During the 2012 elections, one of the revelations that came out about Republican candidate Mitt Romney’s finances was that his self-directed IRA was worth up to $100m.
With current annual contribution limits of $5,500 for those younger than 50 and $6,500 for 50 and older, how the heck does anybody build an IRA worth $100m? Especially since the annual contribution limits were even lower during much of Mitt Romney’s working years. Nobody knows exactly, but Romney was probably in a unique position the rest of us would be hard pressed to duplicate.
For one, Romney probably participated in a 401(k) program with his employer Bain Capital with matching employer contributions. Geoffrey Rehnert, a former Bain Capital partner who helped found the firm in 1984, said in that era it had a 401(k) plan that allowed employees to invest pretax dollars in its deals. Bain’s 401(k) plan was self-directed and wasn’t restricted to the usual set of mutual funds that most Americans are limited to. In 1984, the self-directed 401(k) structure allowed Mr. Romney and Bain to contribute up to $30k per year into his account. I’m guessing Mr. Romney took full advantage and maxed his contributions. Then once he built his fortune in the 401(k) plan, he did a 401(k) rollover into a self-directed IRA. Maremont, Mark (January 19, 2012), Romney’s Unorthodox IRA, wsj.com.
So the rest of us won’t be able to replicate working for an employer like Bain with a 401(k) plan that would allow us to contribute up to $30,000 a year and then roll it over into an IRA. But even accounting for higher contributions of $30k per year, how did Romney build his IRA to a worth of $100m? And what can the rest of us can learn from Romney’s investing habits? To get a peek into the window of Romney’s investing strategies, it’s important to look at the self-directed IRA structure itself and to look at other investors who also have high-value self-directed IRA’s. Focusing on the structure of a self-directed IRA, unlike traditional IRA’s that are managed by big financial institutions that act as custodians that limit investments to publicly traded stock, bonds, and mutual funds, self-directed IRA’s can legally own real estate and other alternative investments ranging from private equity to commodities like gold, oil and gas.
A 2014 report from the Government Accountability Office (GAO) backs up the speculation that Romney built up his self-directed IRA through alternative investments. The report suggests that Romney is not alone in his multimillion-dollar IRA wealth. According to the report, there were at least 314 Americans with more than $25 million in their IRAs. The GAO estimated that the average account balance for each of these 314 individuals was $25.8 million. But how did these individuals accumulate such substantial assets in their IRAs? The report suggests that one driver of these higher balances was the use of alternative investments to generate growth beyond what stocks or other traditional investments offer.
The report’s findings completely aligns with Romney’s career at Bain Capital, a venture capital firm. There’s no doubt, Romney carried his penchant for investing in alternative assets like private equity into his IRA investment strategy. And because Romney had a self-directed IRA, he no doubt made his own investment choices, and most likely through a self-directed IRA with checkbook control that allowed him to make acquisitions directly without custodian approval.
Alternative investments like real estate, private investments, and private equity have long been utilized by wealthy investors to hedge against stock market volatility.
This is because alternative investments are theoretically uncorrelated to the broader stock and bond market and therefore insulated from broad market swings. And the self-directed IRA is the perfect vehicle for investing in alternative investments not only as a hedge against wall street but also as a hedge against inflation with above-market returns and the tax deferral component. And by creating a self-directed IRA you can make investment decisions on the go. Funding a transaction through a regular self-directed IRA would normally require going through a third party administrator. This requires paperwork check processing. You can skip all of this when you establish checkbook control with your IRA. Funding is as simple as writing a check.
Although not many Americans will be able to match the value of Mitt Romney’s IRA, there are lessons to be learned from his IRA for the rest of us to maximize the values of our own IRA’s. If your employer offers 401(k) matching, you should absolutely take advantage of it, because when you leave your employer, you’ll be able to roll the 401(k) into a self-directed IRA and direct the funds towards your own investment choices. And as we discussed, alternative investments are the best vehicles for growing your IRA while being shielded from Wall Street volatility and hedging against inflation. If you’re self-employed, there’s no better time then now to establish your self-directed IRA if you haven’t already and start allocating most of your assets towards alternative investments.
Here at Four Peak Capital Partners, as a hedge against Wall Street and for generating wealth, we gravitate towards alternative investments, with a preference for real estate. Real estate is a productive asset. Passive income generated from productive assets should continue to produce even in down times in the Wall Street volatility cycle. Income generating assets like real estate will not suddenly cease providing rental income. And the real estate segment we favor is mobile home parks. While not sexy like a high rise or a mall, mobile home parks are recession-proof. In fact, like with other forms of affordable housing, demand for mobile homes go up in a downturn. So, while other sectors of the economy suffer in a downturn, mobile home parks continue to generate income without a glitch.
By adding our offering to your portfolio through a self-directed IRA, you’ll be well on the road to building a high worth IRA and live the life you envision at retirement.
It’s unlikely any us mere mortals will build an IRA worth $100m, but using the techniques used by Mitt Romney and other high worth IRA holders, you can assure yourself of above-market returns shielded from Wall Street volatility and by committing to multiplying your earnings by reinvesting the passive income from our regular income distributions, you too can put yourself on the path to financial success.
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