The 0.01 Percent’s “I Reap All” Accounts

Do you remember when Mitt Romney’s IRA made headlines during his failed 2012 presidential campaign?

That outsized retirement stash estimated at between $20 and $102 million probably led President Barack Obama to propose limiting the buildup of IRA values. It turns out that Romney’s gigantic IRA was no fluke.

At least 9,000 wealthy Americans have amassed $5 million-plus sized IRAs. Indeed, the former Massachusetts governor’s use of a monster IRA to defer taxation is modest compared to others.

Meet Max Levchin. When he helped launch Yelp, Levchin had the foresight to place at least 7 million of his original shares of Yelp stock in a tax-sheltered Roth IRA when he acquired it.

The Ukrainian-born entrepreneur has sold off some of those shares since then, so estimating the size of that Roth mega-IRA requires some guesswork. Based on Yelp’s recent trading range, it easily could exceed $275 million.

Roths weren’t around when Romney began stuffing his IRA with spectacularly good investments, so his fortune is stuck inside a traditional one.

There’s a tradeoff between Roth and traditional IRAs. Contributions to traditional IRAs are tax-deductible while contributions to Roth IRAs aren’t. Conversely, distributions from Roth IRAs aren’t taxable, whereas distributions from traditional IRAs are. In other words, while the earnings from traditional IRAs are tax-deferred, the earnings on Roth IRAs are tax-exempt.

That gives Levchin a huge advantage. While Romney saved a few thousand bucks in taxes when he established his IRA, the Yelp founding father will save millions, possibly billions, when the money comes out.

Levchin’s advantage doesn’t end there. You see, he’s only 39. If his Roth IRA fortune grows at a 6 percent rate of return until he reaches the former GOP presidential hopeful’s age of 67, he’ll have amassed over $1 billion, entirely tax-free. If Levchin attains a 10 percent rate of return, his Roth IRA will be worth $4 billion by then.

Of course, if he continues to invest in successful start-ups (Levchin also helped launch PayPal and Slide), his gargantuan Roth IRA could grow to $10 billion or more, all tax-free.

Levchin’s advantage will continue after retirement. After reaching age 70-1/2, Romney must start drawing down his traditional IRA and paying tax on the distributions. Not Levchin. Even though it completely contradicts the supposed purpose of the IRA — to fund retirement — he can let his Roth IRA accumulate until he dies.

That tax windfall will continue to amass after death. His children, now toddlers, will be required to draw down the Roth IRA, but only gradually, over their lifetimes. Max Levchin’s gigantic tax-exempt investment fund, masquerading as a retirement account, could potentially last until the end of this young century.

There’s one thing both IRA schemes have in common: They’ve got nothing to do with retirement.

For Romney and Levchin, it’s all about avoiding taxation. The notion that these men will ever rely on their IRAs for living expenses during their golden years — the official purpose of these accounts — is beyond laughable.

The government sets limits on IRA contributions to curb this abuse, but there’s still more loophole than restriction. Although the average IRA balance continues to climb, clocking in around $92,600 as of June, it’s only a fraction of the balance held these super-sized IRAs.

Could Congress end this giveaway enjoyed by the nation’s least-needy people? Easily. And it should focus on Roth IRAs, where the abuse potential is far greater.

First, the rules should require that Roth IRAs be distributed during their owners’ retirement years. That’s the point of a retirement account.

Second, the tax-exemption should end at death. The IRA is there to fund the owner’s retirement, not confer a lavish tax benefit on his heirs.

Third, tax exemption should be limited, perhaps to the first $2 million dollars of distributions. Regulators can’t stop Roth IRA owners from realizing outsized gains, but there’s no sound reason for the tax exemption to be unlimited.

After all, the goal is to help Americans save for retirement, not shield multi-million dollar fortunes from tax.