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September 17, 2014 at 06:25 AM
If it seems impossible to amass a fortune in an IRA during your lifetime, think again.
The Government Accountability Office reported Tuesday that about 9,000 U.S. taxpayers have each accumulated at least $5 million in individual retirement accounts. While the GAO didn’t say how they managed to do so, Mitt Romney and some other successful executives offer a road map.
Outsized, tax-advantaged returns in such accounts drew attention during the 2012 presidential campaign, when Republican presidential nominee Romney reported he had an IRA worth $20 million to $102 million. Congress and President Barack Obama have scrutinized IRAs since, saying they weren’t intended to be a tax shelter for millionaires and billionaires.
Looking for ways to cobble together a fortune in an IRA under the current contribution limit of $5,500 a year? Here are possible strategies:
First, work at a startup.
If you’re an entrepreneur, you can create more than one share class of stock at your company and put $1,000 in a standard or Roth IRA, said Bill Parish, president and chief investment officer at Parish & Co., an advisory firm based in Portland, Oregon. If some shares are valued as low as $0.000001, as Yelp Inc. reported in its S-1 filing with the Securities and Exchange Commission in 2012, that buys a chunk of equity.
Direct ‘Transfer’
“The key is that you transfer the stock directly from the company to your IRA,” Parish said.
As the securities appreciate, investors can sell and diversify into other holdings tax-free until they withdraw funds. Or, in the case of a Roth IRA, the gains aren’t taxed at all, Parish said.
Max Levchin, chairman of San Francisco-based Yelp, reported 2.7 million shares of the company’s Class B Common Stock in his Roth IRA, according to this year’s proxy statement. Class B shares of Yelp are convertible at any time by the holder into shares of Class A on a one-to-one basis, according to the filing.
Yelp shares closed at $76.54 in New York yesterday. That comes out to about $206 million worth of Yelp shares in his Roth account.
At the time of the company’s S-1 filing in February 2012, Levchin reported 3.9 million shares in his Roth account.
He didn’t respond to a request for comment Tuesday.
Initial Value
The next strategy has involved placing a low initial value on an IRA’s investments. Romney, the co-founder of private-equity firm Bain Capital LLC, never explained how he accumulated so much wealth inside his IRA. Yet one way that private equity and hedge-fund managers build large balances is by valuing their company’s investments at close to nothing, and they later grow exponentially, said Bobbi Bierhals, a partner at McDermott Will & Emery LLP in Chicago.
A third way to amass money in a retirement account is to work for yourself.
Self-employed people including doctors and lawyers can contribute as much as $52,000 this year to their IRAs. If you start at age 25 or 30 contributing the maximum amount, you don’t need extraordinary investment returns to end up with millions by the time you’re 50, Bierhals said.
Avoid Diversifying
Another strategy: Using a self-directed IRA to make a big bet on a closely held company, said John Olivieri, a partner in the private clients group at White & Case LLP. If the business succeeds, the IRA’s value can increase dramatically, he said.
