By Margaret Collins and Richard Rubin – September 17, 2014
If it seems impossible to amass a fortune in an IRA during your lifetime, think again.
The Government Accountability Office reported yesterday that about 9,000 U.S. taxpayers have each accumulated at least $5 million in individual retirement accounts. While the GAO didn’t say how they managed to do so, Mitt Romney and some other successful executives offer a road map.
Outsized, tax-advantaged returns in such accounts drew attention during the 2012 presidential campaign, when Republican presidential nominee Romney reported he had an IRA worth $20 million to $102 million. Congress and President Barack Obama have scrutinized IRAs since, saying they weren’t intended to be a tax shelter for millionaires and billionaires.
Looking for ways to cobble together a fortune in an IRA under the current contribution limit of $5,500 a year? Here are possible strategies:
First, work at a startup.
If you’re an entrepreneur, you can create more than one share class of stock at your company and put $1,000 in a standard or Roth IRA, said Bill Parish, president and chief investment officer at Parish & Co., an advisory firm based in Portland, Oregon. If some shares are valued as low as $0.000001, as Yelp Inc. reported in its S-1 filing with the Securities and Exchange Commission in 2012, that buys a chunk of equity.
“The key is that you transfer the stock directly from the company to your IRA,” Parish said.
As the securities appreciate, investors can sell and diversify into other holdings tax-free until they withdraw funds. Or, in the case of a Roth IRA, the gains aren’t taxed at all, Parish said.
“You can expect some people to have multimillion-dollar IRAs if they include funds from rollovers,” Parish said.
Note: This story resulted from a GAO study of large IRA’s triggered by my analysis of Mitt Romney’s IRA for the Wall Street Journal in 2012. The Senate finance committee basically asked the Government Accounting Office (GAO) to analyze how IRA balances could exceed $100 million when the annual contribution limits are so modest. I provided extensive analysis, commentary and guidance to the GAO and must say that I was thoroughly impressed by with the organization’s professionalism and competence and independence.