Can You Grow a $264 Million IRA, Like Warren Buffett's Deputy Did?

Most people need to amass substantial assets in order to support themselves in retirement. With a current average monthly benefit of about $1,559, Social Security income is not likely to be nearly enough for a comfortable, secure, and happy retirement.

Fortunately, there are tax-advantaged retirement accounts such as IRAs to help. They can be powerful wealth builders, as a recent report from June revealed: It seems that more than a few people, including Warren Buffett's deputy Ted Weschler, have grown IRA accounts worth hundreds of millions, if not billions of dollars.

Image source: The Motley Fool.

According to ProPublica, Weschler's Roth IRA was valued at more than $264 million in 2018. PayPal co-founder Peter Thiel, meanwhile, has apparently taken an account worth $2,000 in 1999 to a value of around $5 billion.

Understanding the Roth IRA

Before jumping into whether you, too, might be able to end up with an IRA account worth so much, let's review IRAs. Both traditional IRAs and Roth IRAs offer tax breaks and let you save money over time.

The traditional IRA accepts pre-tax contributions and gives you an upfront tax break. Contribute $5,000 and your taxable income shrinks by $5,000, letting you avoid income tax on that amount. You do have to pay income taxes on it eventually, though -- when you make withdrawals from the account in retirement.

Roth IRAs, on the other hand, offer no upfront tax break -- a $5,000 contribution doesn't affect your tax obligation for the contribution year. But play by the rules, and you can eventually withdraw money from your Roth IRA tax-free. That can be a powerful thing, when you're retired.

Contribution limits for IRAs change every year or few years, and for the tax year 2021, they're $6,000, plus an additional $1,000 for those 50 and older.

Also, notably, if you earn more than a certain amount, you can't contribute to a Roth IRA at all. For 2021, that amount is $140,000 for single taxpayers and heads of households. For those married and filing jointly, it's $280.000. (The rules are a little different for traditional IRAs and there are phase-out ranges for IRAs allowing you to contribute some amount, but less than the usual $6,000 or $7,000 limit.)

How rich people do it

So how do very wealthy people such as Weschler amass so much, when contribution limits are so low and their incomes are presumably so high?

Well, they may be exercising Roth IRA conversions -- taking traditional IRA accounts and/or 401(k) accounts and converting them into Roth IRAs. You have to pay taxes on the converted money when you do so, but after that, the money can grow with the prospect of never being taxed again.

(Note, too, that 401(k)s have much higher contribution limits, so they can often grow fatter than IRA accounts. The 2021 limit for 401(k)s is $19,500, plus $6,500 for those 50 and older, for a possible total of $26,000.)

Wealthy people are also often very connected to particularly promising investment opportunities. For example, they can invest in businesses that are still young and not yet being traded on the open markets. And if they use a self-directed Roth IRA, they may be able to park shares of future hugely successful companies in it.

Imagine Netflix, for example, which started trading after its IPO in 2002. Some early investors may have been able to get shares for a split-adjusted $1 or $2 back then. They are now worth around $625, representing a 632-fold or 316-fold gain. That would be enough to turn a $6,000 investment into almost $2 million or $4 million.

If a connected person is able to acquire shares of such a future outperformer before it goes public, they might do so at far lower prices per share, achieving even huger gains in the future.

Image source: Getty Images.

Can you amass hundreds of millions?

Now, can you end up with such a fat Roth IRA account? Probably not, but possibly yes. In fact, Weschler noted in a statement that he "invested the account in only publicly traded securities i.e., all investments in this account were investments that were available to the general public."

The fact that he's one of two people Warren Buffett has entrusted to invest many billions of Berkshire Hathaway's dollars suggests that he's probably much smarter than you and me when it comes to investing. So he has simply made numerous astonishingly successful investments, noting that, "each $1 saved as a 22 year old in New York City grew over the ensuing 35 years to over $9,000 -- certainly not an expected result, but the sort of example that can hopefully help motivate generations of future savers."

Here's a look at how much you might amass in an IRA account over time (note that Weschler saved and invested for 35 years before ending up with $264 million in his account). The table below assumes annual investments of $6,000, and includes a reasonable average annual growth rate of 8%, as well as a more Buffett and Weschler-like 20%: 

Data source: Calculations by author.

Clearly, it's possible for anyone to accumulate massive sums simply by investing in stocks in a Roth IRA, without any special self-directed investments or any big conversions. But expecting to average 20% annual growth is not reasonable for most people. The stock market has averaged close to 10% annual growth over long periods, and it may do worse over the particular time period in which you invest.

You can go ahead and try to outperform the market by becoming a savvy stock-picker. But for most people, simply sticking with low-fee index funds is a very smart move.

As shown in the table above, simply investing $6,000 annually can get you far -- and if you add on 401(k) investments and perhaps a regular, taxable brokerage account with stocks or funds, you can do even better. 

Don't leave your future financial security up to chance. Have a plan and stick to it, and you can enjoy a much better retirement than you may have expected.