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Billionaire startup founders and private equity executives may have more of an advantage than you realize.
If you put $5,500 in an IRA every year beginning this year and earn 6% returns on average, it would take roughly 42 years for your account to grow to $1 million.
Yet, a very small percentage of the population has the opportunity to grow their IRAs to gargantuan proportions. Startup founders, for instance, may get the chance to put nonpublicly traded shares of their burgeoning business into a retirement account before the company goes public. If the company takes off, the price of the shares could balloon from fractions of a penny to millions of dollars.
If that IRA account happens to be a Roth IRA, it’s like winning the tax-free lottery since only contributions to a Roth, not earnings, are subject to tax. If it’s a traditional IRA, Uncle Sam will get his due, eventually.
That may be cold comfort for the taxman. In November 2014, the Government Accountability Office released a report suggesting steps Congress can take to close up the loophole, but not everyone thinks it needs to be fixed.
“There are going to be cases that are extreme, but it’s an honest system and encourages saving and personal responsibility. I don’t think that is something they would want to tamper with,” says E. Brian Finkelstein, a partner at Broad Financial, a provider of self-directed IRAs and solo 401(k)s.