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IRS crackdown on mega IRAs

Published on January 27, 2015

Do You have a “Mega IRA?” Make Sure You Comply with the IRS

Last month, Senate Finance Committee Chairman Ron Wyden (D-Ore.) told the Internal Revenue Service and the Treasury Department to crack down on high-value “mega” IRAs; this came after a Government Accountability Office report found holders of large IRAs were using alternative investment strategies such as excess contributions and undervalued assets as tax dodges.

This does not affect the majority of account holders but is worth taking note. The GAO report found that for tax year 2011, approximately 600,000 taxpayers had IRA accounts worth more than $1 million, and about 9,000 taxpayers had IRAs worth more than $5 million (only 314 had IRAs worth in excess of $25 million). The report stated that a small number of taxpayers had accumulated these mega balances by likely “investing in assets unavailable to most investors — initially valued very low and offering disproportionately high potential investment returns if successful.” The GAO contends that these individuals may escape taxation on investment gains.

Besides “mega IRAs,” Wyden told the GAO to review self-directed IRAs, which he said “may be a growing target for fraud.” The IRS plans to collect data identifying non-publicly traded assets comprising IRA investments in order to identify potential IRA noncompliance. You can read more about what triggered this initiative by Sen. Wyden as well as GAO recommendations here.

The GAO analysis of very high-value IRAs got a start during the 2012 presidential campaign when it was revealed that Mitt Romney had $100 million in his IRA. IRA guru Ed Slott opined at the time that, “Either these few people with the mega IRAs ($25 million and more) are consistently fantastic investors or the assets going in were extremely undervalued. The undervaluation is probably more likely.” Our CEO, Jaime Raskulinecz, thinks otherwise, and shared her views recently with Bankrate.com:


“It doesn’t seem very feasible to me that assets could be so undervalued. These investors (such as Mitt Romney) are specialists in investing in start-up companies. My opinion is, especially in the case of Romney, that high-net-worth individuals achieved high balances in IRAs when rolling over large 401k accounts. In Romney’s case, this is speculation since details weren’t released; I assume he made investments in private equity (company stock before it goes public) and made some great investments. Someone with this experience and risk tolerance should be able to increase retirement funds using strategies they know and understand. In private equity there are generally many losers but the winners usually make up for them.”

Starting in tax year 2014, the IRS, through Form 5498, will require IRA custodians to include the fair market value of non-publicly traded assets and information on the type of asset. Our team has extended the filing deadline for Form 5498 to make it easier for all our clients to have their nontraditional investments properly valued by a third party and sent to us for filing. Hard-to-value IRA assets within a self-directed retirement plan may be non-publicly traded stock, partnership and LLC interests, real estate, and options.

Beware of prohibited transactions

At Next Generation Trust Services, we educate our clients on the many options and benefits of self-direction, as well as guide them in terms of prohibited transactions and disqualified individuals (a potential issue for those who wish to invest in non-publicly traded shares of their own companies through their self-directed retirement plan; see our blog post on ROBS for more insights on using an IRA rollover for startups).

Since different kinds of retirement plans have different contribution limits and different tax advantages (depending on the plan, your particular financial picture, and your retirement goals), we highly recommend you consult a tax specialist or financial planner to review your self-directed retirement plan selection and contributions. As part of our full-service account administration, our expert transaction specialists are available to answer any questions you have regarding alternative assets allowed through self-direction and help you comply with IRS investing guidelines. Next Generation handles all the paperwork and meets all the mandatory IRS filing requirements for our clients.

Looking to build a high-value IRA through alternative investments?
Contact Next Generation Trust Services to discuss your goals at Info@NextGenerationTrust.com or (888) 857-8058.

Click here to open up a self-directed retirement account with the convenient tools on our website.

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