Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) under the leadership of world-class investor Warren Buffett has been one of the greatest American success stories. Over the past 50-plus years, Buffett has radically transformed the former textile company into an insurance and investment holding company powerhouse. Along the way, Berkshire Hathaway has created scores of millionaire investors.
Yet despite that incredible success, Berkshire Hathaway's class A shares represent the one stock I would never put in my IRA. There are several reasons for that reluctance, but they all tie to the purpose, structure, and benefits of investing inside an IRA vs. an ordinary brokerage account.
First: It's simply too pricey
Although Berkshire Hathaway's stock does not appear substantially overvalued from an investment perspective, its class A shares fetch around $295,000 apiece. Investors under age 50 can only contribute up to $5,500 per year, and those aged 50-plus can only contribute up to $6,500 per year in their IRAs. As a result, it would take decades of contributions and strong investment results to even be able to put a single share of Berkshire Hathaway Class A stock inside an IRA.
The typical American around retirement age has a net worth of around $200,000 -- including home equity, and that's around the age range where people are typically the most financially comfortable. To own just one share of Berkshire Hathaway Class A stock inside an IRA, that IRA balance would have to be well above the total net worth of most Americans. As a result, even if you have enough in your IRA to buy a share, you should ask yourself if you really want that much of your IRA tied up in one investment.
Second: It's too much of a "buy and hold" investment
One of the benefits of Berkshire Hathaway is the fact that the company itself is a conglomerate -- consisting not only of insurance operations but many other industries as well. It owns energy companies, railroads, jewelry stores, restaurants, batteries, and clothing brands as well. In many respects, that internal diversification makes Berkshire Hathaway a company that if you're going to own, you'll likely want to own for the long haul.
That can make the company a wonderful investment, but not one that needs the tax-shelter of an IRA to make worthwhile. In an ordinary brokerage account, once you buy shares of a typical company, particularly one like Berkshire Hathaway that does not pay dividends, you don't pay taxes until you go to sell those shares. And even then, long-term capital gains taxes enjoy a favorable tax rate vs. ordinary income. As a result, there's less value in sheltering Berkshire Hathaway shares inside an IRA.
Third: It pays no dividend
As mentioned above, Berkshire Hathaway pays no dividend, and it is unlikely to pay a dividend as long as its leadership thinks it can reinvest earnings at a superior rate of return. That internal reinvestment framework means outside investors get the benefits of compounding without the taxable impact of dividend payments.
From an investor's perspective, that reduces the need to hold Berkshire Hathaway's stock inside an IRA. After all, without dividends, you as a shareholder aren't paying taxes on any of that compounding anyway, as long as you continue to hold its shares. That makes the tax-deferred nature of dividend payments inside an IRA fairly useless for Berkshire Hathaway shareholders.
Wonderful company -- but save your IRA space for other investments
Berkshire Hathaway is an incredibly well-managed company that has rewarded shareholders for decades under the guidance of world-class investor Warren Buffett. While Buffett's tenure at its helm is closer to its end than its beginning, all signs show that he's setting up the company to continue to thrive once he's no longer in charge.
You could do far worse than including Berkshire Hathaway as a part of your overall portfolio. Still, given the contribution limits associated with IRAs and given the way Berkshire Hathaway is managed, there are likely better fits for your IRA than this one. Save your IRA space for companies that would benefit more from being there, and consider Berkshire Hathaway for a slot in a standard brokerage account instead.