TPM has interviewed some tax experts to find out some dirt on Romney’s individual retirement account:
valued at upwards of $100 million — a stunning amount for a savings vehicle designed to provide middle class retirees comfortable, but non-lavish retirement.
His IRA raises two key questions, both of which his campaign has consistently declined to answer: How, despite a $6000 legal limit on annual contributions to an IRA, did Romney’s IRA grow to over $100 million? And did he avoid any U.S. taxes on its enormous returns?
Tax law experts we spoke to explained to us how an IRA could in theory reach the size of Romney’s. And though it’s impossible to know — without more information from Romney — whether he’s avoided any taxes, the experts explained how a massive IRA could easily benefit from legal avoidance of one obscure U.S. tax.
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So this is the theory that tax experts provided to TPM:
Romney’s IRA likely thrives on a strategy of gaming the valuation of investment partnerships in a way that yields outsized dividends.
“[A]n Internal Revenue Service loophole … allows investors to undervalue interests in investment partnerships when first putting them into an IRA,” Reuters reported. “These assets can produce returns far in excess of those that could be generated from other investments made at the capped level. An investor could even set an initial value for a partnership interest at zero dollars, because under tax regulations an interest in a partnership represents future income, not current value.”
However, that’s not all…but only part of the equation.
“borrowing to hold a stock portfolio is not necessarily a magic formula for wealth, or all of us would go out there and borrow as much as we can to invest in the stock market. The key, presumably, is that the stocks the IRA held performed extremely well (and that the IRA could hold more of the high-performing stock once it borrowed than if it just used the IRA contributions.”
Then there’s a third variable:
There’s a third variable too. Romney’s campaign has publicly insisted that none of Romney’s foreign investments have allowed him to avoid U.S. taxes. But the campaign has persistently declined to answer questions about a specific, but obscure tax, that Romney’s IRA may have helped him circumvent.
The tax is called the unrelated business income tax (UBIT). It can be triggered when tax-exempt entities (including IRAs) borrow to make investments. But as NYU tax expert Daniel Shaviro imagined it, “Rather than borrowing to hold investment assets, the U.S. tax-exempt [the IRA] creates a [fund] in the Caymans and the entity then borrows to hold the investment assets. So all that the US tax-exempt ends up getting is dividends… and it hasn’t literally borrowed to get them at all. Hence, no UBIT.”
In layman terms (I hope):
In other words Romney’s IRA may hold stock in Romney’s offshore funds, those funds could have levered up and yielded huge returns to the IRA. That would allow Romney not just to circumvent the annual contribution limits, but to avoid a 35 percent tax that would have kicked in if the IRA had taken on the debt-financed investments directly.
Neither Romney nor his staff have answered these questions and/or disclosed whether Romney’s IRA included investments that allowed him to avoid the UBIT.