Mitt Romney’s IRA

There’s been a lot of ink spilled recently about the recent tax returns for presidential candidate Mitt Romney. Most of the coverage has dealt with the effective tax rate Romney paid and how that relates to the effective rates paid by other, less wealthy taxpayers. We’re going to steer clear of that politically partisan kerfuffle.

One of the interesting side notes to the Romney tax story was the fact that his Individual Retirement Account (IRA) was valued somewhere between $20 million and $101 million! That’s an astounding number when you realize that the contribution limits to IRAs are capped at $5000 or $6000/year, depending on your age. And those are current numbers; contribution limits in previous years have been much smaller.

We don’t know all the details on how the account grew as large as it did. Most likely, it reflects the combination of some sort of rollovers from workplace retirement plans (like a 401k or some sort of profit sharing plan), tremendous asset growth, and the inclusion of some relatively unusual assets held inside the account, such as partnership interests.

Romney has clearly enjoyed the primary advantage of having assets inside of an IRA, namely that can grow on a tax-deferred basis. No taxes are due on income or capital gains on assets inside of an IRA, although taxes are due when assets are withdrawn.

Unfortunately for Romney, those withdrawals will be taxed at a much higher rate than the low 15% that he currently enjoys for qualified dividends and long-term capital gains. Distributions from IRAs are taxed as ordinary income, like salary, where the last dollar that comes in the door is taxed at the taxpayer’s highest marginal rate. In 2012, the highest marginal tax bracket is 35% on taxable income over $388,350. A married couple landing in the 35% tax bracket would pay a tax of $105,062 (determined from the other lower tax brackets) plus 35% of income above $388,350.

On top of that, Traditional IRA owners are required to start taking Minimum Required Distributions from their IRA starting in the year they turn 70.5. That distribution is determined by dividing the account value at the end of the year prior to the distribution by a divisor that can be located in a table provided by the IRS. (Ordinarily, the first distribution from an IRA is about 3.6 to 4% of the value of the IRA.)

Assuming the low estimate of his IRA value of $20 million and 8% growth over the next 6 years, Romney’s IRA will grow to about $31.7 million. Based on that value, Romney’s Minimum Required Distribution in 2017 would be about $1.158 million, all of which would be taxable as ordinary income. Ignoring any deductions or exemptions – and assuming no other source of income and no changes in tax rates – the federal tax on this distribution would be approximately $374,545, or 32% of the total distribution.

Additionally, Romney might face some problems depending on the liquidity of his IRA investments. He would need to raise the cash to make his MRD payments to avoid significant penalties. If his assets are difficult to sell, or if they can’t be used to make in-kind distributions to an after-tax account, it could be challenging to come up with the necessary cash to make the distribution.

Of course, Romney is most likely working with a team of investment advisors and tax planning specialists to cover all of his bases. As a fee-only Chapel Hill wealth management firm, Woodward Financial Advisors does the same for our clients. We work with them to understand and plan for the eventual tax liabilities resulting from Traditional IRAs and other retirement accounts. Failure to do so results in some pretty undesirable tax bills!

About Ben Birken

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