Billionaires like Warren Buffett are blowing up this retirement account; you also can

Tycoons like Warren Buffett and PayPal founder Peter Thiel have been hoarding millions or even billions of dollars in tax-sheltered retirement accounts, according to a recent report from ProPublica. Here’s one trick you can easily copy from the world’s wealthiest. After all, it was designed for you in the first place.

While lawmakers are promising to close loopholes in the tax code, working Americans should take heed: If a tax strategy is appealing enough for billionaires to borrow, make sure you’re taking advantage yourself.

Leaked tax documents show Individual Retirement Accounts (IRAs), originally created to help the middle class save up for a comfortable retirement, are now helping the ultra-rich get ultra-richer.

Lawmakers find thousands of ‘mega’ IRAs

S.Borisov / Shutterstock

Following the ProPublica report, a few lawmakers asked the Joint Committee on Taxation to find out exactly how many “mega IRAs” were out there with balances of $5 million or more.

The answer: nearly 25,000 during the 2019 tax year, three times as many as back in 2011. Close to 500 accounts hold more than $25 million.

Meanwhile, Thiel owns a Roth IRA worth $5 billion.

Buffett, who has historically supported higher taxes on the rich, had a Roth IRA valued at $20.2 million at the end of 2018. Ted Weschler, one of his deputies at Berkshire Hathaway, held $264.4 million in his.

“It is shocking, but not surprising, to see how the use of mega-IRA accounts by mega-millionaires and billionaires has exploded,” said Senate Finance Committee Chair Ron Wyden, one of the lawmakers looking into a crackdown, in a statement.

“IRAs were designed to provide retirement security to middle-class families, not allow the super wealthy to avoid paying taxes.”

What exactly are billionaires exploiting?

mark reinstein / ShutterstockPayPal co-founder Peter Thiel

Traditional IRAs allow people to save and invest a portion of their income before it’s taxed, potentially granting them a nice refund. Your savings and investments can grow tax-free in the account until you cash out and get taxed in retirement.

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For most people, contributions are capped at $6,000 per year. Thiel’s Roth account started with a balance of just $2,000 back in 1999.

Roth IRAs — the type billionaires are using — work in the opposite way. Your income is taxed before it’s poured into your account, but after that you won’t face taxes on your earnings once you start making withdrawals later in life.

Say you use that money to invest in a promising new tech startup, and that company takes off. Even if you end up selling those shares for a million times their initial value, you won’t owe any taxes on that growth.

The key is that whatever you can accomplish with the money will be totally tax free.