After he disclosed his taxes a few weeks ago, it was uncovered that Mitt Romney has between $20.7 million and $101.6 million in an IRA. According to data from the Employee Benefit Research Institute, the average IRA account balance in 2008 was $54,863. Mitt is far from average, and I can’t keep myself from being like the Joker in “Batman,” asking “Where did he get all those wonderful toys?”
Mitt’s IRA was most likely funded via a 401(k) that was rolled later into an IRA. If Romney began funding a 401(k) in 1975 with the maximum contribution, he would have contributed approximately $1.5 million. For 2012, the maximum elective deferral for a 401(k) is $17,000, which is up from $16,500 in 2011.
So is it possible to save $100 million? No, but it is possible to invest and end up with that sum of money. Mitt is not alone; there are others with mega IRAs.
Mitt was able to grow his account from estimated total contributions of $1.5 million to a possible value of over $100 million by working at Bain and maximizing his opportunities, but what was the tax strategy? Was there any tax strategy?
There is a process where foreign companies are created in parts of the world with very little taxes. Then Bain — in this case — would invest in the company in order to avoid “active income” that would be taxed each year. The process is dubbed by some writers as a “foreign blocker,” which sounds worse than it really is.
Is this illegal? Absolutely not! Foreign blockers are commonly used by pension funds, university endowments and, apparently, Romney. They are perfectly legal planning tools.
In 2018, if the IRS rules don’t change, Romney will be required to begin taking out minimum required distributions (RMDs) and paying ordinary income on each distribution. We would all love to have a cool $100 million tucked away in an IRA, but the question we would ask is why didn’t he convert that to multiple Roth IRA accounts?
The IRS now allows any person with an IRA — regardless of income — the opportunity to convert their IRA to a Roth IRA. You have to pay taxes on what was converted, but you have the ability to change your mind after you see the returns for the year! This is what we call the Texas Two Step to tax free income, and it involves understanding both the tax code as well as the investment opportunities.
Romney’s money is now in a blind trust where he cannot see the actual investments. It appears to me his investment team is doing a nice job but the tax troops may be asleep at the wheel! The Roth is a clear winner for estate taxes, no RMD’s and tax free money. Not everyone should convert their IRA — certainly not all of it — but we all must pay attention to tax opportunities that maximize our investments effectiveness.
Joseph “Big Joe” Clark, whose column is published Sundays, is a certified financial planner. He can be reached at bigjoe@yourlifeafterwork.com or 640-1524.
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'Big Joe' Clark: The $100 million IRA - and how to get one
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