The Individual Retirement Account was intended to be a means of tax-advantaged retirement savings... a way to make tax-free contributions to an account which could grow, tax-free, until retirement, at which time, the withdrawals would be taxed.
This was a great step forward for the average middle class person.... a way to get a 'step up' on retirement assets.
In order to avoid a huge hit on tax revenues, the IRA rules were devised to maximize the amount of money that a person could shelter in any given year... so the plan was a great benefit for people who contributed annually, over a long time horizon, without causing a massive hit on tax revenues. Presently, the conventional IRA rules permit contributions up to $5000 ($6000, if you're over 50)... at age 70 1/2, no more contributions may be made, and a certain amount MUST be withdrawn, and taxed, each year.
(The Roth IRA, conversely, inverts the rules; you invest 'after tax' money, up to a limit, which then grows tax-free, and at retirement time, the money can be withdrawn, tax-free. The Roth compliments the conventional IRA, and can be more advantageous to higher income people with enough disposable income to withstand the after-tax contributions).
As is seemingly typical these days, there are different plans for wealthier people... another example of the inequity in the tax code. A corporation can establish a plan called a SIMPLE IRA, in which employers can make contributions up to $30,000, free of tax, for each employee. I started a SIMPLE IRA many years ago, when I went into business. I never did well enough to deposit more than a few thousand per year into it.... but very successful people could maximize the contribution at $30,000, which can be argues was an unfair advantage over ordinary folks who don't own corporations.
Regardless, the IRA was a good thing.... and people who maximized their contributions over a long period of time have done very well.... or, at least, SHOULD have.... considering the stagnation of the stock market in the past 10 years, it hasn't paid off as well as one would have hoped.
So how is it that Romney has IRA assets worth somewhere between $20M and $100M? How is that possible?
So how did Romney realize a gain of 22,700%, presuming he invested the statutory maximum amount, under SEP IRA rules?During Romney’s tenure at Bain Capital -- from 1984 to 1999, although a recent Boston Globe article uncovered Romney having a role at Bain until 2002 -- the firm used a so-called SEP-IRA, which is like a 401(k) retirement plan but is funded entirely by the employer and has a much higher maximum contribution: about $30,000 annually during the period Romney was at Bain. Assuming Romney maxed out these tax-deferred contributions, he would have invested roughly $450,000 in his SEP-IRA during his years at Bain.
While there are limits to the amount that can be contributed tax-deferred to an IRA, there are no restrictions on the amount of money that the contributed capital can earn and can continue to earn, on a tax-deferred basis, even after the contributions have stopped. (The Internal Revenue Service will get its pound of flesh from Romney when he takes the money out of the IRA.) The only limit is the skill, or luck, of the IRA’s owner. If you are the Warren Buffett of IRA investors, it is conceivable that you could turn $450,000 into as much as $102 million -- an increase of 227 times -- but not very likely, especially as in the last decade or so, the stock market has been a roller coaster. Mere investing mortals would be lucky to still have $450,000 in the account. (The median American family has $42,500 in traditional IRAs, according to the Investment Company Institute.)
Without full disclosure, we'll never know how he managed to turn that sow's ear into a silk purse.... but I believe it was the latter suggestion: Romney invested assets which, for the purposes of tax reporting, were intentionally undervalued. By investing stock of takeover and turnaround companies, it would be very easy to claim just about ANY valuation, due to the absence of liquidity of the asset. Some asset that Romney might have sold for $100M to a willing buyer, could very easily be described, in reporting to the IRS, as having negligible value. It's a loophole of gigantic proportions, only available to people of Romney's wealth.Of course, not every deal Bain did worked out. But let’s say Romney was prescient and put into this hypothetical IRA only the stock of the buyout companies that did well, returning to investors a whopping 10 times their money. (This is very rare but conceivable.) Even so, that would turn Romney’s $450,000 into $4.5 million. If the money was also compounded and reinvested over the years and became, say, $10 million, that would still leave another $11 million to $92 million of unexplained value sitting in the presumptive Republican Party presidential nominee’s IRA.
This great mystery seems to have troubled others, as well. On July 3, Current TV host Jennifer Granholm, a former Democratic governor of Michigan, invited Edward Kleinbard, a law professor at the University of Southern California, on her show to discuss how Romney could have accomplished this remarkable feat. There were “only two possibilities,” Kleinbard told Granholm. Either “from a little acorn, a mighty oak grew very, very quickly, extraordinarily so,” Kleinbard explained, causing Granholm to interject, “What little acorn could grow to be $101 million? I want to get some of that acorn!”
The other possibility, Kleinbard suggested, was not dissimilar to what Maremont theorized: that Romney contributed limited-partnership interests in Bain’s buyouts to his IRA. What was “quite troubling” to Kleinbard is that he suspected Romney may have contributed these interests to his IRA at a fraction of their market value -- “pennies on the dollar” -- and well below what he might have charged you or me. When the buyouts became successful, Kleinbard proposed, the pennies on the dollar were suddenly worth real dollars.
“What’s very frustrating to me about all this is that we can only talk in abstractions and generalities because, again, of the lack of disclosure,” Kleinbard said.
No wonder he won't release his tax returns.