn’t the only route to great Roth IRA wealth, for those who find the right startup shares to buy for their accounts in a year when their incomes qualify them to invest in a Roth.

The Biden Administration Took Aim

In 2021, the Biden administration took up the cause, making several IRA-related provisions part of its Build Back Better framework. That November, the House passed its version of the Build Back Better Act. The legislation would have prohibited the rollover of after-tax contributions from traditional to Roth IRAs after Dec. 31, 2021.

The bill would have effectively ended backdoor Roths that are funded by contributions to nondeductible IRAs. However, the Build Back Better Act was rejected by the Senate and a slimed down version of the bill was signed into law in August—the Inflation Reduction Act of 2022. The law did not limit Roth conversions, and no current legislation has language that would do so.

The Bottom Line

IRAs, which were created to encourage Americans with modest incomes to save for retirement, have since become a way for the ultrawealthy to enlarge their wealth and shield it from taxation. That has been particularly true with Roth IRAs. Congress has attempted to clamp down on practices such as backdoor IRAs through new legislation, but with little success to date.