The Strange Case of Mitt Romney's Massive IRA
October 10, 2012 1:11 PM   Subscribe

How did Mitt Romney manage to amass $102 million in his IRA?

I was reading the other day about Mitt Romney's personal wealth, and I briefly passed over a figure that showed he holds more than 100 million dollars in his IRA. I had to do a double take - how is this possible, exactly?

There are strict yearly contribution limits for IRAs, and there are also types of investments that simply can't be held in an IRA. Even if Romney earned a phenomenal return on his investments, it still seems like he would come up far short of $102 million.

So, what exactly did he do to accumulate an IRA of this size? Are there any experts here that could inform me about his strategies? What am I missing here?
posted by Despondent_Monkey to Work & Money (6 answers total) 4 users marked this as a favorite
 
The long and the short of it was that he, as a principal at Bain, was privy to stock in bain-held companies that wasn't publicly traded, and could be valued at arbitrary amounts.

So, for example, when Bain owned Staples, Romney could have taken part of his profits for the year in Staples stock, and valued that at $1 a share. He puts this stock in his IRA, Staples goes public, the stock shoots up to $20 a share, and now Mitt has 20 times the annual contribution limit for that year.

Rinse, repeat.
posted by Oktober at 1:21 PM on October 10, 2012 [9 favorites]


It probably has to do with rolling over old 401ks and/or making insanely awesome investments with his IRA funds.
posted by cranberry_nut at 1:21 PM on October 10, 2012 [1 favorite]




So, what exactly did he do to accumulate an IRA of this size?

First of all, it seems that his "IRA" is not the sort that you and I have with a $5,000 limit, but some kind of IRA known as a "Simplified Employee Pension Plan" with a $50,000 limit from the employer. Since Romney himself was the primary partner of Bain Capital, he could contribute to his own Pension plan IRA which had a higher limit.

And THEN, the word on the street is that what he did was deposit shares of his own partnership into the IRA right when the partnership started, allowing him to value those shares at effectively close to zero, so he didn't run up against contribution limits. Once the full value of his partnership was realized, lo and behold, it was worth tens of millions of dollars.

Furthermore, he was able to take money in the IRA and invest it in Bain Capital companies which, once again, he could value himself and then had very high rates of return, effectively "flipping" companies with money from their own IRA accounts.
posted by deanc at 1:25 PM on October 10, 2012 [1 favorite]


Michael Graetz writes, "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."
posted by Mr.Know-it-some at 1:34 PM on October 10, 2012 [2 favorites]


He probably invested money in his IRA in Bain deals.

Yes, but it's not that simple. Remember that many of the investors in Bain's funds are pension funds and endowments--in other words, entities that required Bain to provide plausible valuations for its investments on a quarterly basis.

The magic came in the structuring of the various share classes. This article explains it (it may be paywalled, so I copy/pasted the relevant passage below). In short, Bain employees were allowed to "co-invest" in Bain deals but they were buying a special class of shares that were essentially just options to participate in the upside of the investment.
The tax-deferral opportunity stemmed from the way Bain often chose to structure the shares of companies after taking them over.

Even if the companies had only one share class, Bain frequently gave them two classes, usually called Class L and Class A, according to former employees, Bain internal documents and securities filings. Because Bain controlled the companies, it had flexibility in assigning values to the classes.

Class L shares, akin to preferred stock, were safer and had a higher initial value. They had priority if the company paid dividends, and holders of these shares were the first to receive proceeds from a sale or liquidation. The shares also accrued interest, often at 10% to 12%.

Bain assigned a much lower value to Class A shares, which were riskier but potentially more profitable.

If Bain sold or liquidated a company it had taken over for less than was owed to Class L shareholders, the Class A shares lost all of their value.

But once Class L shareholders got their money, Class A shareholders received the bulk of additional gains, often as much as 90% of them, according to the documents and former employees. In successful deals, the A shares could skyrocket.
posted by mullacc at 1:38 PM on October 10, 2012 [5 favorites]


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