Upper Income People Can’t Be Bothered With The IRA

cigar and moneyPlease see my earlier post on The Humble IRA.


Does the humble and homely Individual Retirement Arrangement (IRA) matter to well-paid people?

I remember being shocked in the late 1990s when my mentor Jim on the bond trading floor at Goldman declared “I don’t bother with IRAs because nobody’s getting rich investing through an IRA.”

I eagerly sought out wisdom on personal finance at the time, so I was struck that such a clear tax-advantaged vehicle could be overlooked by a financially savvy professional like Jim.

He was a Vice President at the time and made a good salary and bonus, with bright prospects.  He then became a partner about 6 years later, wholly and thoroughly justifying his scorn for the lowly IRA as a wealth-building vehicle.

His example stuck in my head over the years because – more than the stark irrelevance of an IRA for his own personal situation – I’ve realized that he’s basically right – upper income and wealthy people as a whole really have no use for the IRA.  It’s a waste of time for them.  This is true for a number of reasons.

1. The maximum tax deductibility limit of $5,000 doesn’t get you very far if you have many multiples of that amount to invest.  In the 1990s, when my mentor made his scornful statement about not getting rich from an IRA, contribution limits were stuck at $2,000 – making his scorn even more justifiable.  But even with the upward adjustment to $5,000 in 2012 and $5,500 in 2013, that still doesn’t provide much tax advantage.

2. Most highly compensated people have access to a 401K or a similar saving plan which offers many times the tax-advantaged contributions of an IRA.  If you own your own business, or if you work for a high-paying salary, you could put away at least $17,000 pre-tax in 2012, in addition to larger amounts through employer profit-sharing, leaving the homely and humble IRA in the dust.

3. If you have access to a much better, bigger employer retirement plan like a 401K, as most highly compensated people do, suddenly you’ve lost the $5,000 IRA tax deductibility if you make more than $68K individually, (or $112K if you file with your spouse.)

The end result: my mentor Jim was right.  Upper income people really can’t be bothered with the IRA, and I can’t fault their logic.

All of the above is particularly ironic to me because I’ve spent the past month arguing, pleading, berating, and otherwise pestering the undergraduates to whom I teach personal finance into opening and funding their first personal IRA.

I’ve taught them about the key building-block concepts of compound interest, and understanding wealth, and how to budget and save money.

I’ve argued that opening and funding their first IRA – which I assigned as mandatory homework to them this week – is a key culmination of everything I’ve taught them.

And I do believe in the value of the IRA for them in particular, as I assume they will not be highly paid in their first years out of college, nor will many of them have access to a 401K right away.  So an IRA makes a ton of sense for them.  At least for now.

What I haven’t told them is that as soon as they’re well-paid and wealthy they can forget all about the IRA, with my financial blessing.  But please don’t let them know this yet.

First they have to open the IRA, before they can forget all about it.


Please see related posts on the IRA:

The Humble IRA

IRAs don’t matter to high income people

A rebuttal: The curious case of Mitt Romney

The magical Roth IRA and inter-generational wealth transfer

The 2012 IRA Contribution Infographic

The DIY Movement and the IRA

Angel Investing and the IRA



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15 Replies to “Upper Income People Can’t Be Bothered With The IRA”

  1. I thought IRAs (including ones that are formed from 401K rollovers) had very good tax protections built in for passing wealth to younger generations. Something about putting a child’s name as a beneficiary, thus drawing out the time before minimum distributions are needed, and also limiting the basis adjustments that are normally needed in an inheritance… But since I don’t have kids, I zoned out and stopped listening so I could be totally wrong. =)

  2. Mrs. Pop, you are totally right. My next post will be a rebuttal of this post, and discuss the amazing IRA Romney managed to amass, which isn’t chump change to say the least.
    The post after that will discuss the amazing inter-generational wealth transfer available with the Roth IRA, which you’re referring to.
    Sometimes I like to be contrarian just to see who will disagree. There can be learning in the ensuing argument – as long as it stays civil 🙂

  3. IRAs are great not only from a tax planning standpoint (particularly ROTHs), but also from an asset protection stance. Up to $1 million of an IRA is protected from Bankruptcy. 401(k)s are even better because the ERISA act of 1976 protects them from not only BK, but also Civil Lawsuits (and why I go against my IRA custodians wish for me to roll over my 401(k) to them). If in the case of losing a lawsuit, I believe that an IRA up to $1 million would be protected if you are able to declare BK. This is especially useful for professions where there is a high probability of BK such as doctors.

    1. The bankruptcy angle is a great point. I was once owed about $200K by a businessman, who simultaneously owed a bank about $2.5 million. He sent me and the bank a note saying: Here’s my CPA-certified, bankruptcy protected, homestead worth $2 million (he lived in Florida), and my bankruptcy protected IRA worth $1 million. And you guys are getting none of it. He defaulted and declared bankruptcy and my business was out about $200K that he owed me. Later I went and visited him (long story) and he picked me up in his late model Lexus, and then (somewhat) sheepishly explained to me that he’d leased it the week before declaring bankruptcy. Absolutely true story and I get steaming made all over again just typing this. My only revenge will be writing a chapter in my book about this guy. So, yes, Bankruptcy is a great reason to sock away assets in an IRA.

  4. Traditional IRAs should only be used bysingle and MFJ citizens with taxable incomes in the 25% bracket or higher.

    For single people, anyone earning under $45K taxable income (10/15% tax bracket) should not put any money in traditional IRAs. Their money should go directly in an after brokerage account. For married couples, the same applies to taxable incomes under roughly $70K; they are only saving $15.00 of taxes for every $100.00 in the IRA.

    Don’t lock up the money until age 59 1/2 if you are only saving 15% in taxes. That is the truth you never hear from people in my business.

    Also, the middle class citizen who is in the 25% tax bracket or higher should consider self-directed IRAs now. In self-directed IRAs they can take their accumulated IRA money from years past and buy local real estate for income and growth – or they can loan the money out as mortgage money and earn a fixed interest rate that is much better than CDs etc., as long as the loan to equity ratio in not more than 60% or lower.

    Real estate is now the “buy low” asset class for investors. However, as the rich continue to hoard more and more of middle class wealth through declining wages and higher middle class debt, rental owners will see the credit quality of renters to ger more and more shabby.

    As for the rich, the traditional IRAs are chump change, unless they have accumulated mucho bucks in SEPs, 401ks. etc. in which case they will roll the money over to a rollover IRA, as Mitt the Twit Romney did.

  5. IF the reader can’t figure it out, my previous comment had an error – which is corrected here:

    For single people, anyone earning under $45K taxable income (10/15% tax bracket) should not put any money in traditional IRAs. Their money should go directly in an after-tax brokerage account. For married couples, the same applies to taxable incomes under roughly $70K; they are only saving $15.00 of taxes for every $100.00 in the IRA.

  6. A Roth IRA is a fabulous vehicle for those with money. Sure, you don’t get a tax deduction, but you’ll never pay taxes on the earnings. I converted my IRA’s in 2010, invest ed in gold and aggressive stocks and have doubled my principal. There is some risk that Congress will renege on the tax free earnings when we reach our Cyprus moment, but I hope to stay ahead of the Commie bastards.

    1. Yes, please see my upcoming/subsequent post on the Roth IRA in particular as an inter-generational wealth transfer tool.

    2. Lloyd, we have already reached our Cyprus moment.

      Just look at the decline of the value of the US dollar against other global currencies ever since the Wall Street bailouts and the QE programs started.

      With money market interest rates at 0.1%, we are being “assessed” a minimum 2.5% surcharge annually – based on the lowball CPI inflation (much more if you add in food and energy) – on all money in liquid savings plans.

      In fact, ALL our liquid savings deposits are losing a minimum 2% to 3% a year, even accounts under $100K that are supposed to be insured.

      And who is getting wealthy from the FOMC keeping interest rates so low? Yes, the Wall Street bankers and their hedge fund cronies who are investing the cheap money in the stock market.

      Think about it. You should be more worried about capitalism than communism

  7. The fact that IRAs don’t have better tax benefits compared to 401Ks doesn’t make them irrelevant for high income earning individuals. If amassing wealth is high on one’s priority, the best way to maximize returns from an IRA is to have back it with physical gold. This precious metal has not only maintained but also increased its value throughout the last century. Paper currency on the other hand has been debased as central banks continue to print more money.

  8. The liquidity problems and contribution limits are not as drastic as this article makes them out to be (or at least there are loopholes).

    (1) Contribution Limits: I earn roughly $100,000 annually, and after $18,000 in pre-tax contributions and $6,000 in company matches, I can then contribute another $29,000 to an after-tax 401k before hitting the $53,000 combined 401k contribution limit. Now, after-tax 401ks kind of suck (due to their tax treatment), and I’ve never contributed the whole $29,000 in a year, but I can (and do) roll over after-tax contributions to my Roth IRA about once every 2-3 months. (Yes, my plan lets me do that, and Fidelity makes it an easy 5 minute phone call.) This is called the “mega back door Roth IRA”. Add the (regular) back door Roth IRA, and I could conceivably contribute $34,500 per year to my Roth IRA. Conceivably. (To be fair, I don’t like the back door Roth IRA because I don’t need it and it carries some small degree of liability should you get the attention of the IRS for some other reason.)

    (2) Liquidity: Roth IRA regular contributions, and the non-taxable portion of conversions (like the After-Tax 401k I roll over) can be withdrawn any time, tax and penalty free. So… I put $20,000 into my Roth IRA by channeling it through my after-tax 401k. After some years it grows to $30,000. I can still pull out the original $20,000 if I want it. I think it’s a decent deal.

    Now… I’m NOT the “upper income people” that the article talks about. His guy who became partner probably made a dozen times what I do. That said, you can put $30,000 into this vehicle annually (if your 401k plan allows it), and you can touch some of your money before 59 1/2 years old. It’s not so bad for the 99%. 😉

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Public Speaking


I founded Bankers Anonymous because, as a recovering banker, I believe that the gap between the financial world as I know it and the public discourse about finance is more than just a problem for a family trying to balance their checkbook, or politicians trying to score points over next year’s budget – it is a weakness of our civil society. For reals. It’s also really fun for me.

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