Mitt Romney’s magical IRA

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.


  1. August Pamplona says

    This is quite remarkable and has caused some head-scratching by accountants trying to figure out how he did it.

    He’s been maxing out his $6000 contribution for 17000 years. Duh!

  2. 'Tis Himself says

    it is conceivable that you could turn $450,000 into as much as $102 million — an increase of 227 times — but not very likely

    Romney is quite the financial wizard. Either that or he’s crossed the line into IRS investigation territory.

  3. Eric says

    If what he’s doing is legal, based on convoluted tax codes and loopholes, I can’t fault him for taking advantage of the circumstances. However, it does highlight how desperately we need tax code reform.

  4. eigenperson says

    It seems to me that Romney has a severe conflict of interest. If he can get elected and get the tax cuts for the super-rich that he wants, he stands to personally gain millions of dollars when he takes that money out of the IRA.

    No wonder he wants to be President.

  5. says

    Romney, no doubt, employs an entire accounting office. My accountant used to have this Baltimore-local media figure whose books he stopped keeping when she moved to LA… So he occasionally sighs wistfully over what Oprah’s accounting team looks like. He said once that she probably had a whole firm of nearly a dozen employees. Romney’d be comparable because it sounds like he’s doing some shenanigans.

    If you make an obscene profit on stocks there are lots of ways of realizing it without paying (much) tax on it at all. Suppose you buy shares in Bain when you found the company. They’re worth -- not very much. They’re worth “not very much” until you sell them or transfer them in such a way that you realize the profits. So one thing you can do is start a trust (like a charitable remainder trust) and endow it with the stock. The trust then sells the stock and it realizes the profit, which is OK since it’s a non-profit and owes no tax on it… It’s possible that Romney’s accountant established him an SEPP/MPP retirement account (sort of like an IRA and a journalist might call it an IRA) it’s basically a mini-corporation that can play the market with its assets (under your control, of course) and keep the profits. Charitable trusts can do this as well. Then the executor of the trust charges the trust a “management fee” of between 10% and 15% per year, effectively getting back all their original money over the course of a few years, and more besides if they are able to play the fund’s assets wisely.

    I predict this particular issue will blow over because all the plutocrats do this and they won’t want to draw attention to it.

  6. says

    I wrote:
    Romney, no doubt, employs an entire accounting office.

    The rich are very good at creating jobs. They’re mostly service positions servicing the rich. But it’s job-creation!! And Romney would never outsource his accounting to someone outside the US. Not because of patriotism but more like because it’s harder to sue across national borders if your accountant screws up.

  7. Shawn Mann says

    It would be easy for Romney to hold foreign subsidiaries in his offshore
    IRA account whereby he could direct profits from those companies or share dilutions directly into his personal IRA account without triggering foreign taxable capital gains. furthermore, he could direct foreign holdings in foreign exchanges and trade shares of companies he owns or has control over thereby sheltering foreign income into a tax free offshore US dollar account. The trick is withdrawing the money without triggering tax. Well, if Mrs. Did not cosign his FBAR there is a good chance half as much is sitting in her name doing the same thing. To get the money out you need a foreign holding company that can invest in your IRA basically loaning you money outside your IRA until your death. The key is at death you can obsolve your tax bill declaring 1 minute before you die you no longer are a US citizen. The 2nd choice is to become President and change the foreign corporate holding company rules so withdrawals in foreign soil are not taxed in the USA. This is the reason why he claims can help the economy, many of his older friends fear death taxes on offshore money’s as well as non IRA money’s made off shore by American Corporations. Many US corporation have billions of dollars sitting offshore hidden from US tax jurisdictions. They want the safety of US soil for foreign profits without paying the taxes. Same problem. This is why Romney says People are Corporations! Because in the eyes of the IRS they look exactly the same on paper!


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