I thought there was an income limit for contributing to a Roth IRA? I'm guessing all of their employees with access to the Medallion fund would be above that limit. I must be missing something.
'The firm initially terminated its 401(k) plan for employees in 2010, a step that permitted them to roll the savings into traditional IRAs. Then, employees took advantage of a rule change that year allowing affluent Americans to convert their traditional IRAs into Roths. '
Looks like they rolled all their savings in to traditional IRAs and then converted them in to Roth IRAs. This procedure, known as a 'Backdoor Roth' conversion, effectively allows unlimited Roth IRA contributions beyond the income limits. If you are scratching your head and asking, why this is legal - so are many other people, but it appears to be accepted as within regulation by tax experts.
Backdoor and Mega-backdoor Roth conversions do not allow unlimited contributions. They allow an unlimited conversion of (limited) contributions.
As for whether it ought to be legal, my view is that multiplication (of which both income taxation and compound investing returns are forms) is commutative and taxing an amount now (the conversion) and then having it grow for 20 years is no different than having it grow for 20 years and taxing it then (traditional IRA), assuming growth and tax rates remain the same.
A Roth conversion is in essence a bet on your marginal tax rate at withdrawal being higher than your marginal tax rate today.
Your comparison assumes that the alternative to backdoor Roth is a traditional IRA contribution. The (ab)use of backdoor Roth contributions is commonly done by high-earning employees who have access to a 401(k)/Roth 401(k) plan. In this situation none of their IRA contributions are actually tax deductible at all!
So the 'backdoor' Roth contribution allows such people to invest post-tax dollars w/ Roth benefits when the IRS income limits seemingly make it clear that they shouldn't be able to contribute in this fashion. Why does the IRS have income limits on Roth IRA contributions but then allow them to be so easily bypassed in this manner?
> Why does the IRS have income limits on Roth IRA contributions but then allow them to be so easily bypassed in this manner?
I think TFA answers this. The limits were put in originally, and then as part of Bush-era tax cuts, as a way to raise current revenue, the conversion was allowed knowing that billions in taxes would be paid today in order to convert. They predicted $9 billion and got something like $30 billion instead.
Taxing the money now, when a large part of it could be passed via inheritance tax free later, is not necessarily bad policy.
I have been suspicious of Roth IRAs because I keep seeing sales taxes increase in the US and a push for something like a VAT. Which might negate most Roth savings (but not in this case).
Interestingly enough, this is also supported - sometimes explicitly, sometimes implicitly - by several top tech companies. It can be a bit tricky to pull off if it's not systematically endorsed by the organization, but it's often very doable.
There is for direct contributions. However the strategy used here is sometimes called the backdoor Roth IRA because there are no income limits to rolling a traditional IRA into a Roth.
