Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Thursday, March 29, 2012

the pain of a $100,000,000 IRA

This WSJ article gives a great look at how Mitt Romney and other Bain Capital partners were able to invest in private equity deals in their IRAs, making huge, tax deferred, profit.

So, Mitt Romney may have $100,000,000 in his IRA. Wow. This combines a two really awesome things - retirement savings, and absolute piles of money. Great, right?

Not quite.

There are two types of IRA accounts: Traditional and Roth. In the traditional kind (include SEP, SIMPLEs and rollovers) money goes in and reduces your income for tax purposes. You don't pay taxes on the money going in, just when it comes out - you pay taxes like it is income. In a Roth IRA, you pay taxes on the money when you pay it in, but you withdraw it completely tax free in retirement. In both accounts, all gains, interest and dividends are sheltered from taxes as long as they are in the account.

Mitt Romney has a SEP-IRA (like a traditional IRA). When he withdraws that money, it will taxed as ordinary income - not carried interest, dividends or long term capital gains. He will pay a higher rate on the in retirement than he would if he were selling in a taxable account today. Private equity investments pay the 15% long term capital gains tax thanks to the carried interest 'loophole'. The top income rate is 35%.

Of course, tax law was different when he opened his IRA. At the time, it may have been a good idea to defer the taxes on those gains. Also, it is fairly well known that Romney and his accountants are rather good about keeping his tax bill down.

But having $100,000,000 in an IRA is not all its cracked up to be.

Too bad he didn't have a Roth IRA.