Can You Grow an IRA to Millions or Even Billions?

Yes, but you have to have the connections of the rich to do it

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. Statistics from the Employee Benefit Research Institute’s 2017 study, its most recent, showed that individuals under the age of 25 had about $11,000 put away in an IRA, while people over the age of 70 had roughly $271,000 set aside in these accounts. The U.S. Federal Reserve’s 2019 Survey of Consumer Finances (also the most recent, as the survey is conducted once every three years) showed that people age 35 to 44 had a median of $10,000 in an IRA, while those age 55 to 64 had a median of just $36,000.

Those amounts make sense once you know that the Internal Revenue Service (IRS) limits how much you can contribute to your IRA every year. For 2021 and 2022 the annual IRA contribution limit is $6,000 per year for people under age 50.

Nevertheless, Mitt Romney had more than $100 million in a SEP IRA that was self-directed, according to his 379-page 2011 federal tax filing. And as of the end of 2019, tech mogul Peter Thiel was revealed to have 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?

Key Takeaways

  • The average IRA balance is dependent on the account holder’s age and how long they’ve been contributing over the years.
  • The IRS caps how much taxpayers can contribute to their IRAs each year.
  • IRA balances over $25 million are rare.
  • The majority of IRAs have balances of $1 million or less.
  • Annual SEP IRA contribution limits and returns are higher than those associated with traditional and Roth IRAs.
  • Roth IRAs not only let your money grow tax free; they also, unlike other IRAs, allow tax-free withdrawals.

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 2021 and 2022 per year 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 per year.

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 2021 was only $135,700, according to figures compiled by Fidelity Investments.

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, 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 $58,000 per year for 2021 ($61,000 for 2022), 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.

Employer contributions to SEP IRAs are immediately 100% vested.

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 amount 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 passed by the U.S. House of Representatives contains provisions that would limit the appeal and efficacy of Romney’s and Thiel’s tax gambits. People who qualify as high-income individuals would not be able to make contributions to their qualified retirement accounts if the aggregate total of them exceeds $10 million. It would also prohibit IRA holders from having in their IRA assets in companies in which they have substantial direct or indirect control or ownership. And 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, is aimed at curbing the strategies being pursued by Romney, Thiel, and others for avoiding the payment of their fair share of taxes. However, as Senator Joe Manchin (D-W.Va.) is currently blocking the adoption of the act in the Senate, it’s unclear which, if any, of these reforms may come to pass.

What Is the Average Amount in an IRA?

As of the end of the third quarter of 2021, the average amount in an IRA in the U.S. was $135,700, certainly a far cry from millions or billions. And figures from 2011 showed that a mere 0.0007% of IRA holders had in excess of $100 million in their accounts.

How Did Mitt Romney and Peter Thiel Amass Their IRA Fortunes?

Romney was able to do it through his connections in the private-equity business and the use of carried interest. Thiel turned his trick through tech-industry connections that allowed him to purchase promising start-up stocks in a sweetheart deal at a fraction of the real share price.

Is What Romney and Thiel Did Legal?

It is indeed legal, though hardly ethical, as it contravenes the spirit of the law. Reforms in the Build Back Better Act would constrain Romney’s and Thiel’s strategies for avoiding payment of their fair share of taxes, but the act’s future in the Senate remains deeply uncertain.

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.

Article Sources
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  2. Center for Retirement Research at Boston College. "401(K)/IRA Holdings in 2019: An Update From the SCF." Page 6.

  3. Internal Revenue Service. "Retirement Topics - IRA Contribution Limits."

  4. Tax Notes. "1040 U.S. Individual Income Tax Return 2011."

  5. ProPublica. "Lord of the Roths: How Tech Mogul Peter Thiel Turned a Retirement Account for the Middle Class Into a $5 Billion Tax-Free Piggy Bank."

  6. Government Accountability Office. "Individual Retirement Accounts: IRS Could Bolster Enforcement on Multimillion Dollar Accounts, but More Direction From Congress Is Needed," Pages 1 and 17.

  7. Fidelity Investments. "Building Financial Futures: Trends and insights of those saving for retirement across America."

  8. Government Accountability Office. "Individual Retirement Accounts: IRS Could Bolster Enforcement on Multimillion Dollar Accounts, but More Direction From Congress Is Needed." Pages 23 to 35.

  9. Internal Revenue Service. "COLA Increases for Dollar Limitations on Benefits and Contributions."

  10. The Atlantic. "What's Really Going on With Mitt Romney's $102 Million IRA."

  11. Internal Revenue Service. "Retirement Topics - Vesting."

  12. Internal Revenue Service. "Topic No. 409 Capital Gains and Losses."

  13. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2022."

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