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IRS closes "loophole" in Roth IRAs

February 8, 2004

The IRS is closing a "loophole" that's allowed individuals to avoid government-theft. Also see this article.

A Roth IRA is a retirement account that allows individuals to avoid being stolen from twice by the government. When you put money into a Roth IRA, you are taxed an initial income tax, but you are not taxed on the growth of the money thereafter, as your normally are (capital gains taxes).

The loophole is capitalized on when the tax-victim "shifts assets from a business to his Roth IRA". What the individual does is sell assets from a business he owns outside of the Roth IRA to one he owns inside of the Roth IRA for "less than fair value". This way, he can get more money into the Roth IRA than would otherwise be possible, as the company buys the assets at an under-valued cost.

Exactly what the IRS means by "fair value" is unknown. Possibly, it means the average market value of the good. More likely, it means whatever the IRS arbitrarily decides it means, and any decision would be arbitrary. When a transaction occurs, the fair value of the good transferred is whatever the two parties agree upon. The worst part is that they're using these kinds of transactions -- which are not prohibited by Roth IRA statute -- to arbitrarily disqualify the Roth IRA.


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