Can You Grow an IRA to Millions or Even Billions?

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

According to the U.S. Federal Reserve’s 2019 Survey of Consumer Finances (the most recent data as of November 2022 as the survey is conducted once every three years), people aged 35 to 44 had a median of $10,000 in an IRA, while those 55 to 64 had a median of just $36,000.

These amounts make sense once you know that the Internal Revenue Service (IRS) limits how much you can contribute to your IRA every year. For 2022, the annual IRA contribution limit is $6,000 per year for people under age 50, while the annual IRA contribution limit in 2023 is $6,500. There is also a $1,000 catch-up contribution limit allowed for individuals 50 years old or older.

Mitt Romney, though, had more than $100 million in a SEP IRA that was self-directed, according to his 379-page 2011 federal tax filing. Meanwhile, tech mogul Peter Thiel had more than $5 billion in a Roth IRA that he started in 1999 with less than $2,000, thanks to IRS data acquired by the investigative journalism site ProPublica. How is that even possible?

The Exception, Not the Norm

An IRA is a type of retirement account available to individuals who want to put away money for retirement. It provides taxpayers who have earned income with certain tax advantages by allowing them to make contributions that decrease their taxable income, thereby lowering their tax bills.

As noted above, you can contribute $6,000 in 2022 and $6,500 in 2023 to an IRA. You can make an additional catch-up contribution of $1,000 if you are 50 or older, for a total of $7,000 in 2022 or $7,500 in 2023.

Although Romney reportedly had more than $100 million in his account in 2011, IRAs valued at $25 million or more that same year were extraordinarily rare, according to a study published in October 2014 by the Government Accountability Office (GAO). Fewer than 0.0007% of all IRAs, a total of 314, had that much money in them, while there were just 791 IRAs with between $10 million and $25 million, accounting for only 0.0018% of accounts. In fact, the vast majority of IRAs had balances of $1 million or less.

More recently, the average IRA balance as of the end of the third quarter of 2022 was only $101,900, a 24.9% decrease from Q3 2021, an 8% decrease from last quarter, and a 33% increase from ten years ago. This information was accumulated by Fidelity Investments.

Best Case Scenario for Most of Us

Let’s assume you make the current maximum contribution each year (as of 2023) of $6,500 every year for 50 years while your investments grew at 8% annually. After 50 years, assuming you make your contributions at the beginning of each period, your IRA would be worth over $4 million, which is 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 then need to be rolled over from an employer plan, which is feasible, as 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 and Thiel both did.

How They Did It

Mitt Romney and Carried Interest

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 $61,000 per year for 2022 ($66,000 for 2023), depending on income. Still, even with higher-than-average returns, a typical SEP IRA would come nowhere near Romney’s $100+ million balance. So how did he do it?

According to a story 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 could 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. In cases such as this, it wouldn’t take long to build a $100 million-plus account.

Peter Thiel and Sweetheart Deals in Start-Up Stocks

Thiel pursued a more obvious tax-avoidance strategy than Romney’s. He opened his Roth IRA properly, with a less-than-$2,000 contribution. Then he invested those funds, as allowed by law, and chose as his investment a sweetheart deal in a start-up stock that had a good chance of exploding in value (something that is not available to most people).

Paying fractions of a penny per share allowed Thiel to amass a large number of shares. If the gains were large, it just meant more money to use for more sweetheart deals and other investments. And as it is all inside a Roth IRA, it all accumulates tax-free. Thus, Thiel doesn’t need to make annual contributions, which is good, as his annual income makes him ineligible to do so. Neither income nor contribution limits, however, affect the ability of his IRA to grow and grow.

Thiel is not the only financial mogul to employ the strategy, according to ProPublica.

"Ted Weschler, a deputy of Warren Buffett at Berkshire Hathaway, had $264.4 million in his Roth account at the end of 2018. Hedge fund manager Randall Smith, whose Alden Global Capital has gutted newspapers around the country, had $252.6 million in his. Buffett, one of the richest men in the world and a vocal supporter of higher taxes on the rich, also is making use of a Roth. At the end of 2018, Buffett had $20.2 million in it. Former Renaissance Technologies hedge fund manager Robert Mercer had $31.5 million in his Roth, the records show."

Tax Considerations

Romney’s and Thiel’s strategies have different tax implications. Supersized non-Roth IRAs are at a disadvantage when it comes to taxes. Withdrawals from a SEP or traditional IRA are taxed at your current earned-income tax rate, not the 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. However, because he had decades to grow his IRA in a tax-free manner, what he saved over the years by not paying capital gains taxes could more than make up for the higher taxes on withdrawals down the road. It only makes sense, though, if you start the process early enough.

Because Thiel and his fellow magnates employed a Roth IRA, they used after-tax money to fund their plans and thus don’t face paying taxes on any withdrawals. They have simply made a clean end run around the government’s income limits for being allowed to fund a Roth IRA, contravening the spirit if not the letter of the law.

Reforms Ahead?

The Build Back Better Act aimed to close up some of the loopholes that many felt were being used by wealthy individuals—notably, backdoor Roth IRA conversions. Passed by the U.S. House of Representatives, the bill stated that:

• High-income individuals would no longer be able to contribute to qualified retirement accounts if the aggregate total exceeded $10 million.
• IRA holders could not invest in companies in which they have substantial direct or indirect control or ownership.
• It would institute required minimum distributions (RMDs) for Roth IRAs, something they currently lack, and the RMDs would be pegged to 50% of the excess total value in all the accounts above $10 million.

All this, obviously, was aimed at curbing the strategies being pursued by Romney, Thiel, and others. The bill, which was blocked by Senator Joe Manchin (D-W.Va.), failed. Roth IRA reform was left out of Build Back Better's scaled-down replacement, the Inflation Reduction Act of 2022, which was signed into law by President Joe Biden on Aug. 16, 2022. Nonetheless, backdoor Roth IRAs are likely to remain a hot button issue.

The Bottom Line

It is possible to grow an IRA into millions and even billions, however unethical the strategies may be. However, such strategies are only available to people with wealth and the connections that come with wealth. The average person saving for retirement is highly unlikely to be able to make use of them.