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

On average, twentysomethings have socked away $13,000 in IRAs, where those in their early 60s who are approaching retirement have balances closer to $165,000 (see also: Traditional IRAs).

While the overall IRA account balance averages $120,000, according to the Government Accountability Office (GAO), some 314 IRAs boast balances greater than $25 million. And 2012 Republican presidential candidate Mitt Romney has more than $100 million in a self-directed IRA, according to public disclosures (see Self-Directed IRA: The Right Move for You?). With an annual IRA contribution limit of $5,500 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 are valued that high. And the 791 IRAs with between $10 million and $25 million, account for just 0.0018% of accounts. The vast majority of IRAs – about 98.4% – 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 $5,500 maximum annual IRA contribution every year for 50 years, and that your investments grew at 8% annually. After 50 years, your IRA would be worth about $3.4 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. These 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 Romney Did It

Romney used a SEP IRA, a retirement plan employers or self-employed individuals can establish, that had a much higher contribution limit of up to $54,000 per year, depending on income (see our SEP IRAs Tutorial for more). 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, “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 most Americans don’t have access to, to grow his IRA to supersized proportions. As a Bain general partner, he 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-plus million account.

The Bottom Line

When it comes to taxes, supersized IRAs are at a disadvantage. Withdrawals from a traditional IRA or SEP IRA are taxed at your current tax rate, and not the capital gains rate. For Romney, it would likely mean the difference between paying the 20% capital gains tax, and the 39.6% ordinary income tax rate for his highest-tier tax bracket--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.