By Edward Zelinsky
On a personal level, I enjoyed the news reports that Mitt Romney holds assets worth tens of millions of dollars in his individual retirement account (IRA). These reports confirm a central thesis of The Origins of the Ownership Society, namely, the extent to which defined contribution accounts, such as IRAs and 401(k) accounts, have become central features of American life.
I was also gratified as colleagues, friends and neighbors who are often skeptical of what I do for a living (“You actually teach about pensions?”) sought my opinion about Mitt Romney’s IRA. Since we don’t have all of the details, my answers entailed a certain amount of conjecture. For those too sheepish to ask, here are the questions most frequently posed to me and my answers:
Mitt Romney. Photo by Gage Skidmore. Source: Wikimedia Commons.
Because he was a better investor than you. It appears that Mitt Romney’s IRA largely consists of investments he made while a partner at Bain Capital and of the proceeds from such Bain investments. Those investments were apparently made in Mitt Romney’s 401(k) account when the investments had relatively little value. When he left Bain, these investments were rolled over, i.e., transferred tax-free, to Mitt Romney’s IRA. While these investments were modest when initially made, they are now quite valuable. That is what successful private equity investors do.
When must Mitt Romney pay taxes on the assets in his IRA?
April 1, 2018. He could start paying taxes before then but what the Code calls his “required beginning date” is April 1, 2018. This date is set by a statutory formula which is quizzical even by the standards of the Internal Revenue Code: Mitt Romney was born on March 12, 1947. He will be 70 years old on March 12, 2017. Six months after this birthday is September 12, 2017. Therefore, Mitt Romney must start to draw down and pay tax on his IRA as of April 1, 2018.
How much tax will Mitt Romney have to pay then?
It will depend on the size of the IRA at that time and the tax rates then in effect. Because Mrs. Romney is only two years younger than her husband, the first distribution from Mitt Romney’s account on or before April 1, 2018 must be at least 3.65% of the account as it then exists. This percentage is based on the Romneys’ joint life expectancies as determined by Treasury actuarial tables. Thus, for example, if Mitt Romney’s IRA is worth $100,000,000 on December 31, 2017, his first distribution from this account on or before April 1, 2018 must be $3,650,000. Assuming that Mitt Romney made only tax deductible contributions to the account, all of this distribution will be taxed as ordinary income, at whatever tax rate then prevails.
What about subsequent years?
Each year, as the IRA holder ages, the required distribution (and thus taxable income) increases as a percentage of the current account balance. For example, when Mitt Romney is 75, his required IRA distribution will be 4.37% of the account as it then exists. When Mitt Romney is 80 years old,