The saga over Mitt Romney’s finances keeps getting more complex. The latest involves his Individual Retirement Account.
The IRA was introduced as a means to encourage people to save for their retirement by putting away some money each year that was tax-deductible (up to a certain income level) and where the accrued interest was tax-exempt. The idea was that when you started withdrawing the money in your retirement, your tax rate would be lower because you were now in a lower income bracket. For most people, it is their IRA, coupled with the Social Security income, that they depend upon in their later years.
Most ordinary people’s IRA accounts are of the Bruce Banner type, modest and unassuming. The average amount that families have in their IRA accounts is around $55,000. Romney’s IRA turns out to be the Incredible Hulk, bursting out of all constraints and growing to an enormous size. It now turns out that he may have as much as $100 million in his IRA accounts, all shielded from income tax. This is quite remarkable and has caused some head-scratching by accountants trying to figure out how he did it.
Experts on estate planning said it is highly unusual to accumulate such a considerable sum in an IRA, an investment vehicle restricted by annual contribution limits.
Michael Whitty, a lawyer at Vedder Price in Chicago who advises private-equity executives, said it is impossible to determine from Mr. Romney’s public disclosures how the IRA grew so large. Based on its listed holdings, which include many Bain Capital vehicles, Mr. Whitty theorizes Mr. Romney may have invested in Bain funds through a 401(k)-type plan, or directed some of his Bain holdings into such a plan, which he then rolled into an IRA.
It is suggested that once again Romney used all the tax avoidance strategies that are available to very rich people, including offshore tax shelters, to achieve this result.
One method used by tax lawyers is to have the IRA invest through an offshore affiliate of the private-equity firm, known as an offshore blocker corporation, which in turn invests the same money in the private-equity partnership. The tax is avoided because the IRA technically is investing in the offshore corporation, not in a private-equity partnership.
Tax experts say that might explain why Mr. Romney’s IRA includes holdings in Bain entities based in offshore locations, including one Cayman Islands entity that Mr. Romney listed as having a value between $5 million and $25 million.
William D. Cohan, a former investment banker, tries to figure out how Romney might have been achieved this remarkable level of savings.
Assuming Romney maxed out these tax-deferred contributions, he would have invested roughly $450,000 in his SEP-IRA during his years at Bain.
While there are limits to the amount that can be contributed tax-deferred to an IRA, there are no restrictions on the amount of money that the contributed capital can earn and can continue to earn, on a tax-deferred basis, even after the contributions have stopped. (The Internal Revenue Service will get its pound of flesh from Romney when he takes the money out of the IRA.) The only limit is the skill, or luck, of the IRA’s owner. If you are the Warren Buffett of IRA investors, it is conceivable that you could turn $450,000 into as much as $102 million — an increase of 227 times — but not very likely, especially as in the last decade or so, the stock market has been a roller coaster. Mere investing mortals would be lucky to still have $450,000 in the account. (The median American family has $42,500 in traditional IRAs, according to the Investment Company Institute.)
All I can think is that it must be good to be Romney’s accountant. You are pretty much guaranteed full-time employment.