Less than 1.5 percent of IRAs have surpassed the $1 million mark because of very strict limits on the amount individuals can place in them annually — $5,500 if you’re under age 50.
Yet federal government figures show 314 taxpayers have beaten the odds with IRAs whose values exceed $25 million each, totaling $81 billion collectively. That comes to $258 million each on average. How did they get there?
One way to do it is with self-directed IRAs that allow alternative investments beyond the publicly traded stocks and bonds that most financial institutions offer, explains Daniel Hanlon, business development manager of Midland IRA.
Billionaire tech investor and PayPal cofounder Peter Thiel bought shares of PayPal and Yelp through a self-directed Roth IRA when the companies’ shares were worth mere cents on the dollar, and he made an early investment in Facebook in the same manner, explains Hanlon.
Forbes notes the 1.7 million PayPal shares Thiel purchased presumably rose to $31.5 million when eBay bought the company for $19 a share. As long as Thiel holds the proceeds in his self-directed Roth IRA until 2027 — when he turns 59 ½ — it’s all tax-free.
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During the 2012 presidential campaign, Mitt Romney disclosed his own IRA was worth somewhere between $20.5 million and $101.6 million, notes Bloomberg News. A self-directed Simplified Employee Pension (SEP) IRA allowed Romney the ability to choose his investments. This type of IRA has a higher annual contribution rate of up to 25% of an individual’s income or $53,000, whichever is less.
“He was able to benefit from a ton of private investments through Bain Capital,” Hanlon said. “And that is what people are able to do with us.
“Normally when someone has an IRA, they set it up with a Schwab or Fidelity and choose from the investments they offer, which are usually mutual funds,” Hanlon said. “With us, it’s an empty bucket, and they can choose from a wider array of investments.”
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Self-directed accounts can hold real estate, intellectual property and even tangible assets, such as holdings in horses or precious metals.
“We can facilitate that purchase, and we are set up to hold these investments,” Hanlon said. Self-directed accounts can also include crowdfunded and private equity investments, such as promissory notes or shares in a startup.
(Midland photo)
Midland IRA, which administers more than $1.1 billion in alternative investments, doesn’t give advice on self-managed accounts. The accounts are in the hands of their 10,000 clients, who want a more diverse portfolio.
Like other IRAs, self-directed IRAs can include funds from a former workplace savings plan.
“As people leave employers, they roll over their 401(k) accounts,” Hanlon said. “Then they can choose whatever they want to invest in.”
Midland also handles rollovers from vested profit-sharing plans. These so-called in-service distributions might be an option for workers nearing retirement who aren’t satisfied with changes in 401(k) fund choices.
To keep their tax advantage, investments need to be arms-length transactions. Borrowing from the account or lending to family members is not allowed.
“You can’t transfer property you already own to an IRA, and you can’t be the person living there and paying rent,” Hanlon said. “That’s too close.”
For IRA investors still trying to close in on $1 million, a pressing issue is often how long to tie up their investments.
“It’s often a matter of liquidity — you may need cash for children’s college expenses or retirement income,” Hanlon said “But you can choose what investments to hold. For instance, many of Origin Investments’ deals are structured to last three to five years.”
