TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, January 19, 2012

The Tax Pros and Cons of Mitt Romney's $100 Million IRA

IRAWall Street Journal, Romney's Unorthodox IRA:

Like many Americans, Mitt Romney has an individual retirement account. Unlike most Americans, Mr. Romney has between $20.7 million and $101.6 million in it, a big chunk of his fortune.

Experts on estate planning said it is highly unusual to accumulate such a considerable sum in an IRA, an investment vehicle restricted by annual contribution limits. It appears that Mr. Romney's grew so large mostly because it holds investments in Bain Capital, the private-equity firm he helped start.

Under federal law, Mr. Romney isn't required to pay annual taxes on the account's investment gains, and the bulk of his contributions to the fund are likely to have been pretax dollars, IRA experts say. As such, the Romney IRA has enabled the current Republican front-runner to defer paying taxes on a sizable portion of his wealth—although he could face high tax bills when he eventually withdraws the money.

Several estate-planning experts said they know of others with IRAs of more than $100 million, but they are rare. Typically, they said, that occurs when founders of companies invest in their own shares, which then take off.

Jonathan Rikoon, a lawyer at New York's Debevoise & Plimpton LLP who advises private-equity-fund executives on estate planning, said Mr. Romney's reliance on a tax-deferred retirement plan for so much of his wealth could end up costing him. An IRA allows a small immediate tax savings, plus deferral of taxes, he explains. But income from the account, when eventually withdrawn, will be taxed at the higher ordinary-income rate, not the lower capital-gains rate that might have applied if Mr. Romney had held the investments outside  ...

The Wall Street Journal analyzed Mr. Romney's latest federal financial-disclosure report, filed in August, to glean clues about his tax strategy. ...Mr. Romney's retirement account wasn't a Roth IRA, on which he would already have paid taxes, according to the campaign aide. He is required by law to begin withdrawing funds from his account beginning in 2017, when he reaches age 70½. Those withdrawals will be treated as ordinary income, which currently is taxed at a maximum federal rate of 35%. (For most Americans, IRAs make sense because their savings are so modest their retirement income won't likely trigger high tax rates.)

Mr. Romney's aide said that the candidate "accumulated his IRA holdings through annual contributions, rollovers of sums in other retirement plans, and successful investments."

Under current tax law, anybody investing an IRA in a private-equity fund, as Mr. Romney did, would likely incur a hefty special tax on "unrelated business income," also known as UBIT. This tax, assessed at a maximum 35% rate, is meant to discourage tax-exempt entities such as an IRA, pension plan or endowment fund from unfairly competing with for-profit, taxpaying entities by operating a business without paying taxes on it. Investing in a partnership that uses debt to buy companies would trigger the tax, experts said.

It isn't known whether Mr. Romney paid UBIT. His filings suggest use of a strategy involving offshore funds sometimes employed to avoid it, according to several experts.

One method used by tax lawyers is to have the IRA invest through an offshore affiliate of the private-equity firm, known as an offshore blocker corporation, which in turn invests the same money in the private-equity partnership. The tax is avoided because the IRA technically is investing in the offshore corporation, not in a private-equity partnership.

Tax experts say that might explain why Mr. Romney's IRA includes holdings in Bain entities based in offshore locations, including one Cayman Islands entity that Mr. Romney listed as having a value between $5 million and $25 million. Michael Knoll, a University of Pennsylvania law professor, said using offshore blocker corporations to avoid UBIT "is a form of tax planning that happens all the time."

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"Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes." Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934).

Though good luck with the public relations on this.

Posted by: the real anon | Jan 19, 2012 4:09:55 PM

Increase in Tax is ok as long as the extra money from tax will be going to the useful project of the community.

Posted by: Jezreel Ricafort | Jan 19, 2012 4:41:04 PM

It would appear to me that he has been very aggressive in his use of an IRA considering the limitations on amounts he could contribute. I would suggest that their has been very aggressive valuation on the assets contributed to the IRA. In addition, the use of offshore accounts to defeat the law goes against the spirit but not the law. A potential leader and president should not be touching the edges of the law. If he does as a normal citizen what can you expect as a plausible denial President.

Posted by: Sid | Jan 19, 2012 10:01:30 PM

Given the current system/rules of insider trading which applies (or typically does not apply) to our elected officials, would anyone venture a guess as to what Romney's net worth would be after a 4 year stint in the White House ? Hmmmm - me thinks it would end up being substantially greater that what now exists.

Posted by: Deductionseaker | Jan 20, 2012 10:43:27 AM

I find it humorous that most of this article and other discussion in the press of Romney's tax situation seem merely to recite basic tax principles: capital gains rates vs ordinary income, pass through of partnership income, tax deferral through an IRA. It's as if the news media suddenly found IRS Publication 17 to be newsworthy.

Nothing we have seen so far with respect to Romney's tax planning seems illegal or even aggressive. That is equally true with respect to his IRA's possible investments in foreign corporations. The IRS has approved the use of a foreign corporation as a blocker for unrelated business tax purposes (see LTR 200251016), and I am not aware of any reason why it would be improper for his IRA to take advantage of this structure.

Posted by: taxguy | Jan 20, 2012 2:46:16 PM

Here is an other example that our income tax system favors the rich. Our tax is basically screw up. It should not surprise us why we have such huge "Tax Gap". The issue is not wheather Mr. Rommey is using legal tax planning but what he is doing ethical? As a presidential candidate and possible future president, it is his duty to speak out against such laws because they are unfair and favor a select few. It is no wonder why he did not want to make public his income tax returns. He needs to lead by example.

Posted by: Joe | Jan 20, 2012 8:13:40 PM

While these discussions are interesting, nobody has commented on how much Mr. Romney has paid (out of pocketg) in taxes while he has accumulated his wealth and the tax deferred portion (the IRA) of it.

Posted by: Also a Tax Pro | Jan 21, 2012 4:34:19 PM

The aptly named Learned Hand (1872-1961) wrote on this topic a couple of times:

"Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."

Gregory v. Helvering 69 F.2d 809, 810 (2d Cir. 1934)

Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.

Comm’r v. Newman, 159 F.2d 848, 850–51 (2d Cir. 1947) (Hand, J., dissenting).

Posted by: Walter Sobchak | Jan 21, 2012 9:18:23 PM

Joe: Do you have something like evidence for your belief. I do not think it is supported by the facts. The best summary of the available information is provided by the the non partisan Congressional Budget Office. Here is a link to their most recent report:

I would suggest studying the data files linked there.

Posted by: Walter Sobchak | Jan 21, 2012 9:24:11 PM

There's no chance that the WSJ is right about the valuation of his IRA. I've prepared that form before, so I know what to look for when you're trying to isolate asset silos, and you just can't tell from the form what's in his IRA. Given the implausibility of the number cited by WSJ, I'm comfortable saying that we can know w/ reasonable certitude that the WSJ is wrong.

Posted by: jpe | Jan 22, 2012 4:38:02 AM

These comments regarding whether or not he paid the right amount of tax are all of the "Do you still beat your wife?" variety. He paid the lowest amount of tax that he was legally obligated to pay. And that's a pretty big number. The average percentage paid in America is 18%, and that includes 42% who don't pay any tax whatsoever. 15% isn't that far off the mark.

Would you rather a president who demonstrates he doesn't understand tax law (by paying way too much, like Gingrich) to be setting our tax laws? I want legislators who, when I write to them explaining how a proposed tax law has a loophole a mile wide that will only be used by .01% of the population, understand that means millions of dollars in lost taxation and tighten up the bill. Even better are legislators that can see that loophole before it ever gets to be found by me.

Posted by: liz zitzow | Jan 22, 2012 10:20:35 AM

Has anyone given any thought to how Romney's IRA will grow over time, even taking RMDs which the article stated he would sometime in 2017? How about the beneficiary or beneficiaries or contingent beneficiaries and the use of life insurance to pay the estate tax due when the eventual time comes around.

Also if a flat tax is enacted (and at a much lower rate) would Romney and later on his heirs make a so-called killing paying less in taxes sometime in the future?

A bigger question should be -- is there a maximum amount an IRA could grow to before a new law would require the distribution sooner than 70.5 years of age - in other words a maximum dollar balance amount?

For ordinary everyday working people the fact that Romney can shelter this kind of money looks terrible. Will they actually vote for him?

Posted by: taxhobbyst | Jan 27, 2012 7:14:39 AM