The following was written by guest blogger John Hyre.
Attorney John Hyre
Mitt Romney grew his IRA to $100 million. He did it tax-free and legally.
How did he do it? He did not release all of the details, but we have some clues. Remember, Romney was in the business of buying companies for next to nothing, turning them around and selling them.
Or he and his partners would look for companies that were not worth much as companies – but had assets, that if sold separately to the right people, had lots of value.
He made a fortune by buying companies, and then either turning them around or splitting them up and selling the assets. Bottom line, they bought companies for very little and sold them or their assets for quite a lot.
Furthermore, this business was run through a partnership. That’s important because there is an obscure little tax rule that says that an interest in future partnership profits (which in the tax world would include most LLCs) is worth zero (or close to zero) on day one.
Video: Private Placement Investing with a Self-Directed Retirement Account
How Could It Work? An IRA Example
So let’s do the math. The interests in the future profits of a partnership could be worth, say $1 per share. Let’s say the partnership had 100,000 shares.
An IRA with a mere $10,000 in it could buy 10 percent of the future profits in the partnership. Given how good Romney and his people were at finding or making deals, the value of 10 percent of the partnership’s profits could be worth millions after a few years. That could be how he did it.
The IRA bought an interest in future profits for very little – and the future profits were worth quite a lot.
While that particular technique may (or may not) work for smaller investors who are not quite as well connected as Romney, similar strategies exist. For example, I know of a guy who managed to accumulate over 50 free and clear rentals into his Roth IRA.
Think about that. He is now over 60 years of age. That means that the rent from those free and clear rentals is all tax-free to him. So how did he do it on only $5,000 per year in contributions?
Careful and creative use of leverage. He often did not touch the money he put into the Roth IRA. That was held back as a reserve. Rather, he borrowed 100 percent on each property and then quickly paid them down.
Some factors Romney very carefully managed:
The debt could not be from a “disqualified party.” Who or what is a “disqualified party” is a complex area of the law.
The debt had to be “non-recourse,” meaning that the creditor’s only recourse in the event of default would be to seize the property. They could not go after the Roth or the Roth account owner. (Learn more: video on non-recourse loans)
He did pay some tax on the first few years of rental income. That tax is called UBIT, and there are ways to minimize it.
The properties had to be managed by an outside manager.
He needed to have an LLC specially created with a customized operating agreement.
So it wasn’t simple. There were lots of moving parts. But the reward was huge: 50+ free and clear rentals producing tax-free income.
Saving for More than Retirement: Beyond the Roth IRA
This legal technique could also be used in a Coverdell Education Savings Account to pay for kids’ K-12 private school + university education. The same technique could also be used in a Health Savings Account to pay for healthcare for the rest of one’s life.
Other techniques exist, I have simply provided you with two examples.
But Romney did not get results by sitting on his hands. Nor did the investor I described above get his results by avoiding action. Act now – before Congress changes its collective mind.
Can I co-invest other funds with my IRA to make an investment?
Yes, partnering your self-directed IRA or other retirement account with another funding source is possible. You can partner your IRA with your non-IRA money, your other retirement accounts, your spouse’s IRA, other people’s IRAs, another investor’s non-IRA money and your children/grandchildren’s CESAs, to name a few options.
2
What is UBIT or UBTI?
If your IRA owns an asset or interest that produces unrelated business taxable income (UBTI), your IRA may be subject to an unrelated business income tax (UBIT) pursuant to Section 511 of the Internal Revenue Code.
John Hyre is a tax attorney, accountant and investor. His tax practice is based in Columbus, Ohio, but most of his clients are from states or countries outside of Ohio. He has been practicing for twenty years in the area of tax law, with a focus on the taxation of real estate, small businesses and self-directed IRAs/401(k)s. John frequently speaks nationally on taxation and has successfully represented clients in IRS audits and in Tax Court. John is accepting clients from all over the US (and overseas) for tax planning consultations and representation in IRS audits or in Tax Court.
John Hyre is not affiliated with Equity Trust Company or its affiliates. The information provided in this article is for educational purposes only and should not be construed as tax, legal, or investment advice. Whenever making an investment decision, please consult with legal, tax, and financial professionals.
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