• Yesterday the WSJ had an article stating that Mitt has around $100 million in his 401(k). How do you do that when the maximum contribution is $44K/year? After 20 years, contributing 44K/year and earning 8%, he would have about 2.1M- if he never had a down year. That’s a little less than 100 million dollars.
• How do you get 100 million dollars into your 401(k)? The WSJ accounted for this by saying that he must have made good investment decisions. (!) So Mitt is really the brilliant investor/business man he is purported to be! He made more than 50 times the return that the best money managers have ever produced- and consistently over 20 years! Actually, the only way he could have done it is if Bain "matched" his contribution by about 5000%- ie they put in 2.2 million each year for his 44K. Then, with 8% return per annum, and no down years during the TEC bubble or the bank crash, he would have about $117 Million in his tax deferred account. (The other way would have been for them to put 20-50 million in his account at the start, as a so called “matching contribution”.)
• Do any of you have an employer who can or would match your $44,000 with 2.2 million- year after year? And why would Mitt arrange his compensation in this way?
In an apology for his financial scheming, the WSJ said that it wasn't even necessarily a good idea for Mitt, since the money would eventually come out as income rather than capital gains (as it does for all of us poor smucks with 401(k)s.) So Mitt, supposedly, is looking at 35% rather than 15 % tax. Why would he do that? First, the argument assumes that current capital gains could be sheltered in a 401(k)- and they cannot. Only income can be sheltered. How the “carried interest” that Mitt receives (at 15% tax, unlike the rest of us working stiffs) is handled is not clear. I am not sure that he can put that money into a 401(k) at all. So perhaps he was given some “income” to deduct against. Thus, even if the WSJ is correct, the “extra” tax of converting capital gains into income only applies to gains made after depositing the money in the account. And that is exactly how it works for all workers with a 401(k). Even with compounding tax deferred, why is this a good idea for Mitt?
Obvious- he has 5 kids and 16 grandchildren. He cannot possibly spend all of his money before he dies, and with the money in a 401(k) he can make them the beneficiaries- so they get it over their life expectancies, not his. The money remains untaxed and accumulating for 60-80 years- and most importantly, there is no inheritance tax. No one anticipated that anyone could stuff $100 million into his 401(k), so the law does not include this in the estate. With a 5.1 million exemption, one would normally pay almost half of the $100 million in estate taxes- Mitt’s family will escape tax free.
Mitt is simply avoiding about 50-75 million in inheritance taxes this way. not bad. (And leave it to the WSJ to fail to mention it.)
Note- this discussion does not even begin to address setting this up in the Caymans…