The IRS and your MEGA IRA

A number of years ago I thought it was a good idea to retire "early" and go fishing. Maybe it was that "gone fishing" sign on the door of the little country store in rural Ohio where I grew up that made me think what a "cool" thing to do. Well I did it. I moved from this paradise we have in San Diego to a small coastal town in Oregon. I learned to fish Steelhead and Chinook salmon. Got pretty darn good at it. Did your mother ever tell you that you can get too much of a good thing? (Like Halloween candy?) Well, after 18 months of 100 inches of horizontal rain, I had all the fishing I needed. Still love it…but from a distance! I guess mom would say, I got too much of a good thing.

So what does that have to do with anything…and what the heck is a MEGA IRA? A MEGA IRA is one with so much money in it that the IRS wants to examine everything you do with it. They don’t want you to have too much of a good thing. That may be the biggest understatement I have ever made.

Recently the Senate Finance Committee in its infinite wisdom told the IRS to check out the holders of large IRA accounts to see if they were using investment strategies to make excess contributions. And they were also looking for undervalued assets - stuff you do to lower your taxes. It’s ok if it is done right, however that is highly subjective where the IRS is concerned.

Now you may not have a MEGA IRA (as yet undefined), but it is worth taking note. In 2011, approximately 650,000 people had IRA accounts valued over $1 million, and about 10,000 people had IRAs valued at more than $5 million. The Senate report assumed that individuals had accumulated large accounts by investing in assets valued very low but if successful had high investment returns. There is a theory that if an investment makes a high return then it must be worth more than the value it has in the IRA, and so if the asset is distributed from the IRA at a lesser value than the IRS thinks it should be, someone would pay less taxes. Now do YOU think that is too much of a good thing? OK, the point is whether you have a MEGA IRA or a MINI IRA do we want the IRS determining the value of our assets to get more tax money? I don’t think so.

How did the IRS get on this band wagon? It got a start during the 2012 Presidential Campaign when it was revealed that Mitt Romney had $100 million in his IRA.  How did he do that? Details were never released (nor should they be), but my guess is he made investments in private company stock before it went public and made some savvy bets. I’m not taking a position on what Mr. Romney did or didn’t do, however what part of a risk reward ratio do the regulators not get? What ever happened to "buy low - sell high"?

In this filing year of 2014 the IRS will require IRA custodians to include the fair market value of non-publicly traded assets, and they want "information" about those assets. What does a custodian know about values and information? They are independent custodians who have no experience or business in providing such information.  If you have non-traditional investments in your IRA such as Real Estate the best thing is to have them valued by a third party and sent to custodian so a reasonable value is placed on your assets.  If you have not yet done this then by all means file and extension and don’t let your IRA custodian file the valuation form the IRS requires. You can find more information at www.raymonddale.com.