Friday, September 19, 2014

How 1% shelter hundreds of millions in IRA accounts

How to shelter hundreds of millions in an IRA account - MarketWatch

The GAO report shows that the top 1% have saved $1 trillion in their IRAs, 22% of the total.

It’s no surprise that rich people have a large share of wealth, but it is a bit surprising that they own such a large percentage of IRA assets, which were designed to help middle-class people save a few hundred thousand, not to help billionaires save a few hundred million.

The IRA is not supposed to be a giveaway to millionaires. But that’s what it’s become.

have been raised that tax benefits accrue primarily for higher-income
individuals,” the GAO says in its usual monotone.

Democratic Sen. Ron Wyden of Oregon used stronger language at a hearing at the Senate Finance Committee this week.

“Something is out of whack,” Wyden fumed. “The IRA was never intended to be a tax shelter for millionaires.”

millionaires take advantage of “sweetheart deals” to avoid taxes, the
typical American has saved only about $59,000 for retirement, Wyden
pointed out. A third of Americans can’t save anything.

Recall that during the 2012 election, Romney released tax documents
showing that he had between $20.7 million and $101.6 million in his IRA
accounts. It became a minor campaign issue, not just because it put the
spotlight on Romney’s wealth but also because it revealed just how easy
it is for the wealthy to take advantage of tax loopholes to amass even
more wealth.

The GAO report shows that Romney was a piker when it came to avoiding taxes on his millions.

of 2011, 314 multi-millionaires had more than $25 million saved in
their IRA, with average holdings of $258 million, the GAO reported.
About 9,000 taxpayers had at least $5 million in their IRA, with average
holdings of $16 million.

All told, 630,000 millionaires — about 1% of all IRA savers —
cumulatively had more than $1 trillion in IRA accounts, accounting for
22% of all IRA assets.

Meanwhile, the other 99% — the 42 million
taxpayers whose IRAs held less than $1 million — had average savings of
just under $100,000.

There are two main ways to accumulate assets
in an IRA: 1. Contribute up to the maximum each year. 2. Roll over a
distribution from a defined-contribution pension — such as a 401(k) — or
from a defined-benefit pension plan.

It would be nearly
impossible to accumulate $5 million in an IRA using those two methods,
the GAO found. If a couple contributed the maximum every year since 1975
(when the IRA was invented), they would have about $350,000 today if
they had invested it all aggressively in the S&P 500 Index

A couple who rolled over the
maximum from another pension could have earned about $4 million if they
invested 100% in stocks.

But only a few people contribute the
maximum to an IRA or defined-contribution plan in any year, the GAO
says. So it’s extremely unlikely that many people contributed the
maximum for 35 years.

If it’s nearly impossible to accumulate $5
million, then how did those 314 taxpayers accumulate an average of $258
million? Perhaps they were very fortunate in their investments, buying

at the bottom and riding them to the top.

maybe they took advantage of a trick Romney used to fund his IRA:
putting undervalued non-publicly traded assets in his IRA to stay under
the maximum contribution limits, and then watching those investments
turn into gold.

According to the Wall Street Journal,
that’s what Romney and others at Bain Capital were able to do to
achieve astronomical returns in their IRAs. Bain took over companies and
allowed its employees to invest in those deals. After turning the
companies around, Bain sold them, and the employees who invested earned
returns averaging 50% to 80% annually, the Journal reported.

But that wasn’t enough.

“Bain added a couple of unusual twists
that made co-investing even more rewarding,” Mark Maremont of the
Journal reported. “It allowed employees to co-invest via tax-deferred
retirement accounts, and to do so by buying a special share class that
cost little but yielded much larger gains than other shares when deals
proved successful.”

In essence, Bain would value the special,
riskier shares at pennies on the dollar. In one deal, employees invested
about $23,000 in their IRAs. When the takeover target went public,
those shares were worth about $14 million, and were worth about $23
million they finally sold the shares. That’s a 100,000% return.

are the kind of “sweetheart stock deals” that Wyden complained about.
They may be legal, but they violate the spirit of the law, which is to
limit contributions so that middle-class families can get most of the
benefits of the tax breaks.

Taxpayers spend $140 billion a year
subsidizing retirement savings, with about $20 billion going to the top
1% of earners. If we’re going to subsidize savings, let’s help those who
really need it, not millionaires and billionaires.

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