Friday, August 3, 2012

How To Tuck Your Vast Fortune Into An IRA

Jed Lewison tells us that Mitt Romney built a $100 million IRA account and lawmakers are wondering how.  I don't know how he did it, but something occurred to me a few years ago about how one could funnel arbitrarily large amounts of one's fully taxable money into an IRA.  It involves setting up a taxable account as well as an IRA, and trading some tiny little under-the-radar stock between the IRA and the taxable account on a special exchange, so that the IRA wins and the taxable account loses.  I'll explain.

So let's say you've got your IRA, with $2000 cash in it.  And you've got your taxable account, worth $100,000.  And let's say they're both hooked up to some ECN where you can buy and sell stocks after hours if you like.  Nobody else on the ECN is trading shares of Pastry Innovation Enterprises of Snohomish (PIES) after hours, as it's a tiny company that hardly anybody invests in.  The stock is trading at $50 per share during the daytime, though, and you've just filled your taxable account with 2000 shares of PIES.  So one night you go on the ECN under your IRA account and put up a bid for 2000 shares of PIES at $1 each.  So who's going to sell you 2000 shares of PIES for $1 each?  You are!  You go on with your taxable account and sell your 2000 shares into the IRA account at $1.  (It's important that nobody else be on the exchange, or else you might sell to them at a really low price and lose tons of money.)  Now your taxable account is worth $2000 and your IRA is worth $100,000.  If you want to turn your PIES in the IRA into cash, just wait for daytime and sell them on the open market.

I have no idea if this is legal, and I didn't actually try to do it.  But in theory it's something you could do.  And I have no idea if Mitt Romney did it, but if we're trying to explain a $100 million IRA, one possibility would be something like that.  

1 comment:

Holden Pattern said...

More likely that he tucked a large part of his Bain ownership stake into an IRA at its nominal value, which would have been almost nothing on a per-unit basis, then when it converted to actual value upon his departure, hey presto, tax-free gains!