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As a Wealth Advisor for a major Wall Street firm, I'm asked occasionally by business owners how they can shield more of their income (defer taxes today, pay later).  There are all kinds of methods from deferred non-qualified compensations plans, employee stock ownership programs (ESOP), profit sharing, corporate owned life insurance, etc.  I have no insight into which of these Romney has used, but if his IRA is indeed valued at $100,000,000, then it’s worth trying to understand how this happened.

[note: this is largely the same comment I posted to Vyan's rec'd diary about how he may not have paid taxes for 10 years.  I'm adding to the conversation.][Vyan's diary is here:]

Any attempt to equate his account with normal IRA contribution limits is simply ridiculous.  No one is going to turn a few thousand dollars per year (in contributions) into that large of an account balance.  It’s far more likely that his firm, Bain Capital, had some type of top heavy compensation plan that allowed for executive bonuses (incentive compensation) and/or salary to be deferred into a qualifying account.  The bonuses could very well have been in company stock, as generated by an ESOP.  Since it was a private company, the valuation of that stock could have been practically anything the Bain executives said it should be.  Furthermore, his company 401(k) plan may have had a line item for their company stock.  Many companies do this, including my own.  He may have had 100% of his 401(k) contributions put into his own company stock.

As many financial experts will attest, it’s nearly always better to have an IRA than a corporate sponsored account, so Mitt rolls his “old” qualifying account(s) into an IRA.  If
he rolled over his Bain stock he’d likely have to have a private letter ruling from the IRS to do so.  So his new consolidated IRA is all the old Bain stock, that has whatever value his company assigns (per share).  Mitt being who he is, probably has a ton of the stuff.  As evidenced by his huge account in 2010, Bain must be valuing their shares fairly high…or he simply has millions of shares.  So the concept of him having a super high IRA doesn’t vex me at all.  It is also possible that he rolled over no stock at all, but cash into his IRA.  If his bonuses/contributions of stock were highly appreciated in his corporate accounts, it’s very conceivable that his rollover size would have been huge. This is a tax free transfer.  I understand it’s not optically pure from a presidential candidate’s perspective, but it is what it is.  I sincerely doubt any legal processes were violated in getting him an IRA of that size.

What I find most interesting is what Mitt will do with his huge account.  It’s part of his estate.  There is no hiding/offshoring that account.  If he died next year (and Ann too), $100,000,000 will be taxed at the highest tax rate there is: the estate (death) tax…presently 35% but going back up to 55% next year.  From an estate planning perspective, this presents certain challenges.  But what is more amusing to me is that beginning in about 6 years, he will have to start taking Required Minimum Distributions (RMD), as all IRA owners do at 70.5 years of age.  At $100,000,000 his first RMD will be $3,649,635.  That number is categorized as ordinary income; the same category as a paycheck.  There is no escaping the tax man at that point.  And his annual “income” from his IRA only goes up from there, assuming the value of the account remains at about $100,000,000.

Assuming also that it is Bain stock inside the account, what will be interesting is if they revalue his investment right before he has to take that RMD, thereby lowering both his income (which he doesn’t need) and his tax burden.  

But there is a way out for him.

It’s a very little used tactic in the Internal Revenue Code called “Net Unrealized Appreciation” (NUA).  Essentially it is used to take highly appreciated stock OUT of a qualified plan and put it directly into a brokerage (i.e. “taxable) account.  Unlike an IRA where cash is taken out, using NUA, you take out the highly appreciated stock.  When you put the stock into a brokerage account, and wait the desired time, you can pay capital gains rate when you sell the stock.  

It works like this.  Low cost stock is put into the corporate sponsored account, at say $1/share.  Years later, when the value of your account is worth $100,000,000, you do a NUA maneuver, and transfer the shares into a brokerage account.  You pay income taxes on the $1/share x number of shares.  Let’s say he had 4,000 shares with a $1 cost basis.  When the stock comes out of the account, he’ll have $4,000 worth of income.  No big deal.  But the account is really worth $100,000,000.  Using NUA, he pays the much lower capital gains rate of 15% (highest ordinary tax bracket is currently 35%).  This isn’t exactly the way it’s calculated, but let’s do the math the easy way:
Ordinary income of $100,000,000 x 35% = $35,000,000
Long Term Capital gains on $100,000,000 x 15% = $15,000,000
Mitt saves $20,000,000 by using NUA

And this is my theory on why Mitt wants to be president so badly.  He doesn’t want the ordinary income tax bracket to go any higher than 35% (indeed, he wants it lower).  And he doesn’t want the capital gains rate to change (or lower it to zero, a concept not alien to those on the right).   There aren’t many people who are in situations like his.  So it is very important for them to have their interests protected.   I know it’s cynical to present his desire to be president on such a shallow concept as protecting his own wealth, but he hasn’t left me much in the way of alternatives.  He doesn’t genuinely seem to care about any other Americans or fixing their problems.  

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