How a $5,000 IRA Can Grow to $196 Million in Six Years: GAO
Individual retirement accounts were created to help ordinary Americans build a nest egg for later life. But the IRA has also enabled some affluent investors to accumulate multimillion-dollar tax-sheltered accounts, often by using assets that aren’t publicly traded.
Unless Congress changes some of the tax rules, “the intended broad-based tax benefits of IRAs will continue to be skewed towards a select group of investors,” the Government Accountability Office, an arm of Congress, said in a report released Tuesday. Those investors often include entrepreneurs and hedge-fund and private-equity managers.
The GAO study was requested by outgoing Senate Finance Committee chairman Ron Wyden (D.-Ore.). In September, the committee held hearings on retirement savings that scrutinized some of the same issues about “supersize” IRAs.
According to estimates by the GAO, more than 300 individuals or families have IRAs with balances greater than $25 million, while more than 9,000 have IRAs worth more than $5 million. Given the data, the GAO wasn’t able to distinguish between regular and Roth IRAs.
The report says a small group of taxpayers with “limited, occupationally related opportunities” can accumulate large sums in IRAs using sophisticated strategies not available to most people.
The study offers two detailed examples. The first is based on Securities and Exchange Commission filings involving a technology-company founder, with the GAO’s own analysis added, a GAO spokesman says. He says the second example is based on industry publications and interviews with industry participants. In both cases, “the amounts and transactions do not correspond directly with specific individuals or circumstances,” he added.
In the first example, an entrepreneur contributed $5,000 of “founders’ shares” in a business to a Roth IRA in 2008. The original value of the shares was $0.00125 each. The company went public in 2012 at $25 a share. The account grew to $196 million by 2014.
The other example illustrates how a key employee of a private-equity firm can generate an IRA balance of tens of millions of dollars. The employee first invests $500,000 of IRA assets in a way that gives him the right to 5% of the general partner’s “carried interest” in a successful fund. The result, at the end of 10 years, is a $23.9 million payment made to the employee’s IRA.
In its recommendations, the GAO said that Congress could “reorient” existing laws so that all taxpayers have access to the same investment strategies for IRAs. It said actions Congress could take include limiting the types of investments held in IRAs, setting a minimum required value for IRA investments, or setting a ceiling on accumulations in an IRA and requiring an immediate distribution of balances above that ceiling.
In effect, the GAO report addresses questions many people asked after learning that former presidential candidate Mitt Romney had a traditional IRA worth as much as $101 million and technology entrepreneur Max Levchin put more than 13.3 million shares of Yelp stock in a Roth IRA before the firm went public.
The report also said the Internal Revenue Service is collecting new data on non-publicly traded assets in IRAs. One tax form has been revised to require disclosure of the fair-market value for each of several asset classes, including real estate, nontraded debt or stock, or an interest in a limited-liability company, partnership or trust.
However, the report notes that IRA asset-valuation cases are audit-intensive and difficult to litigate, and the IRS said it faces competing funding priorities.
Source: WSJ – How a $5,000 IRA Can Grow to $196 Million in Six Years: GAO
