IRA accounts (Ultra-rich vs Rich vs Poor)

Ever wondered how the Ultra-rich use IRA accounts? And how people with moderate means can also use the IRA accounts? Read on…

In recent past, my Roth IRA account’s worth reached $100,000 so I am personally very excited. I can be considered rich by many standards. Today, we will talk about Roth IRA accounts and how the ultra-rich and rich use it. We will then continue to talk about the middle class and the poor – and explore what can they do to be able to save a little more.

(You can also skip directly to rich or middle class/ poor section if the ultra-rich jugglery does not interest you).


Ultra-rich use several different techniques to make the most of Roth IRA possibilities. The most widely used and easiest to understand is “Buying pre-IPO stock that records a 2,000% gain as soon as IPO’.

IPO stands for Initial Public Offering. Any company usually starts because a few like minded people come together and start to create a new product or service. They put some of their money and start the company.

If the idea starts to do well, they will find investors to invest some serious money. Once the company becomes successful, then they go to the ‘stock market’ and sell part of their (owners + investors) ownership to common public through an IPO.

The company has a lot of flexibility in deciding how much to ‘charge’ for the initial distribution of shares.

The name of Max R. Levchin (Yelp) comes up often in these discussions, let us examine what he did:

He acquired Yelp stock mostly for free. At one point, he held about 29 million shares of Yelp.

Yelp went public in 2012 at stock price of $15. This means Max’s 29 Million shares would have been worth $435 Million.

Media reports suggest that his Roth IRA at that point was worth somewhere around $100 Million. It could be because he might have sold some stock prior to the company going public.

Even if we go with $100 Million, my point is made – Max Levchin will not pay any taxes on this $100 Million. All he has to do is wait till he is 59 1/2 – withdrawals from Roth IRA are tax free.

(On 6/10/2013 alone, Max sold Yelp stock worth about $1.05 Million) – ‘A’ is for acquired and ‘D’ is for disposed. Add 11,733 and 23,465, multiply by 29.7 and you get $1.05 M.

Grantor Retained Annuity Trusts (GRATs)

The biggest advantage of having your money in Roth IRA is withdrawals are tax free after the age of 59 1/2. And you can be rest assured that all these Ultra-rich guys have more than they need to survive till 59 1/2.

GRATs are technically not Roth IRA but while we are talking about Roth IRAs, it becomes kind of mandatory to talk a little bit about GRATs. These trusts allow passage of estate tax-free to heirs (while others would pay 40% over the exemption limit).

Once the Ultra-rich have enough money that they will not be able to spend in their lifetime, they try to get this money to their family/ hiers tax free. GRATs help them do exactly that.

I can write a complete book about GRATs but in the most simplistic form – the Ultra-rich would transfer stock into the trust account. The trust is required to pay him back the IRC Section 7520 hurdle rate (Currently 2%). Anything that the stock in the trust account makes over and above the hurdle rate passes on to the heirs tax free.

Facebook co-founders Mark Zuckerberg (net worth $35 Billion) and Dustin Moskovitz (net worth  $10 Billion) both have used GRATs .

Back in 2008, they established what is called Grantor Retained Annuity Trusts (GRATs) that, industry estimates say, will allow them to transfer approximately $200 million of wealth to children or others, gift tax free. The gift tax exemption in 2008 was $1 million.

Dustin Moskovitz does not have children (November 2015). Mark Zuckerberg got married in 2012 and the couple had their first child in Dec 2015.

The casino king Sheldon Adelson has also quite shrewdly used GRATs.

GRATs are also known as Walton GRATs since a member of the Walton family won a lawsuit against the IRS.

In 2010, six members of the Walton family had the same net worth as 41% of American families! I cannot call them Rich, they are ULTRA-RICH.


Ok, enough about Ultra-rich, now let us talk about the Rich. The regular Rich do not usually have access to such private stock/ pre-IPO stuff/ stock that will appreciate too much too soon.

Six Figure Roth IRA ($100,000+)

Six Figure Roth IRA ($100,000+)

Still, even the regular Rich have plenty of options. If the employer sets up the 401k plan correctly, then the employees can contribute up to $53,000 to their 401k accounts (including $18,000 pre-tax contribution, employer match if applicable, and the rest through post – tax / Thrift 401k contributions).

The biggest advantage of after – tax (or Thrift contributions as they are called) contributions is that Roth IRA rollover is tax free (except for the earnings that accumulated on the Thrift assets within the 401k. Therefore you should rollover somewhat frequently (unless your plan has restrictions on the number of times you can rollover every year). I would ideally like to perform this rollover 4 times a year.

My personal Roth IRA opened in 2012 reached 6 figures 2015.


Now that we have chatted enough about the Ultra-rich and the Rich, let us talk about the Poor. It is anyone’s guess that the Poor struggle to make the ends meet. They are not able to use Roth IRA for multiple reasons, two most important being No savings and No Knowledge.

Usually 401k contributions take precedence over IRA contributions (sometimes for the right reasons and sometimes not).

Even if they are able to contribute, they struggle to contribute the maximum allowable $5,500; contribute nothing in 20s, 30% in 30s, 50% in 40s, 75% in 50s… if they are lucky, then they end up with 6 figures at retirement.

My advice for the middle class/ poor is, three fold:

Advise – 1

Try to get into a better paying job, I know it is not as easy as it sounds but it is possible.

Advise – 2

Manage your spending – think before you spend. Think carefully about big ticket items, recurring expenses, and impulsive buying – specially if it can be postponed

  1. Big ticket items – Think housing and think cars

    1) Housing – Whether we own or whether we rent, this is the single most biggest expense for most of us.If you are buying then keep in mind that the TCO (Total Cost of Ownership) is much more than just the loan payments. Mortgage payments will include property taxes and insurance premiums in addition to loan repayments. In the last one year, here is what I have paid:

    – Real estate taxes (About 2% of home price – varies by location)
    – Homeowner’s Insurance (Less than 1% of home price, shop around – I am paying about 0.4%)
    – HOA dues (depends on the HOA – specially high for manned security gates and special amenities like golf course)
    – Appliance insurance (upwards of $1,000 per year)
    – Swimming pool maintenance ($100 – $200 a month)
    – Landscaper costs ($100 – $200 a month)
    – Pest control ($250 – $500 a year)

    – Roof repair (I paid $350 once in the last 12 months)

    Some other costs that I pay but I would have paid them even if I was renting instead of owning:

    – Internet
    – Phone
    – Power/ Gas

    – Cable TV

    Now that you have a holistic idea about housing costs, think hard about the following 2 things:
    1. Whether you need the house in the neighborhood you are in (planning to be in)?
    2. Do you need as big a house? Whether you can manage with one bedroom less?

    2) Cars

    Big ticket items

    After housing (ignoring educational, medical, and alimony expenses), cars are likely to be your biggest expense.

    Whenever I think cars, I think about Time Value of Money:  A textbook definition says “The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.”

    In simple words $100 received today is not worth the same as $100 received one year from now. Similarly, $100 spent today is not the same as $100 spent one year from now.

    For simplicity, let us assume the rate of return (interest rate) is 10%. If you have $100 today, you make 10% over the next year, the same $100 today is worth $110 after one year. So, by not spending $100 today, you are able to spend $110 after one year.

    And do not even get me started with the effects of compounding. The same $100 today will become $1,750 in 30 years (think retirement).

    Now let us take example of a car – my girlfriend and I bought cars around the same time in 2013. In fact, I refinanced both the cars recently. For simplicity, I will round off the numbers – her car is $50,000 and mine is $25,000.

    This $25,000 difference today will become a difference of $435,000 in 30 years when we retire.

    Even if you do not want to stay on the low cost car for rest of your life, can you at least buy a lower cost car right now for the next few years and then upgrade to the expensive model? Between my girlfriend and I, I am saving $2,500 every year I postpone buying the more expensive car ($25,000 * 10%).

    I will spare you the TCO (Total Cost of Ownership) details for the car – premium car vs economy car: premium cars will have higher insurance, require premium gas, more expensive part, and likely a lower mileage.

  2. Recurring expenses

    Recurring Expenses Examples

    It is anybody’s guess that if you can save $10 on a monthly expense, you are saving $120 on a yearly basis. Most people pay for expenses from their net salary. If you are in the 25% tax bracket, then we are talking about $160 salary before tax. If there are 5 such  expenses you can re-organize, then we are talking about a neat $900 per year.


    1) Phone plans

    Do you even know how much data do you have on your plan? Or how much of the available data/ minutes have you been using over the last 3 months/ 12 months?

    Most people do not know (they do not remember now). Hopefully you thought about it when you signed up for a plan, but usage, habits, and requirements change all the time. So this should be reviewed at least twice in a year.

    Quoting a friend of mine “I use Verizon wireless. I started out with their lowest plan of 500 min/ unlimited text/ 2 GB data and never changed.  After 4 years, I coincidentally found out that somewhere soon after I selected a plan they started to offer an unlimited minutes plan at 20% lower charge. I have just been a paying fee for a lesser plan – for 4 damn years. I feel stupid”.

    2) Health insurance (if you are on medication, make sure to check for generic brand versions.  For me, personally, Harris Teeter has offered the best discounts on prescriptions.)

    3) TV

    Do you really need the cable? Many folks I know are subscribing to one or more of the following – Netflix, Hulu, HBO. Even apart from such subscriptions, there is an astonishing amount of free entertainment available online, including movies/ shows.

    4) Auto insurance

    Every year, right before you are up for renewal of current policy, SHOP.  I curated a list of insurance broker emails in my area; saved an email template; and blasted that email with an ultimatum/deadline to beat whatever current best quote.  Time invested on my end: 5 minutes or less.  Turnaround/response times from wooing prospective providers: (Based on my particular ‘deadline): 24 hours or less.  Easy peazy.  BAT COMPETITORS AGAINST EACH OTHER.  (Note: If you are an ultra-safe driver, you could consider the cheapest type of coverage: liability only.)

    5) KEEP AN EXPENSE SHEET.  Record EVERY expense.  At least once a month, take a holistic look at monthly expenses and balance (inflow/outflow); analyze where most of the money is going out to. Apply 80/20 analysis –

    Do you handle your credit well? If not, then do not attempt this – but if are sure you do, then you should put as many recurring charges on the credit card as possible – my 2 car insurance payments equal $900 / 6 months, my average household mobile expenses are $150 a month, my Dish network expenses are about $80 a month, my landline/ internet expenses are about $85 a month, and there are many more.

    These total to $465 a month -> that is $5,580 a year. If your credit card gives 2% cash back, we are talking about an annual savings of $110.

  3. Impulsive buying
    How many times has it happened that you bought something that you regretted later because you never used it?Will it not be better to think through before buying it, specially if you are trying to save money in order to become financially independent of your job.I always start my buying process with ‘Why do I need this now when I haven’t needed it ever before?’Acceptable answer: Something has changed – for example, I got glasses last year, that is a new expense for me.Unacceptable answer: Something has changed – for example ‘my income’. My friend – if your expenses continue to increase in proportion to your income, then you will always remain poor.

Advise – 3

Try to doo something about your life. Being upset about inequalities is human but remember many of the Rich worked hard to be able to play on the second half of the chess board

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