Roth IRAs Predominantly Used By the Wealthy

Roth IRAs are great because you pay tax on the money as it goes into the account, which means that all future growth is tax-free. Additionally, you do not have to take annual minimum distributions once you turn 70 1/2. Few ordinary people take advantage of these retirement planning mechanisms, but many wealthy people do – maybe to an abusive extent.

Max R. Levchin, the chairman of the social review site Yelp sold 3.1 million shares of Yelp held in his Roth IRA. Most of the money he received was profit and he will not have to pay tax at all on those gains as long as he does not take money out until after he is 59 1/2. There is an annual contribution limit of $5,000 per person for Roth IRAs, but entrepreneurs like Levchin probably rolled 401(k)s into Roth IRAs when changing jobs, and then they probably invested the funds in pre-IPO stock for their company and for others.

Levchin still has 3.9 million shares of Yelp in his Roth, which brings his tax-free retirement total to around $95 million. If he doesn’t spend his Roth in retirement, he can leave it to his kids and grandkids and the money will continue to grow tax-free.

Tax rules explicitly ban investing your IRA or Roth in a business that you control. It is more of a grey area though if a chairman or CEO of a private firm with many investors buys its shares for his/her Roth.

See Deborah L. Jacobs, Why—And How—Congress Should Curb Roth IRAs, Forbes, Mar. 26, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.