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Retirement Rich List: 314 Have IRAs Averaging $258 Million Each, GAO Estimates

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At the end of 2011, some 314 taxpayers had more than $25 million each squirreled away in tax deferred Individual Retirement Accounts, Congress’ Government Accountability Office estimated today. Moreover, using  data from the Internal Revenue Service, GAO estimated that a total of $81 billion was held in the lucky 314’s IRAs---or an average of $258 million per taxpayer.

The numbers were released today in connection with a Senate Finance Committee Hearing into tax breaks for retirement, which some Democrats argue are too tilted to the wealthy.  The issue gained political salience during the 2012 Presidential campaign when Republican candidate Mitt Romney disclosed his IRA could be worth as much as $102 million.   Last year the Obama Administration put forward a convoluted plan for limiting the maximum amount any one individual could have in all of his or her tax favored retirement accounts combined. Critics warned it would limit the incentives small employers have to offer their workers 401(k)s.  Other Democratic proposals would curb the ability of non-spousal heirs to stretch out withdrawals from large IRAs.

According to the new GAO numbers, 43 million taxpayers have IRAs of any size and 622,000 have between $1 million and $5 million in IRA accounts. But only 9,000 taxpayers have more than $5 million in their IRAs. The full GAO estimates are reproduced below.  (Click on the GAO table to expand it.)

So how do so many Americans end up with $1 million plus IRAs? Contribution limits to IRAs are modest  (a maximum of $5,500 in 2014, $6,500 for those 50 and older),  but large IRAs can be built in different ways .

The most common way is through rollovers from  employer sponsored defined contribution plans such as a 401(k)s and/or traditional defined pension plans that allow lump sum rollovers at retirement.The GAO calculated, for example, that if a worker had received the maximum combined employer-employee contribution to a defined contribution plan every year from 1980 to 2011, and invested it the S&P 500 portfolio, he would have nearly $4 million in that account by the end of 2011. By contrast, had he made the maximum allowed IRA contribution from 1975 to 2011 and invested in the same S&P fund, he would have built an IRA of only $353,379.

But mega-size IRAs  come from more than just buying and holding the Vanguard 500 Index Fund. The most likely source, and the way that Romney presumably built his stash:  start-up stock.

Senate Finance Committee Chairman Ron Wyden (D-OR) put it this way in his opening statement at today’s hearing:

  “So how did those massive IRA accounts come to be? In many cases, they’re sweetheart stock deals that most investors would never have access to. Executives buy stocks at a special, rock-bottom price – sometimes fractions of a penny per share – and use an IRA as a tax shelter. The stocks start out dirt cheap, but just like that they turn to gold, and the IRA shoots up in value. Wise investors have every right to use all the tools available to them, and no one should begrudge them their success. But IRAs were never intended to become tax shelters for millionaires – they’re designed to help typical Americans save for retirement.”

While taxes on Romney’s traditional IRA will eventually be due when he and his heirs make required minimum withdrawals, the use of Roth IRAs for start-up stock has even more potential for limiting taxes on the rich. Contributions to a Roth are made on an after-tax basis, but all withdrawals in retirement (or by heirs) are tax free. Forbes has reported, for example, that Yelp founder 2010 Max R. Levchin held millions of shares of the social review site in his Roth IRA and that billionaire investor Peter Thiel put shares of PayPal and, it appears, early shares of Facebook,  in his Roth.

Traditionally, tax breaks for retirement have enjoyed bipartisan support. But they are among the most expensive breaks in the tax code and  will inevitably become a target if and when Congress pursues a tax reform aimed at lowering rates and simplifying the tax code.

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