Mitt Romneyâ€™s $100M IRA: Gaming the System at Bain
Mitt Romney will pimp your portfolio. Well, not yours but...
I might have titled this piece “How to Build a $100 Million Dollar IRA, Just Like Mitt Romney” but it would have been an unfair tease. The problem is, even if you know how to do it, you need to run a firm like Bain Capital to pull it off. If you work for Bain Capital, that’ll do. But you have to have a boss with a very particular mindset, a boss like Mitt Romney.
The way you do it is astonishingly arcane. You rip the fiscal guts out of a company you’ve acquired and refashion them just so. You split the shares into two classes, type A shares and others we'll call type B. Type A shares are riskier, but if the acquired company turns around, their value grows exponentially. The other shares, Type B, are more like standard shares that you would see on the market. They go in your regular portfolio.
You value the shares at very low levels, arbitrarily low levels, because there is no oversight or regulation to which you need to adhere other than ineffectual IRS guidelines that the IRS does not enforce. Then you award yourself and your colleagues these shares as compensation. Or, you sell them to your colleagues. These shares, with their artificially low initial values, will do amazing things for you if you succeed in turning the firm around.
When the owner and employees of a takeover firm like Bain work on a project they might receive part of their compensation in the two varieties of shares. Or they may co-invest in the acquisition. Type A shares, with their potential for extreme growth, go into tax-deferred retirement accounts, where all that growth grows untaxed until retirement. In this manner, all of the income restrictions on how much can be contributed annually to an SEP-IRA are circumvented and the owners of these accounts can build a lifetime of retirement savings in just a few short, lucky, years.
What we are talking about here is the very meaning of the words unfair advantage.
The Wall Street Journal, much to its credit, did the initial digging into how Mitt built his $100 million retirement account in a story that appeared in March. It should be noted that the true value of Mitt’s SEP-IRA is unknown because he refuses to share the details—“Let them eat cake,” as his lovely wife Ann was paraphrased on the topic of open access. Ironically, this disclosure is a practice initiated by Mitt’s father George during his own run for the Big Office. In fact, the value of Mitt’s IRA could be as low as $20 million, which I imagine will make you feel a lot better, because a 401k or IRA valued at that level might make you feel like Mitt’s unfair advantage is a little less, well, unfair, right?
Anyway, back to the Wall Street Journal article, “Bain Gave Staff Way to Swell IRAs by Investing in Deals,” by Mark Maremont. It is a gem, recommended reading to be sure. A short excerpt goes a long way toward explaining how the deals work:
Bain in the Romney era had what's known as a SEP-IRA—a plan somewhat akin to a 401(k) but involving only employer contributions—which had contribution limits before 2001 of $30,000 a year. Putting in low-price A shares, said former employees, gave them a shot at building substantial tax-deferred accounts despite the contribution limits.
A deal for Sealy Corp. shows how this could work if all went well. Bain led a group that took over the mattress maker in 1997. One junior Bain employee invested about $30,000 in Sealy, documents reviewed by the Journal show, putting a few thousand dollars of IRA money into the risky, low-price A shares. Ninety percent of the employee's investment went into the safer shares, which were placed in a taxable account.
In 2004, after Sealy's value had been sharply raised by Bain and its partners, they sold most of Sealy for a large gain. The employee's approximately $30,000 investment grew to about $160,000.
To put this in context, this Bain employee was able to amass an amount--$160,000—that is approximately three times what the average American has in their entire IRA or 401k through the rapid growth of an initial investment of $30,000 of what the company said was junk stock. And that’s an important point. Because only Bain knows the parameters of the deal, it’s chances for success and the potential upsides involved. Let’s say it plainly: the classification and pricing of shares is purely arbitrary. Their potential for rapid growth is directly based on the degree to which they can be undervalued at the outset. This is what I mean by gaming the system.
And it is by gaming the system in this manner that Mitt was able to build his $100 million nest egg. If he had undervalued one class of shares and then stuck them in his Cayman island or Swiss bank account that could work, too, but that might raise the specter of tax evasion, which is a crime. Mitt is too smart for that. He is a tax avoider, not a tax evader, as far as we know, because of course he won’t disclose his offshore holdings, and presumably he had his Swiss bank accounts vacated when the federal government cracked down on tax evasion via Swiss accounts.
Mitt was so clever that his plan verged on, well, actually, well beyond, overkill. No one really wants to have $100 million in an IRA, because it will be taxed at the level of income when the money is withdrawn and it is taxed at a brutally high rate if it goes into one’s estate. However, if the plan was to fund one’s religious tithing with those tax-deferred dollars; that would be a really cheap way to fund the tithe with tax-privileged, false cost basis, taxpayer-subsidized dollars. And that is a hard-core benefit no matter how you cut it. It is almost as if the government is covering the bill.
And this scenario is in no way mere serendipity. Tax planners talk with wealthy donors all the time about the benefits of using a tax-deferred retirement account to fund charitable giving. But most high rollers don’t get to fund their plans with the stock market equivalent of funny money; they have to use real dollars.
Is this the ethos of government service that you want to see in your president? Is this “Ask not what your country…?” No, let me answer. It is not. This is, “How can I game the system to extract the last drop of income out of the tax code and make that tax structure work for me in ways that the other 99.99 of my fellow Americans cannot?”
Some would argue that you want a guy this smart running the country. I would beg to differ. First of all, Bain’s accounting department or one of its consultants came up with the original scheme, not Romney himself. Second, a genius for tax avoidance is not the same genius it takes to actually run a company or a country. I would rather have a gifted legal mind driving the bus, rather than a flat-out schemer. No, I take that back. I would take a little of the schemer if it could be the Lyndon Johnson variety, someone who can twist an arm to get a law passed. Romney, stiff as a shirt-board, couldn’t glad-handle his way out of a paper bag. Not to say President Obama is a whole lot better, though he sure can sing better, and that counts for something on Congressional Karaoke night.
If I had been a minion at the table back at Bain Capital, I would have posed the question: Is it possible to put too much money into a SEP-IRA or 401k? I mean, shouldn’t we go for a tax-deferred retirement account that hits the top .0001 percent, say, $4 million, and call it a day?
At some point all these machinations just begin to look like connivance. And in that respect you can call Mitt a bit of an overachiever. In a way, it’s just stupid to have a $100 million IRA. As to the tithing, charitable gifts are laudable, but Mitt gamed the system in such a way that the lost revenue to the government was more than substantial, and in a manner that is entirely unavailable to the rest of us. So, being as charitable to Mitt as circumstances allow, it’s Church of Jesus Christ of Latter Day Saints’ gain, U.S. Treasury Department’s loss. I would prefer as president a guy who would bust a nut working for the welfare of all Americans, not just some at the expense of others. What he did doesn’t have to be illegal for me to think of him as a tax cheat.
UPDATE August 1: Here's what the New York Times had to say about Romney's IRA:
"Given the extraordinary size of his I.R.A., we have to presume that Mr. Romney valued the assets he put in his retirement account at far less than he would have sold them for. Otherwise it is quite a trick to turn contributions that are limited to $30,000 to $50,000 a year into the $20 million to $101 million he now has there. But we cannot be certain; his meager disclosure of tax records and financial information does not indicate what kind of assets were put into the I.R.A."
from "Mitt Romney's Financial Mysteries", by Michael J. Graetz, July 30, 2012