Mega-IRAs: An Inefficient Use of Tax Incentives

As of 2019, 497 Americans each held more than $25 million in their IRAs. When considering both IRAs and defined contribution (DC) plans such as 401(k)s, approximately 130,000 households had accumulated at least $5 million in tax-advantaged retirement accounts. In stark contrast, median holdings are just $87,000 among the 54% of U.S. households with any savings at all in retirement accounts. The billions of taxpayer dollars spent annually on retirement tax incentives for Americans who have already achieved immense financial security is hugely inefficient and goes well beyond policymakers’ intention of promoting retirement preparedness.

Tax Advantages for Retirement Savings: Valuable but Untargeted

Over the years, Congress has established and expanded significant tax incentives to encourage individuals who might otherwise not save (or save insufficiently) to put away money for their retirement. Individuals can save income in traditional IRAs and DC plans before that income is taxed, allowing larger amounts to benefit from compound growth before the government taxes withdrawals as normal income in retirement. Alternatively, savers can contribute to Roth IRAs and DC plans on a post-tax basis, and those contributions grow and are withdrawn tax-free in retirement.

These tax incentives likely help millions of Americans save more for retirement than they otherwise would, but a small group of wealthy individuals have leveraged them to accumulate enormous tax-advantaged balances, mostly in IRAs. In 2019, the aggregate balance of “mega-IRAs”—those with a balance greater than $5 million—was $280 billion. Of this total, over $40 billion is held in Roth IRAs, meaning that this amount and any returns are exempt from future taxation. These mega-IRAs cost taxpayers billions of dollars while doing little to advance retirement security.

IRA Balances by Number of Taxpayers (2019)

IRA Balance as of 2019	Number of Taxpayers
Between $5 million and $10 million	24,990
Between $10 million and $15 million	2,275
Between $15 million and $25 million	853
$25 million and above	497

Source: Joint Committee on Taxation (2021)

Strategies to Accumulate Mega-IRAs Out of Reach for Most

Thousands of Americans accumulate millions of dollars in IRAs despite the annual contribution limit of $7,000 in 2024, or $8,000 for those 50 years or older. (These limits are indexed to inflation.) To generate even $5 million via rollovers from DC plans—which have higher contribution limits of $23,000 and $30,500, respectively, in 2024—an IRA owner would need to make large contributions consistently over decades. Instead, owners of mega-IRAs likely use alternate strategies involving investments not available to most taxpayers.

One strategy involves company founders issuing non-publicly traded shares at an artificially low initial price—often less than one cent per share. Only a very small number of investors can purchase these nonpublic shares, which can yield enormous returns for even moderately successful companies.

Another method used at private equity firms and hedge funds is to build large IRA balances through carried interest, which is the share of an investment firm’s profits paid as incentive compensation to a general partner of the fund and often distributed among key employees. Carried interest provides an individual with the possibility of future income for dedicating their expertise and experience to the fund. But because these shares are purchased at a preferred (low or nominal) price in recognition of the employee’s efforts on behalf of the fund, the carried interest placed in a retirement account can have a low initial value but grow significantly larger in value once the profits are realized.

Finally, founders of companies can issue shares at a nominal price within their IRAs and sell them at much higher prices during an initial public offering, accumulating substantial tax-advantaged gains in their IRAs.

Refocusing on Tax Incentives’ Policy Goals

Congress certainly should not create obstacles to saving for retirement, but individuals who have already secured their financial future do not need further subsidies from federal taxpayers. To this end, Congress should consider limitations on the investment strategies described above, as well as caps on total tax-advantaged contributions. For example, in 2016, BPC’s Commission on Retirement Security and Personal Savings recommended prohibiting individuals who accumulate $10 million in tax-advantaged retirement accounts from making additional tax-advantaged contributions. (Annuitizing $10 million would yield an expected lifetime monthly payout of $61,000, or nearly $730,000 per year.) Such a limitation—or even a lower cap, if Congress finds appropriate—would present no disincentives to further saving and investing beyond that level, as investors would still benefit from the relatively generous treatment of capital gains. Rather, it would ensure that the incentives Congress has enacted to advance retirement security are targeted to that purpose—and save billions of taxpayer dollars annually.