There is no limit on how much money you can accumulate in an individual retirement account. Most people (99 percent) have IRA balances of $1 million or less, but a few taxpayers have significantly more. A recent Government Accountability Office report estimates that 7,952 people have between $5 and $10 million in their IRAs, and 314 people have over $25 million in an IRA. Here’s what it takes to accumulate a very large IRA balance:
Delaying taxes. When workers put their money in traditional IRAs they defer paying tax on that portion of their earnings. This allows the money to grow without the drag of taxes until a withdrawal is taken from the account. Distributions from traditional IRAs aren’t required until after the account owner turns age 70 ½. A worker in the 25 percent tax bracket who puts $5,500 in a traditional IRA would save $1,375 on his federal income tax bill. The U.S. Department of the Treasury estimates that the federal government will give out $17.5 billion in tax breaks for IRA contributions in 2014. Most of these tax breaks go to high income individuals who have a greater ability to save in retirement accounts.
The tax deduction for traditional IRA contributions is phased out for investors who have access to a retirement plan at work and a modified adjusted gross income between $61,000 and $71,000 for individuals and $98,000 to $118,000 for couples in 2015. Workers without a workplace retirement plan who are married to someone with a 401(k) are eligible for a tax deduction on their IRA contributions until their income tops $193,000 in 2015. But people with higher incomes can still roll their 401(k) balances over to an IRA.
401(k) rollovers. The IRA contribution limit is $5,500 in 2015, or $6,000 for investors age 50 or older, which makes it difficult to accumulate a very large balance. But retirement savers are allowed to transfer their 401(k) balance to an IRA, and 401(k)s have much higher contribution limits. Workers can contribute up to $18,000 to a 401(k) or similar type of retirement account in 2015, and people age 50 and older can put an additional $6,000 in a 401(k). Some employers also make additional contributions on behalf of their workers. “Large employee and employer contributions sustained over decades and rolled over from an employer plan would be necessary to accumulate an IRA balance over $5 million,” according to the GAO report.
Riskier investments. A worker who made the maximum possible IRA contributions each year between 1975 and 2011 and achieved modest investment returns equal to the average annual Social Security interest rates could have accumulated about $303,000 in an IRA account. However, if that worker invested those contributions in an S&P 500 portfolio he would have $729,508 upon retirement, according to GAO calculations. “An individual who decided to make maximum contributions to an IRA each year since ERISA created IRAs but uses a more risk-averse investment strategy will also be unlikely to achieve a balance of $1 million or more,” according to the report. “It would take double-digit rates of return — in excess of the S&P 500 return over the period — to achieve a balance of $1 million or more, assuming an individual made only IRA contributions.” However, a worker who received the maximum possible employer and employee contributions between 1980 and 2011 and invested in the S&P 500 would have $7,268,906.
Most employees aren’t able to completely max out their 401(k)s and IRAs. “Few, if any, individuals would sustain maximum contributions for more than three decades, given that in practice, few individuals contribute the maximum to an IRA or employer defined-contribution plan in any given year,” GAO found. “Further, few, if any, individuals would be employed by employers who made matching and additional contributions for more than three decades at a level high enough to reach the combined employee plus employer limit.” An estimated 43 million taxpayers had IRA accounts cumulatively worth $5.2 trillion in 2011. The GAO says taxpayers with IRA balances of $5 million or more tend to have higher adjusted gross incomes, be joint filers and age 65 or older.
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How to Supersize Your IRA Balance originally appeared on usnews.com
