Individual retirement accounts (IRAs) are a vital part of retirement savings plans in the U.S. The average balance on an individual retirement account depends on the account holder’s age and the number of years they’ve been making contributions.

On average, twentysomethings have socked away $13,000 in IRAs, while those in their early 60s who are approaching retirement have balances closer to $165,000. But while the overall IRA account balance averages $120,000, according to the Government Accountability Office (GAO), more than 300 IRAs boast balances greater than $25 million.

In 2012, then-Republican presidential candidate Mitt Romney was reported to have more than $100 million in a self-directed IRA, according to public disclosures. With an annual IRA contribution limit of $6,000 per year (for 2020 and 2021) for people under age 50, how is that even possible?

The Exception, Not the Norm

It should be emphasized that IRAs valued at $25 million or more are extraordinarily rare. Fewer than 0.0007% of all IRAs have that much money in them. There were just 791 IRAs with between $10 million and $25 million, accounting for only 0.0018% of accounts.

The vast majority of IRAs—about 98%—have balances of $1 million or less.

Best Case Scenario for Most of Us

Let’s assume you started retirement planning early and made the $6,000 maximum annual IRA contribution every year for 50 years while your investments grew at 8% annually. After 50 years, your IRA would be worth about $3.7 million—enough money for most people to retire comfortably.

According to the GAO study, to accumulate a balance much larger than that, you would need large individual and employer contributions sustained over decades.

Those assets would need to be rolled over from an employer plan, which is feasible since there is no limit on IRA accumulations or rollovers from employer defined-contribution plans.

It helps if you can invest in assets that are unavailable to most investors, as Romney did.

How Mitt Romney Did It

Romney used a SEP IRA, a retirement plan employers or self-employed individuals can establish, that has a much higher contribution limit of up to $58,000 per year for 2021 ($57,000 for 2020), depending on income.

But even with higher-than-average returns, a typical SEP IRA would come nowhere near Romney’s $100 million balance. So how did Romney do it?

According to a story by William D. Cohan that appeared in The Atlantic, titled "What's Really Going on With Mitt Romney's $102 Million IRA," the amount of money in Romney's IRA had little to do with investment selection:

The truth about Romney’s IRA is that its massive size has very little to do with choosing the right investments and a lot more to do with the alchemy of the private-equity business itself and the opportunities that come out of that insular world for people like Romney, who was the founder and chief executive of Bain Capital for at least 15 years.

Instead of choosing winning investments, Romney likely used carried interest, which is a share of the profits from a private equity firm. Few Americans have access to carried interest to grow their IRA to supersized proportions.

As a Bain general partner, Romney was able to put up a small fraction of the equity needed for a buyout, and then reap 20% of the profits if the deal went well.

Hypothetically, Romney’s initial investment—say, $30,000 from his IRA—could have easily swelled to tens of millions of dollars in carried interest from one large deal. He could then use those millions, along with his $30,000 contribution each year, to invest in more Bain Capital deals.

It wouldn’t take long to build a $100 million-plus account.

Small Comforts

When it comes to taxes, supersized IRAs are at a disadvantage. Withdrawals from a traditional IRA or SEP IRA are taxed at your current earned-income tax rate, not the often lower capital gains rate.

For Romney, that would likely mean the difference between paying the 20% capital gains tax, and the 37% ordinary income tax rate for his highest-tier tax bracket. That's a huge difference in taxes. 

For Romney and others, this type of gamble worked out in his favor, because he had decades to grow a huge IRA in a tax-free manner, which could more than make up for the higher taxes on withdrawals down the road.