MONEY IRAs

Closing the Loophole Behind $10 Million Tax-Free Retirement Accounts

Fewer than 1,100 of 43 million IRA owners have what may be called outsized balances, and the IRS wants to rein them in.

The former presidential hopeful Mitt Romney lit a fuse three years ago when he disclosed his IRA was valued at as much as $102 million. Now the federal government wants to keep the issue from exploding, and is weighing actions that would prevent rich people from accumulating so much in a tax-advantaged account.

Last week, the General Accounting Office recommended that the IRS either restrict the types of investments held in IRAs or set a ceiling for IRA account balances. The idea is to give all taxpayers equal ability to save while making certain the amounts put away tax-advantaged do not go beyond what is generally regarded as sufficient savings to secure a comfortable retirement.

Romney’s campaign disclosure caught almost everyone by surprise. How could one person build such a large IRA balance when yearly allowable contributions — up to $5,500 a year in 2014 and $6,500 if you’re age 50 or older — have always been comparatively low? The answer lies in the types of investments he and privileged others were able to put in their IRA: extremely low-priced and often non-public securities that later soared in value.

One such security might be the shares of a privately owned business. These can reasonably be expected to take flight if the business does well and later goes public. That produces a wealth of tax-advantaged savings to company founders, investment bankers and venture capitalists. But these gains are not generally available to any other investor. Once an asset is inside an IRA there is no limit to how valuable it may become and still remain in the tax-advantaged account.

Restricting eligible IRA holdings to publicly available securities is one way to level the field and rein in the accumulation of tax-advantaged wealth. Another way is to cap IRA balances at, say, $5 million and require IRA holders to take an immediate taxable distribution anytime their combined IRA holdings exceed that threshold.

The GAO found that the federal government stands to forego $17 billion of 2014 tax revenue through the IRA contributions of individuals. That’s not a high price to pay for added retirement security for the masses. The problem is that under current rules only a select few will ever be able to put together multi-million-dollar IRAs. There are 43 million IRA owners in the U.S. with total assets of $5.2 trillion. Fewer than 10,000 have more than $5 million, and the GAO seems to have little quarrel with even this group. They tend to be above-average earners past age 65 who had been contributing to their IRA for many years—pretty much exactly as designed.

But just over 1,100 have account values greater than $10 million and only 300 have account values greater than $25 million, the GAO found. “The accumulation of these large IRA balances by a small number of investors stands in contrast to Congress’s aim to prevent the tax-favored accumulation of balances exceeding what is needed for retirement,” the report states.

Officials are now gathering data on the types of assets held in IRAs, including the so-called “carried interest” stake that private equity managers have in the investment funds they run. These stakes, which give them a percentage of a fund’s gain, are another way that a select few manage to sock away multiple millions of dollars in IRAs. No one doubts the data will illustrate that only a privileged few have access to outsized IRA savings. The Romney campaign showed us that three years ago.

Read next: 3 Ways to Have a Happier, Healthier Retirement

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