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The following was written by guest blogger 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?
[Related: What is a Backdoor Roth IRA?]
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.