It appears that Mitt Romney is not as shrewd a financial manager as Warren Buffett because, rather than take his income as earned, paying taxes as received, and then investing it, he put it in deferred income accounts and made his very successful investments within those accounts. According to the WSJ this morning, Romney has tens of millions of dollars there, all untaxed…so far.
I like that conservative, delayed gratification approach. I used it myself, always believing that in retirement I would have lower income tax rates and that the value of compounding tax free for decades and paying the income taxes later would be a smart move, even though it was endorsed by the federal government.
Of course nobody, except maybe Warren Buffett, knew that there would be a dozen years with two market meltdowns and no net gains in equities and that dividends and capital gains in after-tax accounts would be taxed at only 15%, much lower than the likely rate on capital gains and dividends that accumulate in deferred income accounts.
Romney was born in March, 1947, and will reach age 70-1/2 in 2017. That is important because that year he will have to begin withdrawing and paying taxes at ordinary income tax rates on all that deferred income. At that age, the IRS assumes a distribution period of 27.4 years, so, if Mr. Romney’s balance is $100M, he will have to withdraw and pay ordinary income tax rates on $3.64M. Who knows what the tax rates will be in five years, but it is safe to say they won’t be any lower than 35% for incomes at that level. So, for as long as he lives, he will be paying income tax bills of well above a million dollars a year.
Here’s the nice thing about Mr. Romney. I don’t believe those tax bills will bother him in the least. He has always played by the rules, taken a conservative approach, and emphasized family financial security over piling up income and wealth or conspicuous consumption. And, he has apparently met his objectives though it must bother him a bit to know that the money in those deferred income accounts is not really his, yet, and that the federal government could decide that a 90% marginal rate would be appropriate for such a rich fellow.
Still, in a presidential candidate, I will take conservative over shrewd any day.
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