INDIVIDUAL 

RETIREMENT 

ACCOUNTS

IRS Could Bolster 

Enforcement on 

Multimillion Dollar 

Accounts, but More 

Direction from 

Congress Is Needed

Report to the Chairman, Committee on 

Finance, United States Senate

October 2014

GAO-15-16

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-15-16, a report to the 

Chairman, Committee on Finance, United 

States Senate

October 2014

INDIVIDUAL RETIREMENT ACCOUNTS

IRS Could Bolster Enforcement on Multimillion Dollar 

Accounts, but More Direction from Congress Is Needed

Why GAO Did This Study

In 2014, the federal government will 

forgo an estimated $17.45 billion in tax 

revenue from IRAs, which Congress 

created to ensure equitable tax 

treatment for those not covered by 

employer-sponsored retirement plans. 

Congress limited annual contributions 

to IRAs to prevent the tax-favored 

accumulation of unduly large balances. 

But concerns have been raised about 

whether the tax incentives encourage 

new or additional saving. Congress is 

reexamining retirement tax incentives 

as part of tax reform.GAO was asked

to measure IRA balances and assess 

IRS enforcement of IRA laws. 

This report (1) describes IRA balances 

in terms of reported FMV aggregated 

by taxpayers; (2) examines how IRA 

balances can become large; and (3) 

assesses how IRS ensures that 

taxpayers comply with IRA tax laws. To 

address these objectives, GAO 

analyzed 2011 IRS statistical data, 

reviewed IRS documentation and 

relevant literature, and interviewed 

government officials, financial industry 

stakeholders, and academics. GAO 

compared IRS enforcement plans and 

procedures with law and criteria for 

evaluating an enforcement program.

What GAO Recommends

Congress should consider revisiting its 

legislative vision for the use of IRAs. 

GAO makes five recommendations to 

IRS, including approving plans to fully 

compile and digitize new data on 

nonpublicly traded IRA assets and 

seeking to extend the statute of 

limitations for IRA noncompliance. IRS 

generally agreed with GAO’s 

recommendations.

What GAO Found

For tax year 2011 (the most recent year available), an estimated 43 million 

taxpayers had individual retirement accounts (IRA) with a total reported fair 

market value (FMV) of $5.2 trillion. As shown in the table below, few taxpayers 

had aggregated balances exceeding $5 million as of 2011. Generally, taxpayers 

with IRA balances greater than $5 million tend to have adjusted gross incomes 

greater than $200,000, be joint filers, and are age 65 or older. Large individual 

and employer contributions sustained over decades and rolled over from an 

employer plan would be necessary to accumulate an IRA balance of more than 

$5 million. There is no total statutory limit on IRA accumulations or rollovers from 

employer defined contribution plans.

Estimated Taxpayers with Individual Retirement Accounts (IRA) by Size of IRA Balance, Tax 

Year 2011

Notes: The taxpayer reflects a taxpaying unit including individuals as well as couples filing jointly, which may have 

more than one IRA owner. The IRA balance aggregates the value of all IRAs owned, including inherited IRAs.

A small number of taxpayers has accumulated larger IRA balances, likely by 

investing in assets unavailable to most investors—initially valued very low and 

offering disproportionately high potential investment returns if successful. 

Individuals who invest in these assets using certain types of IRAs can escape 

taxation on investment gains. For example, founders of companies who use IRAs 

to invest in nonpublicly traded shares of their newly formed companies can 

realize many millions of dollars in tax-favored gains on their investment if the 

company is successful. With no total limit on IRA accumulations, the government 

forgoes millions in tax revenue. The accumulation of these large IRA balances by 

a small number of investors stands in contrast to Congress’s aim to prevent the 

tax-favored accumulation of balances exceeding what is needed for retirement.

The Internal Revenue Service (IRS) has enforcement programs covering specific 

aspects of IRA noncompliance, such as excess contributions and undervalued 

assets. As recommended by an internal task team, IRS plans to collect data 

identifying nonpublicly traded assets comprising IRA investments. IRS expects 

the data will help it identify potential IRA noncompliance. However, research on 

those taxpayers and IRA assets at risk will hinge on getting resources to 

effectively compile and analyze the additional data. IRS officials said IRA 

valuation cases are audit-intensive and difficult to litigate because of the 

subjective nature of valuation. Additionally, the 3-year statute of limitations for 

assessing taxes owed can pose an obstacle for IRS pursuing noncompliant 

activity that spans years of IRA investment. View GAO-15-16. For more information, 

contact James R. McTigue, Jr., at (202) 512-

9110 or mctiguej@gao.gov or Charles A. 

Jeszeck at (202) 512-7215 or 

jeszeckc@gao.gov.
Page i GAO-15-16 Individual Retirement Accounts

Letter 1 

Background 6

Few Taxpayers Had Reported IRA Balances Greater Than $5 

Million 15

Alternate Strategies Are Likely the Cause of Large IRA Balances 

That Congress May Not Have Intended 26

IRS Has Dedicated Resources to IRA Compliance but Faces 

Challenges with Nonpublicly Traded IRA Investments 43

Conclusions 55

Matter for Congressional Consideration 56

Recommendations for Executive Action 57

Agency Comments 57

Appendix I Objectives, Scope, and Methodology 60

Appendix II Illustration of Earnings and Tax Effects of Traditional and Roth 

Individual Retirement Accounts 76

Appendix III Tables from Statistics of Income Data for Tax Year 2011 79

Appendix IV Examples of Strategies to Accumulate Large Individual Retirement 

Accounts 82

Appendix V Printable Figure 9 on Form 5498 87

Appendix VI Comments from the Internal Revenue Service 88

Appendix VII GAO Contacts and Staff Acknowledgements 92

Contents
Page ii GAO-15-16 Individual Retirement Accounts

Tables

Table 1: Estimated Number and Percent of Taxpayers with 

Individual Retirement Accounts (IRA) by Size of IRA 

Balance, Tax Year 2011 17

Table 2: Estimated Total and Percent of Individual Retirement 

Account (IRA) Fair Market Value Balances by Size of IRA 

Balance, Tax Year 2011 17

Table 3: Rates of Return Needed to Accumulate Individual 

Retirement Account (IRA) Balances of $1 million or $5 

Million under Two Illustrative Contribution Scenarios, 

1975-2011 24

Table 4: Investments That Can Generate Tens of Millions of 

Dollars in a Tax-Favored Retirement Account 27

Table 5: Annual Contribution Dollar Limits for Individual 

Retirement Plans (IRA) and Defined Contribution (DC) 

Plans, 1975-2014 63

Table 6: Assumed Contributions (Including Catch-up) from 1975 to 

2011 under Two Illustrative Scenarios 65

Table 7: Alternate Asset Allocation Assumptions and Ending 

Balances for the Maximum Combined EmployerEmployee Contribution Scenario, 1980-2011 68

Table 8: Criteria for Assessing Individual Retirement Account 

Enforcement 71

Table 9: Estimated Median IRA Balances by Size of Individual 

Retirement Account (IRA) Balance, Tax Year 2011* 79

Table 10: Estimated Percent of Taxpayers with Individual 

Retirement Account (IRA) Balances of $1 Million or Less 

and More Than $5 Million and IRA Balances by Adjusted 

Gross Income, Tax Year 2011* 80

Table 11: Estimated Percent of Total IRA Balances by Size of IRA 

Balance, by Adjusted Gross Income, Tax Year 2011 80

Table 12: Summary of Holdings and Transactions in Company 

Founder’s Roth Individual Retirement Account (IRA) 83

Table 13: Summary of Contributions and Distributions from a $1 

Billion Private Equity Fund 86
Page iii GAO-15-16 Individual Retirement Accounts

Figures

Figure 1: Small Business/Self-Employed Examination Process 14

Figure 2: Estimated Percent of Taxpayers with Individual 

Retirement Account (IRA) Balances of $1 Million or Less 

and More Than $5 Million and Percent of IRA Balance, by 

IRA Type, Tax Year 2011 18

Figure 3: Estimated Percent of Taxpayers with Individual 

Retirement Account (IRA) Balances of $1 Million or Less 

and More Than $5 Million and IRA Balances, by Adjusted 

Gross Income, Tax Year 2011 20

Figure 4: Estimated Percent of Taxpayers with Individual 

Retirement Account (IRA) Balances of $1 Million or Less 

and More Than $5 Million by Filing Status, Tax Year 2011 21

Figure 5: Estimated Percent of Taxpayers Age 65 or Older by 

Individual Retirement Account (IRA) Balances of $1 

Million or Less and More Than $5 Million, Tax Year 2011 22

Figure 6: For a Modest Initial Investment, Nonpublicly Traded 

Shares Can Generate a Large IRA 30

Figure 7: General Partners Grant Partnership Interests in Their 

Investment Funds 33

Figure 8: Profits Interest Can Be Held in an IRA or a Defined 

Contribution Plan 35

Figure 9: Types of Assets Individual Retirement Accounts 

Custodians Will Identify on Form 5498 Starting in Tax 

Year 2014 47

Figure 10: Beginning and After-Tax Ending Balances for $1,000 in 

Pre-Tax Earnings in a Traditional IRA, Roth IRA and 

Taxable Accounts over a 20-Year Perioda 77

Figure 11: Founders Can Accumulate Large IRAs with Nonpublicly 

Traded Shares in Their Company 83

Figure 12: Key Employees of Private Equity Firms Can 

Accumulate Large Individual Retirement Accounts (IRA) 

with Profits Interests 85
Page iv GAO-15-16 Individual Retirement Accounts

Abbreviations

AGI adjusted gross income

ATTI Abusive Transactions and Technical Issues Program

AUR Automated Underreporter Program

CIP compliance initiative project

DB defined benefit

DC defined contribution

DOL Department of Labor

ERISA Employee Retirement Income Security Act of 1974

FMV fair market value

IMT Issue Management Team

IRA individual retirement account

IRS Internal Revenue Service

JCT Joint Committee on Taxation

LB&I Large Business and International Division

PwC PricewaterhouseCoopers

S&P Standard & Poor’s

SB/SE Small Business/Self-Employed Division

SEC Securities and Exchange Commission

SEP Simplified Employee Pension Plan

SIMPLE Savings Incentive Match Plan for Employees

SOI Statistics of Income

TE/GE Tax-Exempt/Government Entities

TIGTA Treasury Inspector General for Tax Administration

Treasury Department of the Treasury

W&I Wage and Investment Division

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this material separately.
Page 1 GAO-15-16 Individual Retirement Accounts

441 G St. N.W.

Washington, DC 20548

October 20, 2014

The Honorable Ron Wyden

Chairman

Committee on Finance

United States Senate

Dear Mr. Chairman,

Enacted as part of the Employee Retirement Income Security Act of 1974 

(ERISA), individual retirement accounts (IRA) are a key vehicle for 

individuals to save for retirement. IRAs hold about 26 percent of all 

retirement assets, and more than 54 million taxpayers held an estimated 

$5 trillion in IRAs in 2010, according to the latest published analysis by 

the Internal Revenue Service (IRS).

1

In 2014, tax-preferred treatment for IRAs will result in the federal 

government forgoing an estimated $17.45 billion in net income tax 

revenue, according to estimates by the Department of the Treasury

IRAs also are increasingly important 

as a way for individuals to roll over savings from pension plans. Most 

eligible taxpayers do not take advantage of IRAs as an opportunity to 

save for retirement. For example, the IRS estimated that of 145.6 million 

taxpayers eligible to contribute to an IRA in 2010, less than 8 percent 

contributed. 

 

1

U.S. retirement assets generally are composed of assets in IRAs, defined contribution 

plans, defined benefit plans, and annuity at life insurance companies. Board of Governors 

of the Federal Reserve System, Financial Accounts of the Untied States: Flow of Funds, 

Balance Sheets, and Integrated Macroeconomic Accounts First Quarter 2014 (June 5, 

2014). Also see, Victoria L. Bryant and Jon Gober, “Accumulation and Distribution of 

Individual Retirement Arrangements,” 2010 Statistics of Income Bulletin (Fall 2013). 
 

Page 2 GAO-15-16 Individual Retirement Accounts

(Treasury).

2 To limit the amount of federal revenue forgone and their use 

by higher-income individuals, IRAs are subject to a total annual 

contribution limit, as well as some income and other limits on eligibility. In 

addition, some IRA types require minimum distributions starting at age 

701⁄2. The tax code also imposes an additional tax on excess contributions 

and early withdrawals. However, the tax code does not place any total 

limit on how much can be accumulated in an IRA.

3

Given the potential amount of forgone revenue for the federal 

government—as well as questions we have raised in the past about 

whether tax incentives encourage new or additional saving—the ongoing

debate about reforming the tax code includes reexamining the tax 

treatment of retirement savings.

4 Our 2005 publication, Understanding the 

Tax Reform Debate, describes long-standing criteria—economic 

efficiency, equity, simplicity, transparency, and administrability—that can 

be used to evaluate tax policy.

5

 

2

See Office of Management and Budget, Fiscal Year 2015 Analytical Perspectives: 

Budget of the U.S. Government (Washington, D.C.: 2014). The revenue loss is measured 

as the tax revenue that the government does not currently collect on contributions and 

earnings amounts, offset by the taxes paid by those who are currently receiving retirement 

benefits. The Joint Committee on Taxation (JCT) estimates that IRAs will result in about 

$17.6 billion in revenue losses in 2014. Revenue loss estimates do not represent the 

amount of revenue that would be gained from repealing a tax expenditure because repeal 

would probably change taxpayer behavior in some way that would affect revenue. 

Treasury also estimates that the present value of the revenue effects (net of future tax 

payments) from exclusions on traditional IRA contributions and earnings, Roth earnings 

and distributions, and nondeductible IRA earnings for calendar year 2013 was $1.7 billion, 

$3.4 billion, and $150 million respectively. 

Our 2012 guide lays out a framework 

using these criteria to evaluate the performance of a tax expenditure, 

3

Under the U.S. Bankruptcy Code, a debtor may be able to exempt from the federal 

bankruptcy estate funds in an IRA up to a certain limit indexed for inflation. 11 U.S.C. 

§ 522(d)(12) and (n). That limit was increased to $1,245,475 in February 2013. 

4

GAO, Individual Retirement Accounts: Government Actions Could Encourage More 

Employers to Offer IRAs to Employees, GAO-08-590 (Washington, D.C.: June 4, 2008) 

and Private Pensions: Some Key Features Lead to an Uneven Distribution of Benefits, 

GAO-11-333 (Washington, D.C.: Mar. 30, 2011). 

5

GAO, Understanding the Tax Reform Debate: Background, Criteria, & Questions, 

GAO-05-1009SP (Washington, D.C.: September 2005). This report describes how the 

criteria can be used to evaluate tax policy. In developing the report, we relied on 

government studies, academic articles, and the advice of tax experts to provide us with 

information on the issues surrounding the tax reform debate.
 

Page 3 GAO-15-16 Individual Retirement Accounts

such as the beneficial tax treatment of IRAs under an income tax 

system.6

To better understand how balances accumulate in some IRAs, you asked 

us to review IRA account balances and IRS enforcement of IRA rules. 

This report (1) describes the number and types of taxpayers with IRAs 

and the size of IRA balances in terms of aggregate fair market value 

(FMV), adjusted gross income (AGI), filing status, and age; (2) examines 

how IRA balances can become large; and (3) assesses how IRS ensures 

that taxpayers comply with IRA tax laws. 

To describe the number and types of taxpayers with IRAs and the size of 

IRA balances in terms of FMV, we analyzed individual tax data for tax 

year 2011 (the most recent year available) from IRS’s Statistics of Income 

(SOI). We analyzed these data by size of IRA FMV—as reported by IRA 

custodians to IRS—as well as other factors, including the type of IRA, 

taxpayers’ adjusted gross income, age, and filing status. Because SOI 

samples tax returns, and taxpayers may have multiple IRAs, we 

aggregated IRA data (including inherited IRAs as IRS data do not readily 

identify inherited IRAs) by tax return. Our unit of analysis was the 

taxpaying unit, and a tax return, such as for a married couple filing jointly, 

may include more than one IRA owner. Our analysis of SOI statistical 

data is subject to sampling errors because the SOI data set is based on a 

sample of tax returns as filed.

7

 

6

GAO, Tax Expenditures: Background and Evaluation Criteria and Questions

In addition, the data do not reflect IRS 

audit results. To assess the reliability of the statistical data we analyzed, 

we reviewed IRS documentation and interviewed agency officials familiar 

with the data. We determined that these data were sufficiently reliable for 

the purposes of this report. However, the IRS SOI sample may not 

GAO-13-167SP (Washington, D.C.: Nov. 29, 2012). This guide outlines a series of 

questions and criteria that can be used to evaluate tax expenditures—reductions in a 

taxpayer’s tax liability that are the result of special exemptions and exclusions from 

taxation, deductions, credits, deferrals of tax liability, or preferential tax rates. To develop 

the questions, we reviewed our prior work on tax expenditures, tax reform, results-oriented 

government, and program evaluation, and interviewed experts in tax policy and program 

evaluation. 

7

All percentage estimates derived from samples used in this report have 95 percent 

confidence intervals that are within plus or minus 1 percentage point of the estimates 

themselves, unless otherwise specified. All other estimates in this report have 95 percent 

confidence intervals that are within plus or minus 15 percent of the estimates themselves, 

unless otherwise specified. 
 

Page 4 GAO-15-16 Individual Retirement Accounts

provide a precise estimate of the number of taxpayers or other quantities 

when the number of taxpayers in a particular reporting group is very 

small.

8

To examine how IRA balances can become large, we conducted literature 

reviews on IRA investment strategies and held semistructured interviews 

with finance industry stakeholders, government officials, and academics. 

We selected interviewees through our literature reviews and through 

referrals from internal and external stakeholders for individuals with 

relevant legal, tax, and financial expertise. We also searched for 

documentary evidence of IRA investment strategies in publicly available 

filings with the Department of Labor (DOL) and the Securities and 

Exchange Commission (SEC). We could not determine how many IRAs 

used the strategies identified because IRS does not collect data on asset 

types held in IRAs. We then compared our findings from the literature 

reviews, interviews, and filing searches with our criteria on tax 

expenditures and tax policy, focusing primarily on whether the tax 

treatment is fair and equitable.

To give perspective on what might be considered a large IRA, we 

developed two contribution scenarios to illustrate how much a person and 

an employer could have contributed given statutory limits on contributions 

from 1975 to 2011. We calculated hypothetical accumulations using 

historical stock and bond market returns and interest rates as well as 

what return rates would be necessary to accumulate balances of $1 

million or $5 million under each contribution scenario. 

9

To assess how IRS ensures that taxpayers with IRAs comply with IRA tax 

laws, we first developed criteria for evaluating an enforcement program 

on IRAs. Generally, the basis for the criteria included relevant laws, our 

previous work, and other organizations’ work on good management 

 

8

Estimates based on the small group of taxpayers we studied may have very wide 

confidence intervals. Our estimates related to the larger IRA balances are less precise as 

the number of filers in these categories decreased. About 5 percent of the estimated 

taxpayers with IRAs had at least one associated IRA with blank FMV information. We 

treated the blank FMVs as zeros. If these IRAs did not, in fact, have zero balances, they

could affect our estimates’ upper bound considerably. See appendix I for more details.

9

For a summary of our equity criterion, see GAO-13-167SP. This report draws on 

GAO-05-1009SP, which summarizes other criteria that we have reported should be 

considered in evaluating tax policy. These criteria include economic efficiency as well as 

simplicity, transparency, and administrability. 
 

Page 5 GAO-15-16 Individual Retirement Accounts

practices.10

• Enforcement programs should cover key IRA laws.

We also shared our criteria with IRS officials. The criteria we 

developed are as follows: 

• Enforcement procedures should take into account the cumulative taxrevenue effect of an improperly valued asset that the taxpayer 

contributed to a plan.

• Enforcement management should collect and use data that will enable 

examiners to accurately weigh the noncompliance risk of potentially 

misreported IRA values.

• IRAs should be considered in making enforcement plans.

• Examiners should be trained to identify potential IRA noncompliance.

• IRS should collaborate with the appropriate agency on enforcing 

certain prohibited transactions that could lead to large, noncompliant 

IRAs.

• Examination management should collaborate with staff in its own 

service and outreach functions to help the public better understand 

laws related to potential IRA investment.

We then compared the criteria to documentation on IRS enforcement 

plans and procedures. We also collected information for the comparison 

from interviews with relevant IRS, Treasury, and DOL officials.

For more detail on our methodology, see appendix I.

We conducted this performance audit from June 2013 through October 

2014 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

 

10For prior audits of IRS enforcement of IRA tax laws, see Treasury Inspector General for 

Tax Administration (TIGTA), A Service-wide Strategy Is Needed to Address Growing 

Noncompliance With Individual Retirement Account Contribution and Distribution 

Requirements, 2010-40-043 (Washington, D.C.: Mar. 29, 2010); GAO, Individual 

Retirement Accounts: Additional IRS Actions Could Help Taxpayers Facing Challenges in 

Complying with Key Tax Rules, GAO-08-654 (Washington, D.C.: Aug. 14, 2008); and 

TIGTA, Individual Retirement Account Contributions and Distributions Are Not Adequately 

Monitored to Ensure Tax Compliance, 2008-40-087 (Washington, D.C.: Mar. 28, 2008).
 

Page 6 GAO-15-16 Individual Retirement Accounts

IRAs serve dual roles by (1) providing a way for individuals not covered 

by a pension plan to save for retirement and (2) providing a place for 

retiring workers or individuals changing jobs to roll over, or transfer, their 

employer-sponsored pension plan balances.

During the past 40 years, several types of IRAs with different features for 

individuals and small businesses have been authorized. Two types of 

IRAs are geared toward individuals—each with its own federal income tax 

benefits:11

• Traditional IRA: Eligible individuals may make tax-deductible 

contributions of earned income with taxes deferred on investment 

earnings until distribution at retirement. If either the taxpayer or his or 

her spouse is covered by an employer retirement plan, the individual 

may be eligible for only a partial deduction or no deduction at all, 

depending on the taxpayer’s income and filing status. Individuals may 

make nondeductible contributions to receive the tax deferral on 

investment earnings. Individuals older than 701⁄2 cannot contribute and 

must begin receiving required minimum distributions from these 

accounts.12 Generally, distributions are taxed as ordinary income. 

Individuals who made nondeductible contributions to their IRAs may 

receive a tax-free return of those amounts. Early withdrawals before 

age 591⁄2, other than for specific exceptions, are subject to a 10 

percent additional income tax.

• Roth IRA: Enacted as part of the Taxpayer Relief Act of 1997, this 

type of IRA allows eligible individuals to make nondeductible 

contributions to these accounts but generally receive tax-free 

distributions.13

 

11For a simplified illustration of the tax effects of traditional and Roth IRAs, as well as a 

comparison with a taxable investment account, see appendix II. 

Annual Roth IRA contributions are limited based on a 

taxpayer’s income and filing status. Since January 1, 2010, 

conversions—where a taxpayer pays taxes deferred on balances in a 

traditional IRA to transfer those amounts to a Roth IRA—are no longer 

12Failure to take the required minimum is subject to an excise tax on the IRA owner equal 

to 50 percent of the required amount not distributed.

13Pub. L. No.105-34, § 302, 111 Stat. 788, 825-29 (Aug. 5, 1997) codified as amended at 

26 U.S.C. § 408A.

Background

IRA Types
 

Page 7 GAO-15-16 Individual Retirement Accounts

subject to income eligibility rules.14

The dollar limit on all IRA contributions is adjusted annually for cost-ofliving increases.

There are no age limits on 

contributing, and no distributions are required during the individual’s 

lifetime. Withdrawals are generally tax-free after age 591⁄2, as long as 

the individual held the account for 5 years; early distributions other 

than for specific exceptions are subject to an additional 10 percent 

income tax on earnings.

15

Two other types of IRAs are intended to encourage savings sponsored 

through small employers:

For 2014, the maximum contribution for all traditional 

and Roth IRAs in total is $5,500. Individuals age 50 and older are eligible 

to make additional catch-up contributions of $1,000. Taxpayers age 701⁄2 

and older can contribute to a Roth IRA only. Any contribution exceeding 

the annual limit or made by an ineligible taxpayer is subject to a 6 percent 

excise tax on the amount of excess contributions.

16

• Simplified Employee Pension Plan (SEP) IRA: Enacted under the 

Revenue Act of 1978, this type of IRA was designed with fewer 

regulatory requirements than traditional employer pension plans to 

encourage small employers to offer pension plans to their workers.17

 

14Roth conversions were previously subject to an income limit of $100,000. For 

conversions in 2010 only, a taxpayer had the choice of reporting converted amounts as 

taxable income in 2010 or half in 2011 and half in 2012. According to IRS SOI estimates, 

the amount converted to Roth IRAs rose to an estimated $64.8 billion in 2010, surpassing 

Roth annual contributions for the first time.

SEP IRAs allow employers to make tax-deductible contributions to 

their own and each eligible employee’s accounts. SEP IRAs have 

higher contribution limits than other IRAs: $52,000 in 2014. Annual 

contributions are not mandatory, but as with pension plans, they must 

15Table 5 in appendix I shows the contribution limits by year.

16Employers may also set up payroll deduction IRA programs. Through these programs, 

individuals may establish either traditional or Roth IRAs, and contribute to these accounts 

through voluntary deductions from their pay, which are forwarded by the employer to the 

individual’s IRA. See GAO, Individual Retirement Accounts: Government Actions Could 

Encourage More Employers to Offer IRAs to Employees, GAO-08-590 (Washington, D.C.: 

June 4, 2008).

17Pub.L. No. 95-600, § 152, 93 Stat. 2763, 2797-2800 (Nov. 6, 1978) codified as 

amended at 26 U.S.C. § 408(k).
 

Page 8 GAO-15-16 Individual Retirement Accounts

be based on a written allocation formula and cannot discriminate in 

favor of highly-compensated employees.

• Savings Incentive Match Plan for Employees (SIMPLE) IRA:

Enacted under the Small Business Job Protection Act of 1996, 

SIMPLE IRAs help employers with 100 or fewer employees more 

easily provide a retirement savings plan to their employees.18 In this 

plan, eligible employees can direct a portion of their salary, within 

limits, to a SIMPLE IRA and employers must either (1) match the 

employees’ contribution up to 3 percent of the employee’s 

compensation, or (2) make nonelective, 2 percent contributions of 

each employee’s salary for all employees making at least $5,000 for 

the year. The employee salary reduction contribution limit for 2014 is 

$12,000.19 Employers can elect to permit catch-up contributions, 

which in 2014 are limited to $2,500.

Individuals can roll over assets from employer retirement plans into 

traditional or Roth IRAs.20

 

18Pub. L. No. 104-188, § 1421, 110 Stat. 1755, 1792-1800 (Aug. 20, 1996) codified as 

amended at 26 U.S.C. § 408(p).

Employers may sponsor two broad types of 

retirement plans: (1) defined benefit (DB) plans, which promise to provide 

benefits generally based on an employee’s years of service and 

frequently are based on salary, regardless of the performance of the 

plans’ investments, and (2) defined contribution (DC) plans, in which 

benefits are based on contributions and the performance of the 

investments in participants’ individual accounts. Over the last three 

decades, employers have shifted from sponsoring DB plans to DC plans. 

The 401(k) plan is the predominant type of DC plan in the United States. 

Typically, 401(k) plans allow participants to specify the size of their 

contributions and direct those contributions to one or more investments 

among the options offered within the plan.

19For employees who participate in other employer plans during the year, the overall total 

salary reduction contribution limit for all plans is $17,500 ($23,000 for individuals age 50 or 

older) in 2014. 

20Rolling employer retirement balances into an IRA is one of several options available and 

may not be the best choice depending on an individual’s circumstances. See GAO, 401(k) 

Plans: Labor and IRS Could Improve the Rollover Process for Participants, GAO-13-30 

(Washington, D.C.: Mar. 7, 2013).

Rollovers from Employer 

Plans
 

Page 9 GAO-15-16 Individual Retirement Accounts

In passing ERISA, Congress intended to harmonize the regulation of all 

tax-advantaged retirement plans, including IRAs, to prevent, among other 

things, “[u]njustifiable differences in tax treatment of corporate owneremployees and self-employed individuals under qualified plans.”21 At the 

time, while DB plans were the dominant type of employer-sponsored 

retirement plan, Congress placed various limits on both DB and DC plans. 

For DB plans, benefits are limited to amounts needed to provide an 

annual benefit no larger than the lesser of a specific dollar amount or 100 

percent of the participant’s average compensation for the highest 3 

consecutive calendar years.22

Whereas DB plans have a limit on total benefits, DC plans (like IRAs) 

have annual contribution limits but no total limit on how much an account 

can accumulate. For DC plans, annual contributions are limited to the 

lesser of a specific dollar amount or 100 percent of the participant’s 

compensation.

For tax year 2014, the limit on the 

maximum annual benefit under a DB plan is $210,000. An individual 

receiving a lump sum distribution from a qualified plan may defer taxes by 

rolling the lump sum into a traditional IRA.

23 For tax year 2014, the contribution limit on an 

employee’s elective deferral is $17,500, and the overall contribution limit, 

which includes the total of all employer contributions and employee 

elective deferrals, is $52,000.24 Employees age 50 and older are eligible 

to make additional catch-up contributions of $5,500. Employees older 

than age 701⁄2 generally can continue contributing and, if their employer 

plan allows, delay required minimum distributions until retirement. 

Rollovers from employer plans such as 401(k) plans have become the 

predominant source of funds into IRAs.25 Tax-deferred balances may roll 

into a traditional IRA, and balances from a designated Roth account can 

roll directly into a Roth IRA.26

 

21S. Rep. No. 93-383 at 4 (1973). 

2226 U.S.C. § 415(b)(1). Actuarial assumptions and computations are required to figure 

these contributions.

2326 U.S.C. § 415(c)(1). 

24Table 5 in appendix I shows the contribution limits by year.

25GAO-13-30. 

26NonRoth employer plans balances can be rolled into a Roth IRA, and the rollover 

amount is subject to the same rules for converting a traditional IRA to a Roth IRA.
 

Page 10 GAO-15-16 Individual Retirement Accounts

For employer plans, tax incentives are structured to strike a balance 

between encouraging employers to start and maintain voluntary, taxqualified pension plans and ensuring that lower-income employees 

receive an equitable share of the tax-subsidized benefits.27 In addition to 

the annual limit on employee contributions, other statutory limits include, 

for example, a limit on the amount of compensation ($260,000 for 2014) 

that can be taken into account in determining qualified pension plan 

contributions or benefits.28 One important requirement for tax-qualified 

pension plans of private employers is that contributions or benefits be 

apportioned in a nondiscriminatory manner between highly compensated 

employees or other workers.

IRA owners have wide latitude in the types of assets in which they can 

invest.

29 IRA owners can choose to invest in publicly traded securities or 

assets in custody of a financial institution or custodian. As a way to invest 

in a wider range of assets, albeit with higher risk, some IRA owners 

choose to invest in nonpublicly traded alternative assets, such as real 

estate and private placement stock.30

An IRA owner choosing to directly control IRA assets or invest in 

alternative investments must navigate the IRA tax laws and can face 

additional taxes for noncompliance. An IRA owner is not permitted to 

engage in certain prohibited transactions with the IRA. These transactions 

are prohibited to prevent misuse of an IRA to benefit the owner or other 

Alternative assets may involve 

more direction of investment and activities by the IRA owner, limiting the 

typical role of the custodian.

 

27The Internal Revenue Code establishes requirements that private pension plans must 

satisfy, including minimum coverage and benefits, to qualify for favorable tax treatment. 

Employers that sponsor these tax-qualified plans are entitled to a deduction (within limits) 

for the contributions they make. Contributions are not included in an employee’s income 

until benefits are received. Small employers with fewer than 100 employees may also 

qualify for a federal tax credit for costs associated with starting a new pension plan. 

28There is also a statutory limit on the total amount of tax-deductible contributions that an 

employer may make to certain types of plans.

29Assets specifically restricted for IRA investment are life insurance and collectibles, such 

as artwork, rugs, antiques, metals, gems, stamps, coins, and alcoholic beverages.

30Employer plans can also invest in alternative assets. See GAO, Defined Benefit Pension 

Plans: Recent Developments Highlight Challenges of Hedge Fund and Private Equity 

Investing. GAO-12-324 (Washington, D.C.: Feb. 16, 2012).

IRA Investments
 

Page 11 GAO-15-16 Individual Retirement Accounts

disqualified persons in a way other than as a vehicle to save for 

retirement.31 Such prohibited transactions specifically include, for 

example, borrowing money from an IRA, selling property to an IRA, using 

an IRA account as security for a loan, and buying property for personal 

use with IRA funds. If the IRA owner or beneficiary engages in a 

prohibited transaction, the IRA loses its status as an IRA. As a result, the 

account is treated as distributing all of its assets to the IRA owner at the 

FMV on the first day of the year in which the transaction occurred.32 The 

distribution may be subject to any additional income taxes associated with 

an early distribution and additional excise taxes.33

IRA custodians are responsible for ensuring that all IRA assets (including 

those not publicly traded) are valued annually at their FMV and are 

required to report the account’s FMV at year-end to IRS.34 The FMV is the 

value reflecting contributions and rollovers into the IRA, distributions from 

the IRA, investment earnings (such as interest and dividends), and any 

change in the market value of assets held in the IRA. Nonpublicly traded 

assets do not have easily determined FMV.

 

31Disqualified persons include, for example, an IRA fiduciary, a person providing services, 

and members of the IRA owner’s family (spouse, ancestor, lineal descendant, and any 

spouse of a lineal descendant). 26 U.S.C. § 4975(e)(2). A fiduciary is anyone who 

exercises discretionary authority or discretionary control in managing an IRA or exercises 

any authority or control in managing or disposing of its assets; provides investment advice 

to an IRA for a fee or has the responsibility to do so; and has any discretionary authority or 

discretionary responsibility in administering an IRA. 29 U.S.C. § 1002(21).The IRA owner 

and the IRA’s beneficiaries are considered disqualified persons for purposes of the 

prohibited transaction rules.

3226 U.S.C. § 408(e)(2). 

33If a disqualified person other than the IRA owner engages in a prohibited transaction, 

that person may be liable for a 15 percent excise tax on the amount of the prohibited 

transaction and a 100 percent additional tax if the transaction is not corrected. 26 U.S.C. 

§ 4975(a) and (b).

34Treasury regulations define FMV for purposes of valuation of plan assets as “the price at

which the property would change hands between a willing buyer and a willing seller, 

neither being under any compulsion to buy or sell and both having reasonable knowledge 

of relevant facts.” 26 C.F.R. § 1.412(c)(2)-1(c). 
 

Page 12 GAO-15-16 Individual Retirement Accounts

Multiple IRS units are responsible for enforcing IRA tax laws and 

conducting outreach activities to increase taxpayer understanding of the 

laws.

35 Also, IRS and DOL share responsibility for overseeing prohibited 

transactions relating to IRAs. DOL defines the prohibited transactions and 

may grant exemptions.36

Third-party reporting by IRA custodians provides information that 

taxpayers can use in preparing their tax returns and that IRS can use to 

identify noncompliant taxpayers.

IRS assesses additional taxes for IRAs found to 

engage in prohibited transactions.

37 For every IRA, the custodian is 

required to submit a Form 5498 IRA Contribution Information to IRS. The 

form details the IRA type (traditional, SEP, SIMPLE, or Roth), total 

contributions, Roth conversions, rollovers, and FMV of the account.38 In 

IRA examinations, FMV may be essential in determining a plan or an 

IRA’s compliance with the law, such as whether the contribution value 

causes a taxpayer to violate contribution limits. Custodians are also to 

report on Form 5498 whether a taxpayer is subject to required minimum 

distributions for the coming year; custodians are not required to report the 

minimum amount calculated for each account. The custodian is also 

required to submit a Form 1099-R Distributions From Pensions, 

Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, 

etc., each year that indicates an IRA withdrawal took place and details the 

total distributions from the account during the calendar year. Form 1099-

R also provides information about the IRA distributions, such as whether 

the distributions were taken before age 591⁄2.39

The IRS Wage and Investment division operates automated enforcement 

programs that check taxpayer reporting of IRA transactions. The math 

error program checks tax returns for conspicuous taxpayer errors as tax 

 

35IRS also has offices to address criminal activity by taxpayers (Criminal Investigations) 

and misconduct by certain practitioners (Office of Professional Responsibility) that may 

overlap with IRA issues but neither of these programs performs examinations on individual 

income taxes.

36See section 102 of the Reorganization Plan No. 4 of 1978 (43 Fed. Reg. 47,713). 

37For more on IRS’s automated matching of IRA transactions reported on tax returns to 

custodian reporting, see GAO-08-654. 

38To view the 2014 Form 5498, visit http://www.irs.gov/pub/irs-pdf/f5498.pdf. 

39To view the 2014 Form 1099-R, visit http://www.irs.gov/pub/irs-pdf/f1099r.pdf. 

IRS Enforcement and 

Taxpayer Service
 

Page 13 GAO-15-16 Individual Retirement Accounts

returns are processed.40 The automated underreporter program (AUR) 

identifies noncompliance with certain IRA deduction and distribution rules 

by matching custodians’ Form 5498 and Form 1099-R information returns 

with taxpayers’ income tax returns. AUR may ask taxpayers for additional 

information to reconcile discrepancies. Some AUR cases may be handled 

as correspondence examinations, while other IRA compliance issues, 

such as those with large asset values, may be referred for field 

examination.41

The IRS Small Business/Self-Employed (SB/SE) division conducts field 

examinations targeting more complex individual tax returns. Field 

examinations are IRS’s most costly form of examination. Figure 1 shows 

SB/SE’s process for examining returns.

 

40In 2008, we suggested that Congress expand IRS math error authority to automatically 

correct tax returns for taxpayers younger than age 50 incorrectly claiming catch up 

contributions and taxpayers older than age 701⁄2 improperly deducting IRA contributions. 

See GAO, Tax Administration: IRS’s 2008 Filing Season Generally Successful Despite 

Challenges, although IRS Could Expand Enforcement during Returns Processing, 

GAO-09-146 (Washington, D.C.: Dec. 12, 2008). Congress has not taken action on this 

suggestion as of October 2014. 

41Correspondence examinations are conducted through mail, while field examination, in 

which IRS meets with taxpayers or the taxpayers’ representatives, are done face to face. 
 

Page 14 GAO-15-16 Individual Retirement Accounts

Figure 1: Small Business/Self-Employed Examination Process

Whereas SB/SE examines individual tax returns, the IRS Tax 

Exempt/Government Entities division (TE/GE) has jurisdiction over 

employee plans (including employer-sponsored SEP and SIMPLE IRA 

plans) and requirements for rollovers from qualified employer plans into 

IRAs. If TE/GE examiners discover an individual tax issue, they may refer 

it to other examination offices, including SB/SE.

IRS service activities aim to increase taxpayer understanding of and 

improve compliance with tax obligations, including IRA requirements, as 

well as deliver clear and focused outreach communications and education 

programs to assist taxpayer understanding of tax responsibilities and 

awareness of changing tax laws. IRS Publication 590 Individual 

Retirement Arrangements (IRAs) (Publication 590) explains the 
 

Page 15 GAO-15-16 Individual Retirement Accounts

requirements that taxpayers are to follow in contributing to, and receiving 

distributions from, traditional, Roth, and SIMPLE IRAs.42

Of the 145 million married couples and individuals who filed individual 

income tax returns for tax year 2011, an estimated 43 million, or 30 

percent, had IRAs with an estimated total balance—in terms of FMV 

reported by custodians—of $5.2 trillion at the end of 2011.43

As seen in tables 1 and 2, less than 0.1 percent of taxpayers (about 6,000 

to 10,000 taxpayers) had aggregated IRA balances greater than $5 

million to $10 million but accounted for about 1 percent of the total 

balance. From around 700 to more than 1,000 taxpayers with IRA 

balances more than $10 million accounted for about 2 percent of the total 

About 99 

percent of those taxpayers had aggregate IRA balances of $1 million or 

less and accounted for around 78 percent of the total balance. The 

median accumulated IRA balance for this group was around $34,000. 

Taxpayers with aggregated IRA balances exceeding $1 million, around 

600,000 taxpayers, accounted for about 22 percent of total balance and 

had a median of around $1.4 million.

 

42Publication 560 explains rules for employer-sponsored SEP and SIMPLE IRA plans in 

more detail.

43We use taxpayer to denote the taxpaying unit including individuals, heads of household, 

and married couples filing a joint return. IRAs owned by dependents are aggregated with 

the filer’s IRA. Taxpayers included those filing a return but reporting no taxable income—

for example those with incomes below a certain threshold. We report aggregated IRA 

balances for taxpayers as individuals can own more than one IRA. The aggregate balance 

includes inherited IRAs, as IRS data do not readily identify inherited IRAs. We estimated 

taxpayers with IRA balances of $1 million or less had an average of three IRAs whereas 

those with IRA balances over $5 million had about five to six IRAs on average. We did not 

include information about IRA owners who did not file an individual income tax return. 

However we have no evidence from the IRA dataset that there were IRA owners with 

unusually large IRA balances who did not file an income tax return for 2011. 

Few Taxpayers Had 

Reported IRA 

Balances Greater 

Than $5 Million

Most Taxpayers with IRAs 

Have IRA Balances of $1 

Million or Less
 

Page 16 GAO-15-16 Individual Retirement Accounts

balance.44 A number of taxpayers had IRA balances exceeding $25 

million though our estimates varied widely from around 115 to more than 

600 taxpayers. Some of these taxpayers had very large aggregated 

balances (see appendix III, table 10 for estimated median IRA balances 

by size of IRA balance and their associated ranges).45

 

44Both the numbers and percentages have been rounded as some of these estimates 

may have very wide confidence intervals, particularly estimates related to the fewer 

taxpayers with larger IRA balances. Additionally, about 5 percent of taxpayers with IRAs 

had at least one associated IRA with no FMV information, which we treated as zeros. If 

these IRAs did not, in fact, have zero FMVs, they could affect our estimates’ upper bound 

considerably. See appendix I for more details.

45The very large aggregated balances are reflected in the difference between the 

estimated median and mean FMVs where the median is about a quarter of the mean for 

this group. The large discrepancy between the median and mean indicates that a small 

number of taxpayers with very large IRA balances are raising the mean well above the 

median. 
 

Page 17 GAO-15-16 Individual Retirement Accounts

Table 1: Estimated Number and Percent of Taxpayers with Individual Retirement Accounts (IRA) by Size of IRA Balance, Tax 

Year 2011 

IRA Balance

Estimated 

number of 

taxpayers 95% confidence interval

Estimated percent 

of taxpayers 

with IRAs 95% confidence interval

Total taxpayers with IRAs 43,013,341 42,725,706 43,300,975 100 100 100

$1 million or less 42,382,192 42,094,009 42,670,375 98.5 98.5 98.6

> $1 million to $2 million 502,392 470,897 533,887 1.2 1.1 1.2

> $2 million to $3 million 83,529 72,632 94,426 0.2 0.2 0.2

> $3 million to $5 million 36,171 30,811 41,531 0.1 0.1 0.1

> $5 million to $10 million 7,952 6,120 9,783 <0.1 <0.1 <0.1

> $10 million to $25 million 791 596 985 <0.1 <0.1 <0.1

> $25 million 314 115 650 <0.1 <0.1 <0.1

Source: GAO analysis of IRS data from Forms 1040, U.S. Individual Income Tax Returns and Forms 5498 IRA Contribution Information. | GAO-15-16

Notes: The taxpayer, as a taxpaying unit, may have more than one IRA owner. The IRA balance is 

the aggregate value for all IRAs (including inherited IRAs) owned by the taxpayer. We assumed all 

blank IRA fair market values are zero; the blank values could affect these estimates considerably. 

See appendix I for more details. Percentages may not total 100 percent due to rounding.

Table 2: Estimated Total and Percent of Individual Retirement Account (IRA) Fair Market Value Balances by Size of IRA 

Balance, Tax Year 2011 

IRA Balance 

Estimated total 

IRA balances

($ billions) 95% confidence interval

Estimated 

percent of total

IRA balances 95% confidence interval

Total taxpayers with IRAs 5,241 5,083 5,399 100 100 100

$1 Million or less 4,092 4,038 4,147 78.1 75.8 80.3

> $1 Million to $2 million 674 632 717 12.9 12.1 13.7

> $2 million to $3 million 198 173 224 3.8 3.3 4.3

> $3 million to $5 million 133 114 153 2.5 2.2 2.9

> $5 million to $10 million 52 40 64 1.0 0.8 1.2

> $10 million to $25 million 11 8 13 0.2 0.2 0.3

> $25 million 81 8 225 1.5 <0.2 4.2

Source: GAO analysis of IRS data from Forms 1040, U.S. Individual Income Tax Returns and Forms 5498 IRA Contribution Information.| GAO-15-16

Notes: The taxpayer, as a taxpaying unit, may have more than one IRA owner. The IRA balance is 

the aggregate value for all IRAs (including inherited IRAs) owned by the taxpayer. We assumed the 

blank IRA fair market values are zero; the blank values could affect these estimates considerably. 

See appendix I for details. Percentage may not total 100 percent due to rounding.

To characterize taxpayers with IRAs by IRA type, adjusted gross income 

(AGI), filing status, and age, we compare two subgroups of taxpayers—

those with IRA balances of $1 million or less, which comprised 99 percent 
 

Page 18 GAO-15-16 Individual Retirement Accounts

of all taxpayers with IRAs, and those with IRA balances of more than $5 

million. We do not report on taxpayers with IRA balances greater than $1 

million to $5 million to avoid disclosure of taxpayer information.

Taxpayers held about 87 percent of the total balance in traditional IRAs, 

around $4.4 trillion to $4.7 trillion, while the proportion of total balance 

held in Roth IRAs was 7 percent, around $359 billion to $378 billion. 

Those held in other employer-sponsored SEP and SIMPLE IRAs, around 

6 percent, accounted for the remaining value. Figure 2 shows a 

breakdown of IRA types by taxpayers with IRA balances of $1 million or 

less and those with balances of more than $5 million.

Figure 2: Estimated Percent of Taxpayers with Individual Retirement Account (IRA) Balances of $1 Million or Less and More 

Than $5 Million and Percent of IRA Balance, by IRA Type, Tax Year 2011

Notes: As taxpayers can have more than one type of IRA, the type of IRAs do not sum to 100 

percent. All percent estimates have margins of error at the 95 percent confidence level or plus or 

minus 10 percent points or less. We assumed all the blank IRA fair market values are zeros; the 

blank values could affect our estimates considerably. See appendix I for more details.

a

The distributions for these estimates are so skewed that the usual estimation methods do not 

produce an accurate lower bound.
 

Page 19 GAO-15-16 Individual Retirement Accounts

For those taxpayers with IRA balances of $1 million or less, most (around 

90 percent) have AGI of $200,000 or less.46

 

46AGI is the individual’s gross income minus adjustments to income. These adjustments 

include deductions for trade or business expenses, losses from the sale or exchange of 

property, contribution to pensions and other retirement, as well as alimony paid. About 1 

percent to 2 percent of the taxpayers reported zero AGI. However, to determine eligibility 

for Roth IRA contributions or deductions for contributions to a traditional IRA, a modified 

AGI, in which certain items such as foreign housing exclusion and student loan interest 

deductions are added back to the AGI, is used.

For those with IRA balances 

of more than $5 million, most (about 90 percent) have AGI greater than 

$200,000. However our estimates for this subgroup are imprecise as 

seen in the wide confidence intervals in figure 3.

Taxpayers with IRA 

Balances Exceeding $5 

Million Have Higher AGI
 

Page 20 GAO-15-16 Individual Retirement Accounts

Figure 3: Estimated Percent of Taxpayers with Individual Retirement Account (IRA) Balances of $1 Million or Less and More 

Than $5 Million and IRA Balances, by Adjusted Gross Income, Tax Year 2011

Notes: See appendix III, tables 11 and 12 for the 95th percent confidence intervals associated with 

these estimates. We assumed all the blank IRA fair market values are zeros; the blank values could 

affect our estimates considerably. See appendix I for details.

a

Estimates suppressed due to small cell counts.

b

The distributions for these estimates are so skewed that the usual estimation methods do not 

produce an accurate lower bound.
 

Page 21 GAO-15-16 Individual Retirement Accounts

Joint filers comprised a larger proportion of taxpayers with IRA balances 

greater than $5 million in comparison to those with IRA balances of $1 

million or less. Joint filers also accounted for a larger share of the IRA 

balance with about 90 percent of the IRA balance for those with balances 

more than $5 million, as shown in figure 4.

Figure 4: Estimated Percent of Taxpayers with Individual Retirement Account (IRA) Balances of $1 Million or Less and More 

Than $5 Million by Filing Status, Tax Year 2011

Notes: All percent estimates have margins of error at the 95 percent confidence level or plus or minus 

11 percent points or less. We assumed all the blank IRA fair market values are zeros; the blank 

values could affect our estimates considerably. See appendix I for details.

a

The distributions for these estimates are so skewed that the usual estimation methods do not 

produce an accurate lower bound.

Those who are age 65 and older—and have had more years to 

accumulate funds in IRAs—comprised at least 86 percent of taxpayers 

with balances greater than $5 million and about 90 percent of the total 

Taxpayers with IRA 

Balances Greater than 

$5 Million Tend to be Joint 

Filers and Age 65 or Older
 

Page 22 GAO-15-16 Individual Retirement Accounts

IRA balance for the group. This age group comprised a smaller percent, 

about 27, of taxpayers with balances of $1 million or less, but has a 

disproportionate share of the total IRA balance for the group, as shown in 

figure 5.

Figure 5: Estimated Percent of Taxpayers Age 65 or Older by Individual Retirement 

Account (IRA) Balances of $1 Million or Less and More Than $5 Million, Tax Year 

2011

Notes: Taxpayers were classified in the age 65 and older group if the filer, spouse, or both were age 

65 or older. All percent estimates have margins of error at the 95 percent confidence level or plus or 

minus 10 percent points or less. We assumed all the blank IRA fair market values are zeros; the 

blank values could affect our estimates considerably. See appendix I for details.

a

The distributions for these estimates are so skewed that the usual estimation methods do not 

produce an accurate lower bound.
 

Page 23 GAO-15-16 Individual Retirement Accounts

While there is no total limit on IRA or DC plan accumulations, scenarios 

illustrating the maximum annual contributions by an individual and 

employer over time can shed light on what could be considered a large 

IRA (see appendix I for the statutory annual contributions limits and more 

detailed scenario descriptions).

47 Table 3 illustrates total contributions by 

an individual assuming (1) maximum contributions every year since IRAs 

were created under ERISA, and (2) maximum employer and employee 

contributions since 401(k) plans were created.48 These scenarios 

represent the upper bounds on allowable contributions and do not 

represent how much individuals and employers typically contribute. Some 

may not have sufficient income to even approach the employee limit or 

might not have an employer able or willing to provide additional 

contributions up to the maximum combined employee plus employer limit. 

For 2011, the limit for combined employer-employee contributions, 

(including catch-up contributions for those who are age 50 and older) 

totaled $54,500, with the employee contribution limit (also including catchup contributions) being $22,000. Few, if any, individuals would sustain 

maximum contributions for more than three decades, given that in 

practice, few individuals contribute the maximum to an IRA or employer 

DC plan in any given year. Further, few, if any, individuals would be 

employed by employers who made matching and additional contributions 

for more than three decades at a level high enough to reach the 

combined employee plus employer limit. Our previous work estimated 

that only one-tenth of 1 percent of plan participants had contributions at or 

above the combined employer-employee contribution limit for 2010.49

 

47The scenarios illustrate balances accumulated by an individual in an IRA or DC plan. In 

contrast, for our analysis of IRA balances using SOI estimates, we examined aggregate 

IRA balances by taxpaying unit. A tax return could include more than one person, such as 

a married couple filing a joint return. 

Nonetheless, to illustrate possible accumulations under these upper 

bounds for contributions, the scenarios shown in table 3 assume all 

contributions are invested in a broad stock market index—specifically, the 

Standard & Poor’s (S&P) 500—and are not intended to represent how 

individuals typically invest. We also looked at other illustrative investment 

48Both scenarios assume catch-up contributions for those age 50 and older beginning in 

2002.

49GAO, Private Pensions: Pension Tax Incentives Update, GAO-14-334R (Washington, 

D.C.: Mar. 20, 2014).

IRA Balances Greater 

Than $5 Million Could Be

Considered Large Based 

on What Individuals 

Typically Contribute
 

Page 24 GAO-15-16 Individual Retirement Accounts

allocations, shown in appendix I. The scenarios do not reflect any 

withdrawals or investment fees.

Table 3: Rates of Return Needed to Accumulate Individual Retirement Account (IRA) Balances of $1 million or $5 Million 

under Two Illustrative Contribution Scenarios, 1975-2011

Scenario

Total 

contributions

Balance 

invested in 

S&P 500 

portfolio

S&P 500 rate of return Dollar-weighted 

rate of return to 

accumulate

$1 million

a Dollar-weighted 

rate of return to 

accumulate

$5 million a a Geometric 

mean

Dollarweighted

Maximum IRA 

contributions

(1975-2011) $99,500 b $729,508 11.6% 10.3% 11.6% 18.0%

Maximum combined 

employer-employee DC 

contributions

(1980-2011) $1,185,350 c $7,268,906 11.1% 9.8% N/A 8.0% d

Source: GAO analysis based on statutory contribution limits | GAO-15-16

Notes: All scenarios reflect contributions by an individual with catch-up contributions beginning in 

2002. Scenario results do not reflect investment or administrative fees and expenses. Likewise, the 

scenarios do not reflect any withdrawals or employer plan loans over the period. The contributions 

and returns reported above are for the specific time periods of 1975-2011 for IRA accounts and 1980-

2011 for DC accounts. For the maximum combined employer-employee contribution scenario, we 

looked at a range of possible asset allocations in addition to the one shown in table 3 of a 100-

percent investment in the S&P 500. As shown in appendix 1, ending balances of the additional 

scenarios ranged from $7.1 million for a 100-percent bond allocation to a high of $8.6 million for a 

glide path allocation starting at 70 percent invested in the S&P 500 and ending with 30 percent 

invested in the S&P 500. We also calculated the DC contribution scenario with the investment returns 

equal to historical interest rates reported by the Social Security trustees for special issue governmentbonds as a proxy for a safer investment strategy, which resulted in an ending balance of $3.4 million. 

a

The S&P 500 rate of return is calculated as the geometric mean (sometimes referred to as the

compounded annual growth rate) on a time-weighted basis, which means that each year’s rate of 

return receives equal weighting in calculating the mean. We calculated the dollar-weighted return, 

which takes into account the intersection of the timing of cash flows into or out of the account and the 

timing of the investment returns. For example, because new money is being contributed to the 

account every year, a rate of return in a later year is more important than a rate of return in an earlier 

year because more money is at stake in the later years. The dollar-weighted annual rate of return 

adjusts for this and thereby measures the actual performance of the account under the given 

investment strategy. For more information on alternative return measures, see GAO, Pension Plan 

Valuation: Views on Using Multiple Measures to Offer a More Complete Financial Picture, 

GAO-14-264 (Washington, D.C.: Sept. 30, 2014.)

b

The IRA scenario reflects maximum allowable contributions to a traditional IRA. For a Roth IRA, the 

maximum contributions for 1998 to 2011 would be $57,000.

c

This scenario reflects the upper bound on contributions to a single employer DC plan. Our prior work 

has shown that about one-tenth of one percent of DC plan participants contributed at or above the 

combined employer-employee contribution limit for 2010.

d N/A = not applicable. Contributions alone accumulated from 1980 to 2011 are more than $1 million.

As shown in table 3 above, it would take double-digit rates of return—in 

excess of the S&P 500 return over the period—to achieve a balance of $1 

million or more assuming an individual made only IRA contributions. 
 

Page 25 GAO-15-16 Individual Retirement Accounts

Accounting for the maximum possible combined employer-employee 

contributions and no withdrawals, the DC plan scenario with investment 

sustained over more than three decades could accumulate an individual 

account balance of more than $5 million; however, as already noted, such 

a level of contributions is rare, and such a sustained level is improbable. 

Moreover, an accumulation of more than $5 million looks large in 

comparison to what can be substantial rollovers of lump sum payouts 

from an employer DB plan.50

Historically, IRS has collected annual FMV as reported by custodians for 

each IRA annually but no data on what type of assets are held in IRAs.

For 2011, the maximum lump sum payable 

to a 65-year-old DB participant would have ranged from $2.3 million to 

$2.6 million, depending on the interest rate factors used in the lump sum 

calculations. Finally, as discussed above, we found few taxpayers 

(including married couples filing jointly) with IRA balances greater than $5 

million. For all of these reasons, one could consider an IRA balance 

accumulated by one individual greater than $5 million to be large.

51

As a result, we could not describe the composition of assets held in IRAs 

using the available IRS SOI data.52 IRS officials pointed out that an 

individual may have a larger IRA balance by inheriting a large IRA. The 

IRS IRA data do not readily identify inherited IRAs, so we could not 

describe how many taxpayers had inherited IRA balances as of 2011.53

 

50Some DB plans allow participants to receive a lump sum payment in place of what 

would otherwise be regular benefit payments. In 2011, the total limit on an annual DB 

benefit payment was $195,000.

51As discussed further below, IRS plans to collect additional IRA data beginning in 2014.

52Other studies we reviewed provided snapshots of IRA asset allocation but did not 

contain complete information, such as IRAs invested in nonpublicly traded alternative 

assets held by specialty custodians. See, Holden, Sarah, and Daniel Schrass, “The IRA 

Investor Profile: Roth IRA Investors’ Activity, 2007–2012,” ICI Research Report 

(Washington, D.C.: June 2014); Holden, Sarah, and Steven Bass, “The IRA Investor 

Profile: Traditional IRA Investors’ Activity, 2007–2012.” ICI Research Report (Washington, 

D.C.: March 2014); and Employee Benefit Research Institute, “IRA Asset Allocation, 

2011,” EBRI Notes, Vol. 34, No. 10 (October 2013).

53The Obama Administration in its fiscal year 2014 and 2015 budgets proposed limiting 

tax deferrals beyond the taxpayer and spouse’s lifetime by requiring distribution within 

5 years for IRAs inherited by nonspousal beneficiaries. According to Treasury’s estimates, 

the fiscal year 2015 budget proposal would generate an estimated $5.2 billion from 2015 

through 2024. JCT estimated that the Administration’s 2015 proposal would generate 

about $5 billion for the same period. 
 

Page 26 GAO-15-16 Individual Retirement Accounts

Our interviews with industry stakeholders and review of publicly available 

filings with the SEC and DOL indicate that a small number of individuals 

with access to certain types of nonpublicly traded shares in companies or 

a particular type of partnership interest, as shown in table 4, can generate 

IRA balances far exceeding $10 million. This is in contrast to the vast 

majority of IRA owners with balances well under $1 million. Although IRS 

data at present do not provide information on the investment strategies of 

IRA owners or the assets in their accounts, we found that an IRA owner 

would need to participate in a DC plan and sustain large contributions 

over decades to generate an IRA greater than $5 million. As we have 

previously found, IRA owners face many challenges in trying to 

accumulate even modest retirement savings, such as the pressure to 

draw down their savings for nonretirement expenses like purchasing a 

home or paying college tuition for their children or medical bills.54

 

54See GAO, Unemployed Older Workers: Many Experience Challenges Regaining 

Employment and Face Reduced Retirement Security, 

This is a 

strong indicator that the individuals able to accumulate such large 

balances have not done so through steady contributions and investments 

in publicly traded stocks, bonds, and mutual funds. Instead, these 

individuals likely use alternate strategies involving investments not 

available to most taxpayers. In addition to access, to generate a large 

IRA, investments must have a low initial value and the potential for 

unusually high investment returns. The low initial value of these 

investments: (1) allows the individual to purchase a quantity within IRA 

contribution limits sufficient to generate tens of millions of dollars if the 

investments are successful; and (2) protects the individual against 

financial loss, given the increased likelihood that these investments end 

up worthless. For example, according to SEC documents, the founders of 

one prominent technology company issued nonpublicly traded shares in 

GAO-12-445 (Washington, D.C.: 

Apr. 25, 2012). 

Alternate Strategies 

Are Likely the Cause 

of Large IRA 

Balances That 

Congress May Not 

Have Intended

Investments with Low 

Initial Values Not Available 

to Most Investors Help a 

Small Number of 

Individuals Accumulate 

Large IRA Balances
 

Page 27 GAO-15-16 Individual Retirement Accounts

the newly created company for an initial value, or par value, of $0.000001 

per share.55

Table 4: Investments That Can Generate Tens of Millions of Dollars in a Tax-Favored Retirement Account

Nonpublicly traded shares

May be issued by the founders of a new company for a very low initial price. They may also be 

created for an existing company whose shares are taken off public stock exchanges for instance 

when the company is taken private by a group of insiders or outside investors, such as private 

equity firms. According to industry stakeholders, private equity funds sometimes reorganize the 

existing shares of companies they purchase into multiple share classes, some of which have a 

low initial value and higher risk than other share classes.

Partnership interests

Can be similar to shares and are issued by companies that operate as partnerships. Partnerships 

typically grant two types of partnership interests:

I. Capital interests to outside investors, known as limited partners, generally in exchange 

for cash investments in the partnership.

II. Profits interests to key employees in exchange for services, ideas, and expertise that 

benefit the partnership. In some cases, a profits interest is also referred to as a carried 

interest.

Source: GAO analysis of IRS guidance and industry publications. | GAO-15-16

Note: The initial value of a capital interest is higher than that of profits interest because it reflects the 

outside investors’ cash investment in a fund. The holder of a capital interest has a right to get any of 

his or her remaining initial investment back in the event the fund is unsuccessful. However, the holder 

of a profits interest has a right only to future profits generated by the fund if it is a success.

Nonpublicly traded shares and partnership interests can generally be 

accessed directly by only a small number of individuals, in part because 

all offers and sales of securities must be registered under the Securities 

Act of 1933, unless an exemption from registration is available. The most 

commonly used exemption limits the investors who can purchase 

securities in the offering to accredited investors and “sophisticated” 

investors who are able to evaluate the risks and merits of the investment 

 

55Par value refers to the value initially assigned to a stock or bond when it is issued. 

Founders of newly created companies register the par value of their nonpublicly traded 

shares with the state in which they are incorporated. Par value does not necessarily 

correspond with the price paid, if any, by founders of a company for newly issued 

nonpublicly traded shares in their company.
 

Page 28 GAO-15-16 Individual Retirement Accounts

and bear its economic risk.56

Most investors are unlikely to have access to these investments when 

their value is low enough to accumulate such disproportionate investment 

returns. This is because few investors are likely to be founders of 

companies or key employees in private equity firms and hedge funds. 

However, some individuals who do not meet the requirements to invest 

directly in private equity funds and hedge funds may still be able to invest 

in them indirectly if they are participants in large public or private sector 

DB plans. We found in 2012 that an increasing percentage of large DB 

plans have invested in private equity funds and hedge funds in recent 

Even among this select group, only a small 

number of individuals can use nonpublicly traded shares and partnership 

interests to generate a large IRA. For example, only the founders of 

successful companies and some of their initial employees and investors 

have access to nonpublicly traded shares issued at the creation of the 

company, at which time these shares can be valued at less than $0.01 

apiece. Given the risks associated with starting new companies, most 

founders are unlikely to see their initial investment grow to a balance of 

tens of millions. However, founders of successful companies may 

accumulate large returns disproportionate to the amount they initially paid 

for shares in their own company.

 

56SEC defines individual accredited investors in Rule 501(a) of Regulation D as any 

person who comes within certain categories, or who the issuer of the securities 

reasonably believes comes within certain categories, at the time of the sale of the 

securities to that person. Some of these categories include: (i) any director, executive 

officer, or general partner of the issuer of the securities being offered or sold, or any 

director, executive officer, or general partner of a general partner of that issuer; (ii) any 

natural person whose individual net worth, or joint net worth with that person’s spouse 

exceeds $1,000,000 (subject to the provisions in Rule 501(a)(5) regarding how to 

calculate net worth; for example, the person’s primary residence shall not be included as 

an asset); and (iii) any natural person who had an individual income in excess of $200,000 

in each of the two most recent years or joint income with that person’s spouse in excess of 

$300,000 in each of those years and has a reasonable expectation of reaching the same 

income level in the current year. We found in 2013 that an individual accredited investor is 

generally an investor who possesses knowledge and experience in finance and business 

matters to evaluate the risks and merits of prospective investments or one who the issuer 

of such investments reasonably believes meets this description. See GAO, Securities and 

Exchange Commission: Alternative Criteria for Qualifying as An Accredited Investor 

Should Be Considered, GAO-13-640 (Washington, D.C.: July 18, 2013). We found in 2008 

that most hedge funds restrict their sales to accredited investors, which exempt their 

offerings from certain registration requirements. See GAO, Hedge Funds: Regulators and 

Market Participants Are Taking Steps to Strengthen Market Discipline, but Continued 

Attention Is Needed, GAO-08-200 (Washington, D.C.: Jan. 24, 2008).
 

Page 29 GAO-15-16 Individual Retirement Accounts

years.57 Still, because pension benefits from such plans are generally set 

based on a participant’s salary and years of service, unusually high 

returns from such investments are unlikely to result in greater pension 

plan benefits.58

According to a number of industry stakeholders, individuals may in some 

cases purchase nonpublicly traded shares using funds they accumulated 

in an IRA through contributions and rollovers from employer-sponsored 

plans. Figure 6 demonstrates an instance in which, according to SEC 

documents, one of the founders of a successful technology company 

used a Roth IRA to purchase at least 4 million nonpublicly traded shares 

of his newly created company.59

 

57Specifically, we found that the percentage of large DB plans (as measured by total plan 

assets) investing in hedge funds grew from 47 percent in 2007 to 60 percent in 2010, 

while the percentage of large plans investing in private equity increased from 80 percent 

to 92 percent, in both cases continuing a decade-long upward trend. See GAO, Defined 

Benefit Pension Plans: Recent Developments Highlight Challenges of Hedge Fund and 

Private Equity Investing, 

For an example of how nonpublicly 

traded shares can generate a large IRA balance for the founder of a 

successful company based on this instance, see appendix IV.

GAO-12-324 (Washington, D.C.: Feb. 16, 2012).

58Additionally, investment returns for limited partners, who hold capital interests in a 

partnership are generally commensurate to the amount they invest. Further, as we found 

in 2012, large DB plan investments in private equity and hedge funds represent a 

relatively small percentage of total plan assets. See GAO-12-324. However, these plans’ 

widespread participation in private equity and hedge funds highlights the importance of 

having transparent information on, among other things, the fees they charge their limited 

partners. Such information is needed to help plan sponsors carry out their fiduciary 

responsibilities to participants, such as the requirement to invest with the care, skill, and 

diligence of a prudent person familiar with such matters. Private sector pension plan 

investment decisions must comply with ERISA, which includes fiduciary standards based 

on the principal of a “[p]rudent man standard of care.” 29 U.S.C. § 1104. Public sector 

plans, such as those at the state, county, and municipal levels, are not subject to most 

ERISA requirements applicable to private sector pension plans. To receive preferential tax 

treatment, however, to the extent they operate through a trust format, they must follow IRS 

requirements applicable to such trusts. 

59SEC documents indicate that the initial value, or par value, of these nonpublicly traded 

shares was $0.000001 per share. As a result, the founder could have paid as little as $4 

from after-tax contributions to purchase almost 4 million shares. In contrast, from 2000 

through June of 2014, companies charged an average of $14.50 per share through initial 

public offerings, when companies first offer shares to the general public, often primarily to 

institutional and high net-worth investors. At this price, four million shares would cost an 

investor about $58 million before commissions or fees, well in excess of annual IRA 

contribution limits.

Accumulating Nonpublicly 

Traded Shares in an IRA
 

Page 30 GAO-15-16 Individual Retirement Accounts

Figure 6: For a Modest Initial Investment, Nonpublicly Traded Shares Can Generate a Large IRA

Similarly, employees of private equity firms may have access to 

nonpublicly traded shares in companies the fund purchases, referred to 

as portfolio companies. In some cases, after taking the existing shares of 

a portfolio company off public stock exchanges, the private equity firm will 

restructure them into multiple share classes.60

 

60According to two industry stakeholders, private equity firms generally use these shares 

as an incentive to hire and retain managers of the portfolio company, but may also make 

shares available to their own employees. More recently, private equity funds appear to 

have been restructuring portfolio companies’ shares as stock options rather than splitting 

them into various classes of nonpublicly traded shares. For example, according to a 2013 

PricewaterhouseCoopers (PwC) study of portfolio company compensation, 70 percent of 

the incentives offered to portfolio company management come in the form of stock 

options. See PwC: Driving Portfolio Company Performance in a Changing Private Equity 

Environment (2013).

In what one industry 

stakeholder referred to as the “cheap stock model,” these share classes 

include a preferred share class with a higher initial value and a riskier 
 

Page 31 GAO-15-16 Individual Retirement Accounts

common share class with a lower initial value.61

According to five industry stakeholders who advise them, private equity 

firms can use very aggressive ratios to split the value of portfolio 

companies between share classes.

As with the nonpublicly 

traded shares issued by company founders, individuals may be able to 

purchase a quantity of the riskier share class in an IRA within contribution 

limits sufficient to produce substantial investment returns if the portfolio 

company is later sold for a sizeable profit.

62 According to one industry 

stakeholder, the use of an aggressive ratio can result in a risky share 

class with a liquidation value as low as zero.63 Although risky, these 

shares can increase in value very quickly, suggesting to some that their 

initial value may have been inappropriate. For example, in one publicly 

reported private equity transaction, employees of the private equity firm 

used their IRAs to purchase about $25,000 worth of low-valued, 

nonpublicly traded shares the fund created for a portfolio company. The 

shares were worth nearly $14 million when the private equity firm brought 

the portfolio company back onto public stock exchanges less than 2 years 

later. The employees eventually sold their shares for more than $23 

million, realizing more than 1,000 times their initial investment.64

 

61Preferred shares have a higher initial value because holders of this share class are 

more likely to be repaid if the portfolio company is not successful. Additionally, holders of 

preferred shares are the first to receive proceeds from the private equity fund’s sale of the 

portfolio company. In contrast, the riskier common shares can end up worthless if the 

private equity fund sells the portfolio company for less than it paid. But if the portfolio 

company is sold for a higher price than expected, holders of the riskier common shares 

may receive the bulk of any additional proceeds once preferred share holders have 

received their proceeds.

However, one industry stakeholder who advises private equity firms said 

62According to two industry stakeholders, private equity firms currently use a ratio of about 

4:1 to split the value of a portfolio company between preferred and common share 

classes, respectively. This means about 80 percent of the company’s value would be 

assigned to the preferred share class and the remainder to the common share class. In 

some instances in the 1990’s, private equity funds used ratios as high as 9:1, which one 

industry stakeholder said would have been seen as “pushing the envelope” at the time. 

Another industry stakeholder said that today, a ratio this high would likely be challenged 

as aggressively devaluing the riskier common share class.

63Liquidation value is the value of a business or of an asset when it is sold in liquidation, 

as opposed to being sold in the ordinary course of business. Liquidation price is usually 

below the market price.

64Mark Maremont, “Bain Gave Staff Way to Swell IRAs by Investing in Deals,” Wall Street 

Journal, Mar. 29, 2012 (New York City).
 

Page 32 GAO-15-16 Individual Retirement Accounts

it would be difficult for IRS to prove these shares were inappropriately 

valued, because, for each risky share the employees purchased, they 

also purchased a share from a less risky higher-priced share class. Taken 

together, these shares may more accurately reflect the portfolio 

company’s value.

Carried interest is another means by which key employees of private 

equity firms and hedge funds can generate large IRA balances.65

 

65In this report, we refer to private equity firms and hedge funds that are organized as 

partnerships typically consisting of: (1) a general partner, an entity that is responsible for 

management of the fund, and; (2) outside investors, commonly referred to as limited 

partners. Although there is no universally accepted definition of hedge funds, the term is 

commonly used to describe pooled investment vehicles that are privately organized and 

often engage in active trading of various types of securities, commodity futures, options 

contracts, and other investment vehicles. Likewise, there is no commonly accepted 

definition of private equity funds, but such funds are generally privately managed pools of 

capital that invest in companies, many of which are not listed on a stock exchange. 

Strategies of private equity funds vary, but most funds target either venture capital or 

buy-out opportunities. Venture capital funds invest in young companies that often are 

developing a new product or technology. Buy-out funds generally invest in larger 

established companies and attempt to add value. For both venture capital and buy-out 

strategies, investors hope to profit when the company is eventually sold, either when 

offered to the public or when sold to another investor or company. See 

According to one industry stakeholder who advises wealthy clients, 

including key employees of private equity firms, access to profits interests 

was likely the chief determinant of an individual’s ability to accumulate a 

large IRA balance. He added that the rest of his clients, even those 

whose wealth surpasses $100 million, were unlikely to have an IRA 

exceeding $5 million because of the IRA contribution limits. The share of 

profits paid by outside investors, known as limited partners, to the general 

partner as a performance fee is referred to as the general partner’s 

carried interest in a fund. The general partner typically distributes a 

portion of this fee, referred to as an investment fund’s “carry,” to a few key 

employees by first granting them a profits interest in the fund (see fig. 7). 

A profits interest has the potential to provide a key employee investment 

returns that are disproportionate to his or her invested capital if the fund is 

a success, according to six industry stakeholders who represent private 

equity firms and hedge funds or advise private equity professionals. If, on 

the other hand, a fund does not generate a minimum rate of return for its 

outside investors, profits interests may expire without generating any 

GAO-12-234 and 

GAO, Defined Benefit Pension Plans: Guidance Needed to Better Inform Plans of the 

Challenges and Risks of Investing in Hedge Funds and Private Equity, GAO-08-692 

(Washington, D.C.: Aug. 14, 2008).

Generating Large IRAs through 

a Profits Interest (Carried 

Interest)
 

Page 33 GAO-15-16 Individual Retirement Accounts

money for the key employee. For an example of how carried interest can 

generate a large IRA balance, see appendix IV.

Figure 7: General Partners Grant Partnership Interests in Their Investment Funds

Note: Terms vary for funds offered by private equity firms and hedge funds. For example, the amount 

of capital contributed by the general partner and the timing for distributing profits may vary by fund. 

This figure does not take into account other fees charged by private equity firms and hedge funds 

such as management fees charged to outside investors. Industry stakeholders refer to the “two and 

twenty” fee structure as a guideline. This structure consists of a 2 percent management fee and a 20 

percent performance fee called carried interest charged to outside investors.

a

Outside investors get capital interests in exchange for their investment in the fund. Capital interests 

give outside investors a right to profits generated by the fund. Profits distributed to a capital interest 

are generally proportionate to the amount invested, less fees and expenses. Key employees, on the 

other hand, get profits interests in exchange for their ideas, expertise, and work to make the fund 

successful. Profits interests give key employees a right to profits generated by the fund if the fund is a 

success. But profits interests do not give key employees a right to any of the initial capital used to 

start the fund. Because profits interests represent an investment of effort and expertise rather than 

money, their initial purchase price can be low, making profits interests uniquely suited to the 

contribution limits of tax-favored retirement accounts. The low purchase price means that returns from 

a profits interest can be substantially disproportionate to the money needed to purchase them, and 

consequently much higher than other types of investments.

b

The general partner usually takes 20 percent of a successful fund’s profits as a carried interest, 

although this amount is negotiated with outside investors and can vary.

Profits interests in a private equity fund or hedge fund can have a low 

initial value because they do not necessarily represent a cash investment 

to the fund by key employees. Instead, they represent an agreement that 

key employees will provide expertise, ideas, and work to make the fund a 

success in exchange for a share of the profits from the fund. IRS provided 

guidance on treatment for the receipt of a profits interest for services, 
 

Page 34 GAO-15-16 Individual Retirement Accounts

saying that the grant of a profits interest is generally not a taxable event.66

As with nonpublicly traded shares, key employees at private equity firms 

and hedge funds may use IRAs to purchase profits interests from the 

general partner. According to an industry stakeholder who advises private 

equity professionals in estate planning, key employees may first 

accumulate profits interests in a DC plan, such as a 401(k) or profit 

sharing plan, then subsequently roll over the assets of their employerbased account into an IRA (see fig. 8). A rollover to an IRA can include 

both cash and noncash assets, such as a profits interest that is not done 

yielding distributions of carried interest. According to DOL officials, ERISA 

does not necessarily prohibit an employer from contributing a profits 

interest to the DC plan of its employees, although Internal Revenue Code 

requirements administered by IRS may restrict or regulate these types of 

transactions.

Some industry stakeholders may have taken this to mean that profits 

interests can have an initial value of as low as $0.00, referred to as a 

liquidation value.

67

 

66IRS Rev. Proc. 93-27, 1993-27 C.B. 343 and Rev. Proc. 2001-43, 2001-2 C.B. 191.

67According to DOL officials, the general partner must meet contractual obligations to 

contribute cash to the retirement plan before granting profits interests to key employees. 

DOL spells out rules under which employers can make in-kind contributions, that is, 

contributions other than cash. 29 C.F.R. § 2509.94-3.
 

Page 35 GAO-15-16 Individual Retirement Accounts

Figure 8: Profits Interest Can Be Held in an IRA or a Defined Contribution Plan

a

Individuals covered by employer-sponsored plans may deduct only a portion of contributions to a 

traditional IRA from their taxable income, depending on their income and filing status. In some 

instances, contributions to a traditional 401(k) account may exceed the participant’s elective deferral 

limit but contributions may not exceed the lesser of 100 percent of the participant’s compensation or 

an overall contribution limit.

b

Qualified distributions from a Roth IRA that meet certain requirements are generally tax free. To be 

considered qualified, the IRA owner must, among other things, hold his or her investments for at least 

5 years and reach age 591⁄2 before taking a distribution.

A number of industry stakeholders we interviewed expressed concerns 

that individuals who invest in nonpublicly traded shares or profits interests 

using IRAs and DC plans may undervalue these assets, thus substantially 

increasing their tax benefits. According to one industry stakeholder who 

advises clients on using IRAs to invest in alternative assets, individuals 

can manipulate contribution limits by grossly undervaluing investments at 

the time the individual uses an IRA to purchase them. Two industry 

stakeholders who advise wealthy clients or who research carried interest 

arrangements told us that IRA balances exceeding $10 million are a 

strong indication that assets may have been inappropriately valued. For 

example, company founders may have extensive knowledge of a 

company’s value based on its future assets and liabilities.

Alternate Strategies Raise 

Concerns but Are Difficult for 

IRS to Address
 

Page 36 GAO-15-16 Individual Retirement Accounts

It is often difficult for IRS to pursue cases of potential abuse based on 

inappropriately valued assets. First, in response to a congressional 

inquiry, IRS said it generally requires individuals to assess the FMV of 

assets in IRAs rather than use a liquidation value or other valuation 

method.68 However, IRS guidance implies that individuals can use the 

liquidation value of a profits interest for certain tax purposes. One industry 

stakeholder also noted that individuals can use case law to support very 

low valuations of nonpublicly traded shares and profits interests.69

Second, according to IRS officials, valuation can be subjective and IRS 

may expend resources and ultimately conclude that the taxpayer’s 

valuation is reasonable. Third, the statute of limitations for IRS to pursue 

cases is generally only 3 years, which poses certain obstacles to pursuing 

noncompliant activity that spans years of IRA investment.70 For example, 

as we have previously found, the long-term nature of private equity 

investment requires lengthy financial commitments and delayed financial 

returns. A private equity fund may not begin making profits for 4 or more 

years.71

 

68Treasury regulations generally define FMV for the purposes of valuation of plan assets 

as, “the price at which the property would change hands between a willing buyer and a 

willing seller, neither being under any compulsion to buy or sell and both having 

reasonable knowledge of relevant facts.” 26 C.F.R. § 1.412(c)(2)-1(c). 

For examples of the time that may in some cases be needed to 

realize disproportionately large investment returns from such investments, 

see appendix IV.

69For example, in Campbell v. Commissioner, the Eighth Circuit Court of Appeals 

overturned a decision by the U.S. Tax Court and held that an individual who is granted a 

profits interest does not need to recognize any income if the profits interest does not have 

a readily ascertainable value. 943 F.2d 815, 823 (8th Cir. 1991).

70Generally, IRS has 3 years from the date a return is filed (whether the return is filed on 

time or not) to make an assessment of tax liability. 26 U.S.C. § 6501(a). The statute of 

limitations is extended in certain situations. For example, if a taxpayer submits a false or 

fraudulent tax return or otherwise engages in a willful attempt to evade a tax, the tax may 

be assessed at any time after the return is filed. 26 U.S.C. § 6501(c)(1), (2). Also, IRS and 

the taxpayer may agree to extend the statute of limitations for assessment. 26 U.S.C. 

§ 6501(c)(4). Other extensions are authorized when the taxpayer fails to file a tax return, 

omits a certain amount of gross income from the return, or fails to report a listed 

transaction. 26 U.S.C. §§ 6501(c)(3), (10) and (e)(1). A listed transaction is a transaction 

that is the same as, or substantially similar to, one that IRS has determined to be a tax 

avoidance transaction and identified by IRS notice or other form of published guidance.

71See GAO-12-324. 
 

Page 37 GAO-15-16 Individual Retirement Accounts

Due to a lack of information in publicly available filings by private equity 

firms and hedge funds, we could not determine the extent to which key 

employees use DC plans or IRAs to invest in profits interests and thus 

shelter their portion of the general partner’s carried interest from taxation. 

However, one industry stakeholder who values carried interest 

arrangements told us that he has been asked in one or two cases to 

value carried interest held in a profit sharing plan. We could not determine 

from publicly available filings with SEC and DOL if private equity firms 

and hedge funds enable key employees to invest in profits interests using 

DC plans.72 Of the 60 private equity firms and hedge funds we reviewed, 

about half did not include in their filings with DOL a description of the 

assets held in their employer-sponsored plans.73

Of the filings that did include a description of assets held in the employersponsored plan, we found four hedge funds and one private equity firm 

whose employees were substantially invested in their employer’s 

investment funds (see sidebar). However, we could not determine if these 

were investments in profits interests that would yield disproportionately 

large investment returns in the form of carried interest, or if they were 

investments in capital interests on terms similar to those of outside 

 

72Profit sharing plans and 401(k) plans governed by ERISA and the Internal Revenue 

Code may generally satisfy annual reporting requirements by filing a Form 5500 Annual 

Return/Report of Employee Benefit Plan (Form 5500) and its accompanying schedules. 

Plans with 100 or more participants are generally required to file Schedule H (Financial 

Information) detailing, among other things, information about the plan’s assets. Plans filing 

Schedule H are also generally required to attach the report of an independent qualified 

public accountant detailing information about the plan and a “Schedule of Assets (Held at 

End of Year)” listing assets held by the plan. In contrast, plans with less than 100 

participants may be eligible to file Schedule I (Financial Information-Small Plan), with less 

detailed information on plan assets, in place of Schedule H. Also, certain plans with fewer 

than 100 participants that invest only in eligible assets may file the Short Form Annual 

Report/Report of Small Employee Benefit Plan (Form 5500-SF), which is a simplified 

annual report form, instead of the Form 5500. Form 5500-SF filers generally are not 

required to file schedules or attachments, such as the Schedule H and attached schedule 

of assets. Employers that offer SEP IRA and SIMPLE IRA plans generally do not have to 

file Form 5500s.

73DOL officials told us that Form 5500-SF filers are prohibited from allowing participants to 

invest directly in nonpublicly traded shares or profits interests. They said it was 

conceivable that participants might be able to invest in these types of assets indirectly 

through the use of Common Collective Trusts, but that this was unlikely. Small plans that 

directly invest in or allow participants to invest directly in nonpublicly traded shares or 

profits interests would be required to file the Form 5500 and the Schedule I.

Identifying Carried Interest in 

DC Plans and IRAs Is Difficult
 

Page 38 GAO-15-16 Individual Retirement Accounts

investors.74 In 2014, we found that there were challenges regarding the 

usefulness, reliability, and comparability of plan asset information on 

Form 5500s—the annual report that employee benefit plans file with 

DOL.75 These challenges, identified by Form 5500 stakeholders, included 

a lack of detailed information on plan assets for filers with fewer than 100 

participants that are not required to file a Schedule H, which is a part of 

Form 5500 detailing a plan’s assets.76 We recommended, among other 

things, that DOL and other agencies responsible for administering Form 

5500 revise Schedule H to provide more transparency into plan 

investments.77

 

74DOL officials reviewed filings for two of the hedge funds and pointed out possible 

mistakes in the filings. For example, both filers reported that their plan did not hold hardto-value assets, which DOL officials said was unlikely given that assets in both plans were 

substantially invested in the employer’s own funds. Only one of the five filers we reviewed 

reported holding hard-to-value assets. This raises questions about the possibility that 

private equity firms and hedge funds, including those that file Form 5000-SF, may not be

aware of, or complying with, filing requirements with respect to investments in nonpublicly 

traded shares and profits interests.

75GAO, Private Pensions: Targeted Revisions Could Improve Usefulness of Form 5500 

Information, GAO-14-441 (Washington, D.C.: June 5, 2014).

76We reported that only 12.5 percent of all plans that filed a Form 5500 in 2011 included a 

Schedule H. See GAO-14-441. 

77In comments on that report, DOL officials did not say whether they agreed or disagreed 

with our recommendation, but did identify actions underway to address our 

recommendation.
 

Page 39 GAO-15-16 Individual Retirement Accounts

Drawing on public filings with the SEC we determined that the private 

equity firm and hedge funds enabling employees to invest in their own 

funds charge their outside investors a performance fee that amounts to a 

carried interest in these funds. But, despite recently expanded reporting 

requirements by SEC on private equity firms and hedge funds, we could 

not determine how general partners distribute carried interest among 

various partnership interests, such as those held by employees investing 

in employer-sponsored plans.78

Given the difficultly and uncertainty IRS faces in selecting and pursuing 

potential instances of noncompliance based on valuation, a few 

individuals can realize tax advantages from IRAs that substantially 

exceed those available to the vast majority of investors. According to IRS 

officials, any additional information about assets that have been rolled 

over into IRAs would be helpful. IRS officials told us that expanded 

information could reduce the considerable time and cost of pursuing 

cases of potential noncompliance based on the valuation of assets in 

IRAs. DOL filings for employer-sponsored plans in some instances do not 

contain any detail on the assets held by a plan. However, even when a 

description of assets is included, neither DOL nor SEC filings include 

information on whether the general partner distributes carried interest to

profits interests held by key employees in a DC plan. This information 

could help IRS understand the potential investment returns that could 

have been expected to accrue to a profits interest rolled into an IRA and 

thus determine if the initial valuation of the profits interest was 

Although the private equity firm and 

hedge funds disclosed that they held a carried interest in their funds, they 

did not disclose the general partner’s internal distribution of this carried 

interest among key employees (see appendix IV for an example of how a 

key employee can invest in a portion of the general partner’s carried 

interest through a profits interest). Absent increased transparency in

filings with DOL documenting the assets held in employer plans and 

information about how the profits of private equity firms and hedge funds 

are distributed among various types of partnership interests, IRS will have 

difficulty assessing the kinds of assets being rolled into IRAs.

 

78Some private equity fund and hedge fund managers will remain exempt from registration 

with SEC. For example, certain fund managers with less than $150 million in assets under 

management will not be required to register with the SEC. See Exemptions for Advisers to 

Venture Capital Funds, Private Fund Advisors with Less than $150 Million in Assets Under 

Management, and Foreign Private Advisers (final rule), 76 Fed. Reg. 39,646 (July 6, 

2011).

Hedge Funds and a Private Equity 

Firm that Allow Their Employees to 

Invest in Their Own Funds 

Hedge fund 401(k) profit sharing plan

($18 million in assets)

Employees invest more than 53 percent of 

plan assets in the employer’s funds.

Hedge fund 401(k)

($75 million in assets) 

Employees invest more than 90 percent of 

plan assets in the employer’s funds.

Hedge fund IRA plan

($103 million in assets)

Employees may invest 100 percent of their 

contributions in the employer’s funds.

Hedge fund 401(k) profit sharing plan

($123 million in assets)

Employees invest almost 97 percent of plan 

assets in the employer’s funds.

Private equity fund profit sharing plan

($191 million in assets)

Employees invest almost 28 percent of plan 

assets in the employer’s funds.

Source: GAO analysis of four hedge funds’ and one private 

equity firm’s Form 5500 filings with the Department of Labor, 

December 31, 2012. | GAO-15-16
 

Page 40 GAO-15-16 Individual Retirement Accounts

appropriate. Without this additional detail it will continue to be hard for 

IRS to determine the magnitude of investment returns a profits interest 

held in an IRA could reasonably be expected to generate. Such 

information could be used to determine how assets in IRAs might 

appropriately have been initially valued. Our prior work has shown that an 

important feature that helped DB plan sponsors successfully address the 

challenges of investing in private equity funds and hedge funds includes 

the transparent disclosure of fees such as carried interest.79

Congress enacted ERISA to promote opportunities for individuals to 

accumulate resources for their retirement and IRAs were originally 

authorized largely to ensure equitable tax treatment for individuals without 

access to an employer-sponsored plan. Congress envisioned that these 

individuals would be the most likely to establish and rely on IRAs. IRAs 

provide a way for individuals not covered by employer-sponsored plans to 

save for retirement and give retiring workers or individuals changing jobs 

a way to preserve assets from employer-sponsored DC plans by allowing 

them to roll over, or transfer plan assets into IRAs. Prior to this, 

individuals not covered by an employer-sponsored plan could not save for 

retirement under the favorable tax treatment afforded to participants of 

employer-sponsored plans. This resulted in inequitable tax treatment of 

individuals not covered by employer-sponsored plans. Congress cited the 

need, on the basis of equitable tax treatment, to create IRAs and grant 

these individuals a limited tax deduction on their retirement savings.80

 

79Specifically, we interviewed representatives of 22 public and private sector DB plans to 

determine what steps they had taken, if any, to address the challenges of investing in 

private equity funds and hedge funds particularly given ongoing market volatility in the 

years following the financial market events of 2008. The DB plan representatives we 

contacted took significant steps to improve the terms of their investments, including 

negotiating lower fees or more advantageous fee terms, and obtaining greater liquidity or 

transparency. See 

Similarly, the Taxpayer Relief Act of 1997 created Roth IRAs, which 

extended tax incentives to individuals who, based on their income, were 

ineligible to make tax deductible contributions to traditional IRAs. It 

extended retirement tax incentives to individuals who made just enough 

that they could not benefit from the deductibility of contributions to 

traditional IRAs.

GAO-12-324. 

80See S. Rep. No. 93-383 at 27 (1973): H.R. Rep. No. 93-807 at 4 (1974).

Congress Likely Did Not 

Intend IRAs to Result in 

Tax-Favored 

Accumulations of Funds 

beyond Those Reasonably 

Necessary to Support 

Individuals in Retirement
 

Page 41 GAO-15-16 Individual Retirement Accounts

Since Congress created traditional and Roth IRAs, they have become the 

key retirement savings vehicles for many individuals not covered by 

employer-sponsored plans, including small business owners and 

independent contractors. But a small number of individuals have found 

IRAs, and in particular Roth IRAs, to be an advantageous investment 

vehicle for purchasing disproportionately profitable assets at a low initial 

value, or transferring such assets from employer-sponsored plans, 

without paying more than a nominal amount of tax on their gains. The use 

of IRAs permits these individuals to accumulate far more in resources, 

under favorable tax treatment, than may be reasonably necessary to 

support them in retirement.

Through ERISA, Congress also amended the Internal Revenue Code to 

impose certain limits on employer-sponsored plans seeking preferential 

tax treatment.81 Specifically, Congress established a limit on benefit 

payments from employer-sponsored DB plans and contribution limits on 

DC plans.82 Congress established similar contribution limits on IRAs. 

Congress imposed these limits to prevent the tax-favored accumulation of 

balances “completely out of proportion to the reasonable needs of 

individuals for a dignified level of retirement income.”83

Forty years after the enactment of ERISA, some in Congress continue to 

be concerned with the fairness of tax-favored retirement balances. In a 

2012 letter to IRS, some members of Congress expressed concern that 

strategies for accumulating large IRAs by using very low valuations might 

be widespread among certain higher-income individuals. Members of 

Congress also noted the opportunity to address inequities stemming from 

the inappropriate use of retirement tax benefits presented by Congress’s 

current efforts to reform the broader tax code. In a 2012 hearing on tax 

reform and tax-favored retirement accounts, the Chairman of the House 

 

8126 U.S.C. §415.

82Prior to ERISA, DC plans were often referred to as salary reduction plans. In response 

to controversy over proposed regulations that would have altered their tax treatment, 

ERISA effectively froze the tax treatment of such plans in anticipation of more specific 

legislative action to deal with them. Pub. L. No. 93-406, § 2006, 88 Stat. 829, 992-93 

(Sept. 2, 1974). That legislative action came four years later in the form of the Revenue 

Act of 1978, which created 401(k) plans—now the dominant type of retirement plan 

offered by private sector employers. But the relevant provision did not take full effect until 

January 1, 1980. Pub. L. No. 95-600, § 135.92 Stat. 2763, 2785-87 (Nov. 6, 1978).

83H.R. Rep. No. 93-807 at 112.
 

Page 42 GAO-15-16 Individual Retirement Accounts

Ways and Means Committee stressed the importance of increasing 

participation in retirement accounts by low- and middle-income taxpayers, 

and ensuring that retirement tax benefits are effectively and appropriately 

targeted.

We have long recommended greater scrutiny of tax expenditures, such as 

the deferral of taxation on retirement savings in traditional DC plans and 

IRAs and the ability to essentially pay taxes up front on contributions to 

designated Roth accounts in DC plans and to Roth IRAs, in exchange for 

tax-free investment earnings and distributions.84 We developed criteria to 

assist policymakers in assessing tax expenditures.85

• Identifying the tax expenditure’s purpose, a necessary first step in 

assessing its performance. 

These criteria 

include the following.

• Considering the fairness and equity of the tax expenditure. For 

example the criteria include determining who benefits from the tax 

expenditure, and whether taxpayers with different abilities to pay 

receive different benefits from the tax expenditure.86 

• Determining the budget consequences of the tax expenditure, or, how 

much the tax expenditure costs the government in forgone tax 

revenue. Specifically, the criteria suggest policymakers consider 

options for limiting revenue losses from the tax expenditure, for 

example, by capping the aggregate amount taxpayers can claim.

In the absence of changes by Congress to current tax incentives for 

retirement savings, certain individuals with the resources to do so will 

likely continue to engage in sophisticated investment strategies that 

 

84See GAO, Government Performance and Accountability: Tax Expenditures Represent a 

Substantial Federal Commitment and Need to Be Reexamined, GAO-05-690 

(Washington, D.C.: Sep. 23, 2005). Tax expenditures are special tax credits, deductions, 

exclusions, exemptions, deferrals, and preferential tax rates that can substantially reduce 

federal tax revenues.

85GAO-13-167SP. 

86The equity criterion also asks whether the tax expenditure results in different benefits for 

similarly situated taxpayers. Additionally, our framework includes criteria such as how the 

tax expenditure relates to other federal programs and how evaluation of the tax 

expenditure should be managed. A review of retirement tax expenditures for DC plans and 

IRAs should include all aspects of the tax expenditure evaluation framework.
 

Page 43 GAO-15-16 Individual Retirement Accounts

effectively change their DC plan or IRA from an account for modest 

retirement savings into a tax-advantaged investment vehicle for 

accumulating significant wealth. This will be done through investments 

unavailable to most taxpayers. IRS officials reported in 2012 that longterm revenue losses to the federal government from IRA abuses had 

increased significantly since 2004, when IRS first created an Issue 

Management Team (IMT) to address this issue. IRS officials warned that, 

without legislative change, certain IRA strategies could conceivably result 

in thousands of families living for generations without the need to 

contribute to retirement accounts or pay federal income tax. In 

discussions with industry stakeholders and government officials, a 

number of proposals have been raised to address the accumulation of 

large IRAs. Two approaches are restricting the types of assets that can 

be held in IRAs or imposing a minimum valuation requirement on assets 

in IRAs. For example, a minimum required purchase price of one dollar 

per share could prevent the founders of companies from purchasing 

millions of nonpublicly traded shares within IRA contribution limits. 

Additionally, a limit on the amount of accumulations allowed in DC plans 

and IRAs is another approach. Similarly, Treasury officials have proposed 

limiting contributions to IRAs once a certain level of savings has been 

achieved.

IRS Has Dedicated 

Resources to IRA 

Compliance but 

Faces Challenges 

with Nonpublicly 

Traded IRA 

Investments
 

Page 44 GAO-15-16 Individual Retirement Accounts

Within the Wage and Investment (W&I) division, the Automated 

Underreporter Program (AUR) covers a broad range of taxpayers with 

IRAs and is IRS’s primary means of detecting noncompliance with 

contribution and distribution requirements.

87

IRS’s Small Business/Self-Employed (SB/SE) division uses field 

examinations to pursue more complex tax return cases, including those 

that could involve the multimillion dollar IRA strategies described above. 

In fiscal year 2013, field examiners audited IRA issues on 1,588 returns 

and recommended $3.3 million in additional taxes, representing 0.3 

percent of SB/SE examinations and 1.1 percent of total tax adjustments 

for that year. SB/SE training for new revenue agents and tax compliance 

officers covers specifics on enforcing IRA tax laws. Examiner job aides, 

also called lead sheets, emphasize investigating all of the taxpayers’ 

contributions over time to determine if the taxpayers are noncompliant 

with their reporting. IRS’s Engineering Department, which is part of the 

Large Business and International (LB&I) division, also provides in-house 

expertise on valuation issues and can be called upon when IRS discovers 

a valuation issue during an examination. SB/SE examination officials 

have developed additional guidance on IRAs for examiners’ continuing 

professional education.

In tax year 2010 (the last full 

available year), AUR assessed additional taxes of $88 million for about 

226,000 tax returns with IRA discrepancies. IRS continues to take action 

aimed at noncompliance by taxpayers who fail to take required minimum 

distributions or contribute more than the allowable limits. In addition to 

outreach efforts targeting these rules, W&I held two tests sending 

taxpayers soft notices—letters that require no action on the taxpayer’s 

part but encourage the taxpayer to check his or her return for errors. 

These tests were intended to improve IRA compliance without IRS having 

to invest audit resources. The December 2013 test reminded taxpayers 

that they need to take a required distribution, and the February 2014 test 

targeted taxpayers who made excess contributions. As of October 2014, 

IRS was collecting test data, such as whether taxpayers plan to correct 

the errors, for use in evaluating future soft notice efforts or whether other 

compliance activities are needed.

SB/SE also has conducted special compliance initiative projects (CIP) to 

identify patterns of IRA noncompliance and better allocate examination 

 

87For more details on our methodology, see appendix I.

IRS Relies on the 

Automated Underreporter

Program and Field 

Examinations to Enforce 

IRA Tax Laws and Has 

Targeted Abusive IRA 

Transactions
 

Page 45 GAO-15-16 Individual Retirement Accounts

resources and education efforts. Since 2007, CIPs have targeted excess 

contributions, early distributions, and taxes owed on Roth IRA 

conversions.

Also led by SB/SE examiners, the Abusive Transactions and Technical 

Issues (ATTI) Program has targeted abusive schemes using IRAs. ATTI 

generally gets leads for investigating individuals involved in IRA schemes 

from investigations and monitoring of promoters who market tax shelters. 

In 2012 (the last full year of available data), ATTI examined 95 taxpayers 

and assessed additional taxes totaling $15 million in IRA-related cases. 

Two types of abusive IRA transactions that IRS examination officials said 

they have focused on include:

• Roth IRA “stuffing”: This scheme involves shifting value through 

transactions that disguise Roth IRA contributions exceeding annual 

IRA limits, such as selling receivables at less than fair market value to 

a Roth IRA. In 2004, IRS determined that this abusive tax avoidance 

shelter is a listed transaction that taxpayers must report to IRS.88

Because IRA stuffing can involve improper valuation, IRS’s efforts in 

this area have the potential to detect abuse in asset valuation in the 

strategies that stakeholders told us could lead to multimillion dollar 

IRAs. In a 2012 briefing document, IRS examination officials said that 

noncompliance using this approach “could conceivably result in 

thousands of families living for generations without the need to 

contribute or pay federal income tax. IRS continues to monitor 

taxpayer attempts at Roth IRA stuffing.

• Self-dealing within an IRA: These are prohibited transactions in 

which a taxpayer in control of the IRA’s asset management ultimately 

benefits from the asset before retirement in violation of tax laws.89

Other IRS enforcement programs do not target IRA noncompliance but 

may refer IRA-related cases for field examination. Within LB&I, the Global 

Examples are having the IRA purchase a beachfront home as a 

rental, but the taxpayer uses it for herself, or an IRA owner drawing a 

salary from an IRA-invested business.

 

88 Internal Revenue Service, “Abusive Roth IRA Transactions,” Internal Revenue Bulletin 

No. 2004-4, Notice 2004-8 (Jan. 26, 2004).

89“Self-dealing” specifically refers to the prohibited transactions set forth in 26 U.S.C. 

§ 4975(c)(1)(D)-(F).
 

Page 46 GAO-15-16 Individual Retirement Accounts

High Wealth industry unit targets individual taxpayers with assets or 

earnings of tens of millions of dollars and, in looking at their complete 

financial picture and the enterprises they control, may notice possible 

noncompliance with a taxpayer’s IRA. Similarly, IRS Estate and Gift tax 

examiners may detect possible IRA noncompliance in reviewing a 

decedent’s estate tax return. IRS enforcement officials from SB/SE and 

TE/GE said that reliance on referrals from one division to another requires 

coordination, without which IRS may be vulnerable to noncompliance that 

spans division expertise. For example, asset valuation issues may 

originate in an employer DC plan before being rolled over to an IRA. 

TE/GE examiners would be responsible for valuation issues within a DC 

plan, and it may be many years before the noncompliance is discovered 

by an examiner auditing an individual tax return.

In 2008, IRS chartered an IMT—including representatives from SB/SE 

and TE/GE—to develop IRS-wide strategies and solutions to curb the 

proliferation of IRA abuse and potentially clarify and strengthen IRA tax 

laws. In 2009, the IMT suggested collecting additional data from 

custodians holding IRAs with hard-to-value nonpublic assets as an 

immediate step supporting a longer term strategy recommending 

legislative changes, among other things, to limit the types of IRA 

investments. By 2012, without progress on having IRS’s legislative 

proposals considered by Treasury, the IMT developed an interim strategy 

for IRS to move forward with increased data collection and draw more 

attention to IRA noncompliance.

IRS plans to evaluate more data on hard-to-value IRA assets that would 

help to refine its enforcement efforts. For tax year 2014 (to be filed in 

2015), IRS Form 5498 has new boxes for custodians to report the portion 

of the IRA FMV attributable to nonmarket assets as well as a box with 

codes describing the type of nonmarket assets, as shown in figure 9. Also 

for tax year 2014, custodians are to report similar information on Form 

1099-R identifying distributions of IRA assets that do not have a readily 

available FMV. The new reporting is optional for 2014, and IRS plans to 

require custodians to provide the information for tax year 2015 (to be filed 

in 2016). As of September 2014, IRS officials said that they will continue 

to assess comments from stakeholders about the form changes, but IRS 

does not anticipate changes to the timeline.

IRS Plans to Collect Data 

to Identify IRAs with 

Riskier Nonpublic Assets, 

and Examiner Use 

Depends on Digitizing the 

Data
Figure 9: Types of Assets Individual Retirement Account Custodians Will Identify on Form 5498 

Starting in Tax Year 2014. Interactive graphic



Print instructions For a print version of this graphic, go to appendix V.

Directions:

IRS says it will use boxes 15a and 15b highlighted in red below to ensure that IRA fair market values are 

accurately reported. Rollover box 15b to view the codes custodians will use to identify their assets.

Source: GAO summary of IRS information; PhotoDisc and IRS (images). | GAO-15-16

Page 47 GAO-15-16 Individual Retirement Accounts
 

Page 48 GAO-15-16 Individual Retirement Accounts

SB/SE examination officials said that the new Form 5498 data will help 

them better identify taxpayers with IRAs invested in nonpublicly traded 

assets. They said the data also will help them review the history of FMV 

reported.

Efficient use of the new Form 5498 and 1099-R data for examination case 

selection hinges on IRS’s ability to compile and analyze the new 

information on nonpublicly traded assets types and FMV. Custodians, like 

other third-party reporters, must file electronically if they submit 250 or 

more of one kind of information return.90 A specialty custodian submitting 

fewer than 250 forms currently may file on paper. An IRS Submissions 

Processing official told us about 1,400 custodians submitted only paper 

forms in tax year 2012. As previously reported, IRS historically has limited 

the use of electronically filed data for classification to only the types of 

data that are transcribed from paper-filed returns to assure that paperfiled returns are treated the same as electronic returns91

W&I’s Submission Processing office has requested transcription of the 

new IRA asset-type reporting that will be mandatory for 2015 forms to be 

filed in 2016. IRS prioritizes transcribing data based on a number of 

factors, such as physical capacity, as well as resources and funding. In 

June 2014, we reported that IRS faces budget uncertainty and indications 

are that its funding will be constrained for the foreseeable future.

Unless the new 

information is available electronically—most commonly achieved through 

data transcription—IRS classifiers will not be able to fully use the new 

information, undercutting IRS’s intention to more systematically identify 

IRAs with greater risk of noncompliance.

92

 

9026 C.F.R. § 301.6011-2(b)(1). IRS is generally prohibited from requiring those filing less 

than 250 returns annually from filing electronically. 26 U.S.C.§ 6011(e)(2)(A). Each type of 

information return is considered a separate return for determining the 250 threshold. 26 

C.F.R. § 301.6011-2(c)(1)(iii). 

As of 

October 2014, IRS has not finalized plans for making the data available 

91See GAO, Partnerships and S Corporations: IRS Needs to Improve Information to 

Address Tax Noncompliance, GAO-14-453 (Washington, D.C.: May 14, 2014); Tax 

Administration: IRS Could Improve Examinations by Adopting Certain Research Program 

Practices, GAO-13-480 (Washington, D.C.: May 24, 2013); and E-Filing Tax Returns: 

Penalty Authority and Digitizing More Paper Return Data Could Increase Benefits, 

GAO-12-33 (Washington, D.C.: Oct. 5, 2011). 

92See GAO, IRS 2015 Budget Long-Term Strategy and Return on Investment Data 

Needed to Better Manage Budget Uncertainty and Set Priorities, GAO-14-605 

(Washington D.C.: June 12, 2014) 
 

Page 49 GAO-15-16 Individual Retirement Accounts

electronically. The cost of transcribing the new data would be relatively 

small, as IRS estimated that about 9,000 Form 5498 submissions were 

filed on paper in 2013 out of more than 118 million filings.93 A similarly 

small percentage of Form 1099-R filings go to IRS on paper. IRS 

estimated for us that the annual labor cost for transcribing the forms 

would be $2,322 to $12,210.94

Custodian and taxpayer behavior could change because of heightened 

attention on nonpublic IRA assets with the new reporting and the potential 

for greater IRS scrutiny. Some custodians already restrict IRAs to holding 

only publicly traded investments, and the additional reporting for 

alternative assets may dissuade other custodians from holding IRAs with 

such assets. Furthermore, taxpayers who want to manipulate valuations 

will have less room to do so, since custodians will still report on the type 

of asset in the account. Increased reporting on alternative assets by 

custodians to IRS may encourage better compliance by some taxpayers. 

According to IRS examination and Chief Counsel officials, however, 

custodians may not always be able to get accurate asset information 

about IRAs if the IRA owner has day-to-day investment control, which 

could lead to unreliable Form 5498 reporting of asset types and FMV. It 

may be difficult to apply general penalties to custodians for third-party 

misreporting if the IRA owner is the source of the inaccurate FMV data.

However, noncompliance with IRA rules 

can result in sizable revenue losses if IRA transactions are misreported 

continuously over many years.

SB/SE examination officials said IRA noncompliance is difficult to pursue 

for a variety of reasons. First, some IRA cases—including the large-dollar 

IRA accumulation strategies cited by financial industry stakeholders—are 

about valuation issues. IRS officials said these issues are expensive to 

audit and often must be pursued through litigation in court. For example, 

IRS examination officials said that determining that an asset was 

 

93Internal Revenue Service, Calendar Year Projections of Information and Withholding 

Documents for the United States and IRS Campuses, Publication 6961 (Washington, 

D.C.: 2014). 

94The range is partly attributable to the different transcription systems that IRS could use. 

A W&I program analyst said that the estimates are for direct costs only and are dependent 

on programming changes being made to accommodate the record layout for transcription. 

IRS also estimates that it would cost as much as $38,000 in necessary programming for 

the transcription.

IRS Has Tried to Address 

Challenges in Auditing the 

Valuation of Nonpublic IRA 

Assets and Detecting 

Prohibited Transactions
 

Page 50 GAO-15-16 Individual Retirement Accounts

undervalued cannot be made without expensive auditing and litigation. 

Each case requires extensive resources, including significant time of 

examiners, engineers, appraisers, appeals officers, and attorneys and 

fees to obtain appraisals from external contractors, according to 

examination officials. Examination and Chief Counsel officials said that 

valuation cases are a matter of opinion, and typically involve taxpayers 

with lots of resources. Taxpayers can find appraisers who will value 

assets in an IRA the way they want, and IRS faces difficulty in that it has 

to procure and present its expert testimony about the valuation. An 

improper valuation made many years prior to its discovery by SB/SE also 

may fall outside the 3-year examination statute of limitations discussed 

above.95

Another challenge is uncertainty about how DOL and the courts might 

rule on a particular set of facts in potential prohibited transaction cases or 

the exemptions to prohibited transaction rules that DOL might grant. IRS 

examination and Chief Counsel officials said that in their informal 

consultation process, they have a good working relationship with DOL, 

and DOL officials generally agreed with this characterization. However, 

IRS Chief Counsel officials said “things can get complicated” between 

DOL setting the rules and IRS enforcing them during audits, as IRS may 

not be sure whether DOL thinks a particular transaction is legitimate.96

DOL also may grant exemptions to employer-sponsored IRA plans that 

IRS otherwise could have deemed noncompliant. When possible 

prohibited transactions arise during examination that might require DOL 

input, IRS examination officials reach out to DOL through TE/GE to 

ensure that IRS understands the ruling on the transaction correctly.97

 

95There is a 6-year statute of limitations for assessment if the taxpayer omits gross 

income in an amount that exceeds 25 percent of the gross income reflected on the return. 

Even if a substantial error is identified, the IRS generally will not go back more than the 

last six years. Also, the clock for the statute of limitations does not begin to run until all 

required tax returns are filed. As discussed below, IRS has considered legislative action to 

extend the statute of limitations to 6 years for all IRA activity. 

As 

with valuation, the statute of limitations poses obstacles to pursing 

96For example, IRS Chief Counsel officials said IRS has not completed an audit in which 

the founder stock purchase facts were present. DOL retains the ultimate authority to 

interpret whether such a transaction would constitute a prohibited transaction.

97For employer plans, IRS has a memorandum of understanding with DOL established in 

2003 setting out procedures for collaborating and coordinating in carrying out their joint 

oversight of prohibited transactions. An addendum issued in October 2013 added detail to 

the procedures for communicating and making referrals.
 

Page 51 GAO-15-16 Individual Retirement Accounts

prohibited transactions. According to IRS, abuses frequently are not 

reflected on any filed tax return and are difficult to detect within the 

general 3-year statute of limitation period. When certain prohibited 

transactions occur, the IRA loses its tax-favored status and is treated as 

distributing all of its assets at the FMV on the first day of the year when 

the prohibited transaction occurred. Once IRS examiners detect a 

prohibited transaction, the taxpayer can dispute when the income should 

have been reported.

There are few judicial opinions regarding prohibited transactions, 

according to IRS officials. They also said that the 2013 Tax Court ruling in 

Peek v. Commissioner (see text box) sets a useful precedent for 

increased IRS enforcement of the prohibited transaction in more complex, 

higher dollar value cases.98 Building on Peek, SB/SE is working on 

honing procedures for examiners to use in determining whether an IRA 

case may have violated prohibited transactions that are similar to the 

Peek case. IRS examination officials said that the process would help IRS 

make decisions about the validity of transactions without having to go to 

DOL for every case. They said that Peek will help them more confidently 

identify prohibited transactions and encourage custodians as well as IRA 

owners and their advisors to be more aware of what is noncompliant. As 

of September 2014, IRS said the fact-pattern was an ongoing effort.

 

98140 T.C. 216 (2013).
 

Page 52 GAO-15-16 Individual Retirement Accounts

Peek v. Commissioner Summary

Two individuals, Lawrence Peek and Darrell Fleck, each established traditional 

IRAs, rolled over funds from existing retirement accounts, set up a new 

corporation, and sold all of the stock of the corporation to the IRAs. They then 

used the funds from the sale of the stock to buy the assets of a business and 

executed personal loan guaranties with respect to that purchase. Thereafter, 

Peek and Fleck converted their traditional IRAs into Roth IRAs funded by the 

same stock. The Roth IRAs subsequently sold the now-significantly appreciated 

stock of the corporation and treated the gain as deferred. IRS asserted 

deficiencies against Peek and Fleck on the grounds that the loan guaranties 

were prohibited transactions. The Tax Court agreed and held that Internal 

Revenue Code § 4975(c)(1)(B) prohibits taxpayers from making loan guaranties 

either directly to their IRAs or indirectly to their IRAs through an entity owned by 

the IRAs. The Court further held that the IRAs ceased to qualify as IRAs when 

the prohibited transactions originally occurred and therefore the Roth IRAs were 

also void because the prohibited transaction continued as to those accounts. The 

Court also upheld accuracy-related penalties imposed by IRS. 

Peek and Fleck appealed the Tax Court decision. As of October, 10, 2014, the 

case before the Tenth Circuit Court of Appeals was still pending.

Source: Peek v. Commission 140 T.C. 216 (2013). | GAO-15-16

In 2009, the IMT proposed several legislative changes to address 

enforcement challenges IRS encounters in auditing IRA activity. These 

include: (1) limiting the types of investments IRAs can make to publicly 

traded or otherwise marketable securities with a readily ascertainable fair 

market value; (2) expanding the definition under “disqualified person” to 

address work performed by the IRA beneficiary’s siblings on behalf of the 

IRA-owned entity or operation; and (3) expanding the statute of limitations 

in Internal Revenue Code Sec. 6501 to 6 years for all IRA activity.99 The 

team’s 2009 legislative recommendations were approved by the Servicewide Compliance Strategy Executive Steering Committee in 2010.100

 

99The IMT also suggested changing rules about the duties and role of custodians with 

respect to appraisals and due diligence. In addition, the IMT suggested exploring 

custodian penalties either under existing code sections or through new legislation.

In 

2012, the issue management team met again to study abusive IRA trends 

and continued to recommend legislative change. As of September 2014, 

no further action has taken place. Ultimately, Treasury has to review all 

100 This Executive Steering Committee is a forum to develop a unified cross-divisional 

approach to compliance strategies needing collaboration, including emerging issue and 

abusive tax avoidance transactions.
 

Page 53 GAO-15-16 Individual Retirement Accounts

tax legislative proposals and presents the administration’s tax proposals 

for congressional consideration. In the fiscal year 2014 and 2015 

budgets, Treasury proposed an overall cap on tax-favored retirement 

saving accumulations.101

As IRS begins collecting data on nonpublic IRA assets from Form 5498, it 

will be positioned to quantify the number of IRAs and associated FMV 

held in hard-to-value asset types with greater compliance risk. As

discussed above, the new asset-type data—if available electronically—

will help IRS in selecting examination cases. IRS examination officials 

said that research using the new data could aid in developing the 

business case for further action to address noncompliance. Specifically, 

additional research by IRS could help to evaluate the feasibility of the 

proposals to require greater disclosure of potentially undervalued asset 

types as transactions of interest or require reporting of prohibited 

transactions as listed transactions. Moving forward with a service-wide 

strategy to target enforcement efforts would hinge on IRS first conducting 

the research to understand how many taxpayers and the reported 

amounts of IRA assets are at risk of noncompliance.

IRS has included taxpayer service and outreach in its strategies to 

improve compliance with IRA tax laws. As we reported in 2008, financial 

industry organizations and advisor representatives we interviewed 

complimented IRS Publication 590 Individual Retirement Arrangements 

(IRAs) (Publication 590) for translating the many complicated IRA 

contribution and distributions rules into “plain English” to help taxpayers 

comply.102

Insights about noncompliance detected by enforcement can help IRS 

identify opportunities to educate taxpayers on how to better comply. IRS 

has a system for examiners to communicate issues to IRS’s external 

communication office, Communication and Stakeholder Outreach. ATTI 

IRS continues to target outreach to help taxpayers understand 

minimum distribution requirements and IRA contribution limits.

 

101According to Treasury’s estimates, the Obama Administration’s fiscal year 2015 

proposal limiting the total accrual for tax-favored retirement benefits would generate an 

estimated $28.4 billion from 2015 through 2024. However, the Joint Committee on 

Taxation estimated that the Administration’s 2015 proposal would generate about $4.3 

billion for a similar period. 

102GAO-08-654. 

IRS Outreach and 

Education Increase 

Taxpayer Understanding 

of Complex IRA Rules but 

Are Not Explicit about the 

Risk of Alternative 

Investment 

Noncompliance
 

Page 54 GAO-15-16 Individual Retirement Accounts

chairs an emerging issues team that meets quarterly to address new 

compliance risks and may identify issues for the communications office. 

Research identifying the numbers and types of custodians and taxpayers 

holding hard-to-value assets could also help IRS target outreach activities 

and strategies for improving compliance with IRA asset valuation and 

prohibited transaction requirements. For example, IRS could provide 

notices targeting custodians and taxpayers with nonpublic IRA assets 

with a reminder about their responsibilities and the potential tax 

consequences of engaging in self-dealing and other prohibited 

transactions.

Examination officials said one challenge in educating the public is a 

promoter industry that advertises IRAs with alternative assets that also 

give taxpayers “checkbook access” (i.e., more control over IRA 

investment choices compared to other IRAs). These promoters might not 

disclose the compliance risks and responsibilities taxpayers take on when 

investing in nonpublicly traded assets. The promoters’ advertising may 

leave less sophisticated taxpayers at risk for unintentional noncompliance 

with IRA laws. IRS guidance targeting attention on the compliance 

responsibilities and risks inherent in investing in nonpublic IRA assets and 

directly controlling IRA assets could help taxpayers make more informed 

decisions. In 2009, IRS issued a revised publication explicitly warning that 

it does not approve or endorse particular types of assets for IRAs.103

 

103IRS, An Important Message for Taxpayers with IRAs, Publication 3125 (10-2009), 

Catalog Number 26091B. 

Targeted at protecting taxpayers from fraudulent IRA sales pitches, this 

notice advises taxpayers to proceed with caution when encouraged to 

invest in a general partnership or limited liability company. Publication 

590 describes what prohibited transactions are but does not make the 

explicit connection that certain asset types pose greater potential for 

prohibited transactions. As a result, some taxpayers may be unaware that 

certain IRA investment decisions have greater risks for committing 

prohibited transactions that could trigger loss of their IRAs’ tax-favored 

status. In contrast, for custodians, the IRS instructions for Forms 5498 

and 1099-R plainly state that nonpublic assets and assets under IRA 

owner control have a greater potential for prohibited transactions. General 

reminders are a low cost way to draw attention and caution taxpayers 

about the compliance risks associated with certain IRA choices.
 

Page 55 GAO-15-16 Individual Retirement Accounts

Congress envisioned IRAs as a moderate tax benefit to help individuals 

not covered by employer-sponsored plans to obtain income sufficient for 

a secure retirement, not as a vehicle for accumulating significant taxpreferred wealth. Without further consideration from Congress, individuals 

with these limited, occupationally related opportunities to engage in 

sophisticated investment strategies may accumulate considerable taxpreferred wealth in IRAs. The result is a revenue loss to the federal 

government through a circumvention of the longstanding rationale for IRA 

contribution limits. However, Congress can reorient existing laws to 

address the excesses of these strategies, so that all taxpayers have 

similar opportunities to reap the benefits of IRAs. Congress could, for 

example, address the build-up of unnecessarily large IRAs in a variety of 

ways: by limiting the types of investments held in IRAs, enforcing 

standards such as a minimum required value for investments in an IRA, 

or by setting a ceiling on accumulations in an IRA and requiring an 

immediate distribution of balances above that ceiling. Without such a 

readjustment, the intended broad-based tax benefits of IRAs will continue 

to be skewed towards a select group of investors.

With respect to individual taxes, IRS has dedicated enforcement 

resources to identifying taxpayers who may be building IRA balances 

improperly. It is critical to collect data on alternative IRA assets with a 

higher risk of noncompliance, given that the valuation issues at the heart 

of the strategies to build large IRAs pose high costs for IRS enforcement 

and carry a risk of IRS failing to prove wrongdoing in court. Moving 

forward, IRS has the opportunity to use the data to further research IRA 

noncompliance, such as whether IRAs invested in nonpublicly traded 

shares are predicated on noncompliance, as industry stakeholders we 

spoke with allege. Such research is a necessary step toward designating 

strategies leading to high-dollar IRAs as problematic and targeting 

examination resources efficiently. Positioning IRS to take full advantage 

of the new Form 5498 data hinges on IRS digitizing the data for 

compliance case selection and examination. While IRS estimates 

capturing the data for the relatively few paper filing would add small costs 

to processing the forms, the benefits—in terms of less forgone revenue, a 

greater perception of a fair tax system, and better use of enforcement 

resources—would outweigh those costs.

Existing data from DOL and SEC on employer-sponsored plans and the 

performance fees charged by private equity firms and hedge funds 

provide information that could also assist IRS in assessing the valuation 

of assets in IRAs. We previously recommended that DOL and others 

improve the usefulness, reliability, and comparability of Form 5500 data in 

Conclusions
 

Page 56 GAO-15-16 Individual Retirement Accounts

part by providing more transparency into assets held in employersponsored plans. Providing this information is important because it helps 

regulators better understand the types of assets held in tax-favored 

retirement accounts. If DOL were required to improve the transparency of 

assets held in employer-sponsored plans, IRS could have better 

information on where the assets in a large IRA may have originated. In 

addition, data about how private equity firms and hedge funds distribute 

their carried interest could also be of use to IRS as it decides whether to 

move forward with a case against an IRA owner based on valuation.

The new asset-type data also gives IRS more information about IRAs at 

greater risk for self-dealing abuse and other prohibited transactions. As 

IRS increases it examination presence, evidence on the obstacles 

encountered in pursuing prohibited transactions and noncompliant activity 

engaged in for years may demonstrate whether it would be worthwhile to 

change the current 3-year statute of limitations for tax assessment with 

regard to IRAs.

In an environment where less-sophisticated taxpayers can be lured by 

“checkbook access” to IRAs invested in unconventional assets, IRS has 

an opportunity to warn taxpayers about the added responsibilities and 

compliance risks inherent in investing and managing alternative assets in 

IRAs. Current IRA guidance aimed at taxpayers does not acknowledge 

the greater risks for committing prohibited transactions—even though 

Form 5498 instructions for custodians plainly make this point. Without an 

explicit caution, taxpayers may continue to make un-informed decisions 

about IRA investments that put them at a greater risk of noncompliance 

and loss of their IRAs’ tax-favored status.

To promote retirement savings without creating permanent tax-favored 

accounts for a small segment of the population, Congress should 

consider revisiting the use of IRAs to accumulate large balances and 

consider ways to improve the equity of the existing tax expenditure on 

IRAs. Options could include limits on (1) the types of assets permitted in 

IRAs, (2) the minimum valuation for an asset purchased by an IRA, or (3) 

the amount of assets that can be accumulated in IRAs and employersponsored plans that get preferential tax treatment.

Matter for 

Congressional 

Consideration
 

Page 57 GAO-15-16 Individual Retirement Accounts

We are making five recommendations to the Commissioner of Internal 

Revenue.

To improve IRS’s ability to detect and pursue noncompliance associated 

with undervalued assets sheltered in IRAs and prohibited transactions, 

we recommend that the Commissioner of Internal Revenue: 

• Approve plans to fully compile and digitize the new data from 

electronic and paper-filed Form 5498s to ensure the efficient use of 

the information on nonpublicly traded IRA assets.

• Conduct research using the new Form 5498 data to identify IRAs 

holding nonpublic asset types, such as profits interests in private 

equity firms and hedge funds, and use that information for an IRSwide strategy to target enforcement efforts.

• Work in consultation with the Department of the Treasury on a 

legislative proposal to expand the statute of limitations on IRA 

noncompliance to help IRS pursue valuation-related misreporting and 

prohibited transactions that may have originated outside the current 

statute’s 3-year window.

To help taxpayers better understand compliance risks associated with 

certain IRA choices and improve compliance, we recommend that the 

Commissioner of Revenue: 

• Building on research data on IRAs holding nonpublic assets, identify 

options to provide outreach targeting taxpayers with nonpublic IRA 

assets and their custodians, such as reminder notices that engaging 

in prohibited transactions can result in loss of the IRA’s tax-favored 

status.

• Add an explicit caution in Publication 590 Individual Retirement 

Arrangements (IRAs) for taxpayers about the potential risk of 

committing a prohibited transaction when investing in nonpublicly 

traded assets or directly controlling IRA assets.

We provided a draft of this report to the Secretary of the Treasury, the 

Commissioner of Internal Revenue, the Secretary of Labor, and the Chair 

of the SEC for comment. In a September 18, 2014, letter (see app. VI), 

the IRS Deputy Commissioner for Services and Enforcement generally 

agreed with our recommendations. On October 2, 2014, the Associate 

Director and Chief Counsel for SEC’s Division of Investment Management 

Recommendations for 

Executive Action

Agency Comments
 

Page 58 GAO-15-16 Individual Retirement Accounts

voiced various legal and other concerns regarding implementation of a 

recommendation, designed to assist the IRS for tax reporting purposes, to 

expand reporting requirements on private equity firms and hedge funds to 

require disclosure of a general partner’s agreements for distributing 

carried interest. As a result, we redirected the recommendation to IRS as 

part of an existing recommendation that IRS conduct research using new 

Form 5498 data on non-public IRA assets. We shared the revised 

recommendation with IRS officials, who continued to agree with it. IRS, 

Treasury, SEC, and the Department of Labor provided separate technical 

comments, which we incorporated in our report where appropriate. 

In the IRS letter, the Deputy Commissioner emphasized that rules 

governing IRAs can be complicated for both the IRS and taxpayers. The 

Deputy Commissioner also highlighted efforts that IRS has undertaken to 

conduct enforcement, such as the AUR program and compliance initiative 

projects. The Deputy Commissioner acknowledged that IRA 

noncompliance can span IRS units and that the issue management team 

allowed cross-functional coordination to address noncompliance.

IRS agreed with our assessment that digitizing IRA information return 

data could improve case selection. However, the Deputy Commissioner 

said that IRS is faced with competing funding priorities and will continue 

to evaluate the priority of digitizing additional Form 5498 information.

IRS also agreed to conduct research using the new Form 5498 data to 

identify IRAs holding nonpublic assets and use the information for an 

IRS-wide strategy to target enforcement efforts. The Deputy 

Commissioner said that the SB/SE Abusive Transactions and Technical 

Issues function has begun to develop research objectives to refine 

enforcement efforts using the additional information that IRS will obtain 

from the revised Form 5498 data.

The Deputy Commissioner agreed that legislation to extend the period of 

limitations for assessment of tax associated with IRA noncompliance 

would remove an obstacle to IRS efforts to pursue identified IRA 

noncompliance. The Deputy Commissioner added that IRS will discuss 

with Treasury proposals regarding the statute of limitations on assessing 

tax associated with IRA noncompliance.

The Deputy Commissioner said IRS agreed to build on research data on 

IRAs holding nonpublic assets to identify options to provide outreach, 

such as reminder notices. The Deputy Commissioner said that as IRS 

analyzes the data, it will identify options to provide targeted outreach to 
 

Page 59 GAO-15-16 Individual Retirement Accounts

taxpayers with IRAs holding such assets to increase awareness of 

prohibited transaction rules and penalties for failure to comply with these 

rules.

The Deputy Commissioner agreed with our recommendation to add an 

explicit caution in Publication 590 for taxpayers about the risk of 

committing a prohibited transaction when investing in nonpublicly traded 

assets or directly controlling IRA assets. 

As arranged with your office, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days from the 

date of this letter. At that time, we will send copies to Secretary of the 

Treasury, Secretary of Labor, IRS and SEC. In addition, the report will be 

available at no charge on the GAO website at http://www.gao.gov. 

If you or your staff has any questions about this report, please contact 

James R. McTigue, Jr. at (202) 512-9110 or Charles A. Jeszeck at (202) 

512-7215. You may also reach us by email at mctiguej@gao.gov or 

jeszeckc@gao.gov. Contact points for our offices of Congressional

Relations and Public Affairs are on the last page of this report. GAO staff 

members who made major contributions to this report are listed in 

appendix VII.

Sincerely yours,

James R. McTigue, Jr.

Director, Tax Issues

Strategic Issues

Charles A. Jeszeck

Director, Education, Workforce,

and Income Security
Appendix I: Objectives, Scope, and 

Methodology

Page 60 GAO-15-16 Individual Retirement Accounts

This report: (1) describes the number and types of taxpayers with 

individual retirement accounts (IRA) and the size of IRA balances in terms 

of aggregate fair market value (FMV), adjusted gross income (AGI), filing 

status and age; (2) examines how IRA balances can become large; and 

(3) assesses how the Internal Revenue Service (IRS) ensures that 

taxpayers with IRAs comply with IRA tax laws.

To describe the taxpayers with IRAs by the accumulated balances in 

terms of FMV, AGI, filing status and age, we used an Internal Revenue 

Service (IRS) Statistics of Income (SOI) sample of individual income tax 

returns for tax year 2011 (the most recent year available) as well as IRS 

“IRA Contribution Information” Form 5498 data associated with the SOI 

sample. Our analysis of SOI statistical data is subject to sampling errors 

because the SOI data are based on a sample of tax returns as filed.1

We aggregated the total FMV for all IRAs associated with a return 

(including inherited IRAs as IRS data do not readily identify inherited 

IRAs) to obtain an accumulated IRA balance. We used the taxpayers as 

our unit of analysis. Taxpayers filing joint returns are treated as a single 

unit and the IRAs owned by both spouses are aggregated. Our analysis 

of SOI data is subject to errors from sampling as well as from the small 

sample of returns with higher IRA balances. About 99 percent of 

taxpayers with IRAs have accumulated balances of $1 million or less. 

However our group of interest was that small group of taxpayers with 

large IRA balances and estimates based on this small group may not be 

In 

addition, the data do not reflect IRS audit results. The SOI sample of 

individual income tax returns does not include those who do not file a 

return. However, some IRA custodians submitted Form 5498s on 

nonfilers. An IRS official said SOI attempts to include additional 

information on nonfilers by sampling documents, including Form 5498s, 

which have no associated individual income tax returns. Form 5498 filings 

without a matching return were sampled at approximately 1:1,000. In 

2011, about 3,800 nonfilers were sampled, none of whom had unusually 

large IRA balances.

 

1

All percentage estimates derived from samples used in this report have 95 percent 

confidence intervals that are within plus or minus 1 percentage point of the estimates 

themselves, unless otherwise specified. All other estimates in this report have 95 percent 

confidence intervals that are within plus or minus 15 percent of the estimates themselves, 

unless otherwise specified. 

Appendix I: Objectives, Scope, and 

Methodology

Measuring IRA Balances 

and What Is Considered 

Large
Appendix I: Objectives, Scope, and 

Methodology

Page 61 GAO-15-16 Individual Retirement Accounts

precise and have very wide associated confidence intervals. Because of 

the skewness of the distribution for taxpayers with IRA balances greater 

than $25 million, we used a statistical technique referred to as 

bootstrapping or resampling to estimate the confidence interval.

About 5 percent of the estimated taxpayers with IRAs had at least one 

associated IRA with blank FMV information. We treated the blank FMVs 

as zeros. If these IRAs did not, in fact, have zero balances, they could 

affect our estimates’ upper bound considerably. However, IRS officials 

told us they generally treat blank FMVs as zeros based on their 

understanding of IRA custodians filing practice. We compared Form 5498 

information for particular IRA owners to information from their income tax 

and Form 1099R information returns. Working with IRS, we identified a 

number of reasons why blank FMVs could be zeros such as: (1) the entire 

account balance was distributed; (2) the balance was rolled over to 

another IRA; (3) the owner of the IRA was deceased and IRA assets were 

transferred to a beneficiary; (4) tax year contributions were made to a 

new IRA account for a prior calendar year.

In addition to the number of taxpayers and FMVs for their aggregated 

IRAs, we presented the data for two separate groups: 1) those with IRA 

balances of $1 million or less and 2) those with IRA balances of more 

than $5 million and the confidence intervals associated with the 

estimates. We do not report on taxpayers with IRA balances greater than

$1 million to $5 million to avoid disclosure of taxpayer information.

We compared the two groups on three types of IRAs—traditional, Roth, 

and other IRAs that included employer-sponsored SEP and SIMPLE 

IRAs. We used eight categories of AGI, which is the individual’s gross 

income minus adjustments that include deductions for trade or business 

expenses, losses from the sale or exchange of property, contributions to 

pension and other retirement plans and alimony payments. Our AGI 

categories were

• $0 or less,

• $1 to $20,000,

• $20,001 to $50,000,

• $50,001 to $100,000,

• $100,001 to $200,000,

• $200,001 to $500,000,

• $500,001 to $1,000,000, and

• Greater than $1,000,000.
Appendix I: Objectives, Scope, and 

Methodology

Page 62 GAO-15-16 Individual Retirement Accounts

About 1 percent to 2 percent of the taxpayers reported zero AGI. We did 

not use the modified AGI used to determine eligibility for IRA contributions 

which added certain items such as foreign housing expenses and student 

loan deductions back to the AGI. For the filing status comparison, we 

used three categories—single, married filing jointly and others, which 

included married filers who were filing separately, head of household, and 

qualifying widow(er). For the comparison of age we used 2 categories: 

those younger than age 65 and those age 65 and older. As our unit of 

analysis was the taxpaying unit, our age-65-and-older category included 

the filer, spouse, or both who were age 65 or older. To assess the 

reliability of the data we used, we reviewed IRS documentation and 

interviewed agency officials familiar with the data. We determined that 

these data were sufficiently reliable for the purposes of this report. 

However, the IRS SOI sample may not provide a precise estimate of the 

number of taxpayers or other quantities when the number of taxpayers in 

a particular reporting group is very small.2

To provide perspective on what might be considered a large IRA, we 

illustrated how much an individual could potentially accumulate in an IRA 

based on the statutory limits on annual contributions (see table 5) 

Specifically, we developed one scenario assuming maximum IRA 

contributions from 1975 through 2011 (the same year as our SOI 

analysis). Given that rollovers from employer plans have become the 

predominant source of funds into IRAs, we also developed a second 

scenario assuming the maximum combined employer and employee 

contributions from 1980 to 2011.3 For simplicity, the defined contribution 

(DC) plan scenario assumed an individual participating in a single 

employer plan and rolling over a DC balance into a newly established IRA 

in 2011.4

 

2

Estimates based on the small group of taxpayers we studied may have very wide 

confidence intervals. Our estimates related to the larger IRA balances are less precise as 

the number of filers in these categories decreased.

Both scenarios also assumed maximum catch-up contribution 

for individuals age 50 and older beginning in 2002. Table 6 shows the 

assumed contributions for the IRA and DC plan scenarios. The two 

3

The predominant type of defined contribution (DC) plan, the 401(k) plan, became 

available in 1980. Prior to 1987, DC plans had a single limit on employer and employee 

contributions. The Tax Reform Act of 1986 imposed a limit on employee deferral 

contributions, but still maintained the total limit on annual contributions. 

4

An individual with multiple employers could participate in more than one employer DC 

plan. Also, an individual could roll over a lump sum distribution from an employer DC plan.
Appendix I: Objectives, Scope, and 

Methodology

Page 63 GAO-15-16 Individual Retirement Accounts

scenarios are intended to illustrate the upper bound on total contributions 

over time based on the statutory annual limits for each type of taxpreferred retirement account and do not reflect how much individuals 

typically choose to contribute.5 Our scenarios illustrate balances 

accumulated by an individual in an IRA or DC plan. For a married couple 

filing jointly, both spouses in concept could contribute at the statutory 

maximum.6

Table 5: Annual Contribution Dollar Limits for Individual Retirement Plans (IRA) and Defined Contribution (DC) Plans, 1975-

2014 

Year

IRAa DC plan

Annual contributions

b

Catch-upc Employeeelective deferral

Combined employee and 

employer contributions d Catch-up

1975

c, d

1,500 N/A N/A N/A N/A

1976 1,500 N/A N/A N/A N/A

1977 1,500 N/A N/A N/A N/A

1978 1,500 N/A N/A N/A N/A

1979 1,500 N/A N/A N/A N/A

1980 1,500 N/A N/A 36,875 N/A

1981 1,500 N/A N/A 41,500 N/A

1982 2,000 N/A N/A 45,475 N/A

1983 2,000 N/A N/A 30,000 N/A

1984 2,000 N/A N/A 30,000 N/A

1985 2,000 N/A N/A 30,000 N/A

1986 2,000 N/A N/A 30,000 N/A

1987 2,000 N/A 7,000 30,000 N/A

1988 2,000 N/A 7,313 30,000 N/A

1989 2,000 N/A 7,627 30,000 N/A

1990 2,000 N/A 7,979 30,000 N/A

 

5

GAO, Private Pensions: Pension Tax Incentives Update,GAO-14-334R (Washington, 

D.C.: Mar. 20, 2014); Private Pensions: Some Key Features Lead to an Uneven 

Distribution of Benefits, GAO-11-333 (Washington, D.C.: Mar. 30, 2011); and Private 

Pensions: Issues of Coverage and Increasing Contribution Limits for Defined Contribution 

Plans, GAO-01-846 (Washington, D.C: Sept. 17, 2001). 

6

For our analysis of IRA balances using SOI estimates, we examined aggregate IRA 

balances by taxpaying unit. A tax return could include more than one person, such as a 

married couple filing a joint return.
Appendix I: Objectives, Scope, and 

Methodology

Page 64 GAO-15-16 Individual Retirement Accounts

Year

IRAa DC plan

Annual contributions

b

Catch-upc Employee

elective deferral

Combined employee and 

employer contributions d Catch-up

1991

c, d

2,000 N/A 8,475 30,000 N/A

1992 2,000 N/A 8,728 30,000 N/A

1993 2,000 N/A 8,994 30,000 N/A

1994 2,000 N/A 9,240 30,000 N/A

1995 2,000 N/A 9,240 30,000 N/A

1996 2,000 N/A 9,500 30,000 N/A

1997 2,000 N/A 9,500 30,000 N/A

1998 2,000 N/A 10,000 30,000 N/A

1999 2,000 N/A 10,000 30,000 N/A

2000 2,000 N/A 10,500 30,000 N/A

2001 2,000 N/A 10,500 35,000 N/A

2002 3,000 500 11,000 40,000 1,000

2003 3,000 500 12,000 40,000 2,000

2004 3,000 500 13,000 41,000 3,000

2005 4,000 500 14,000 42,000 4,000

2006 4,000 1,000 15,000 44,000 5,000

2007 4,000 1,000 15,500 45,000 5,000

2008 5,000 1,000 15,500 46,000 5,000

2009 5,000 1,000 16,500 49,000 5,500

2010 5,000 1,000 16,500 49,000 5,500

2011 5,000 1,000 16,500 49,000 5,500

2012 5,000 1,000 17,000 50,000 5,500

2013 5,500 1,000 17,500 51,000 5,500

2014 5,500 1,000 17,500 52,000 5,500

Source: GAO analysis of legislation and Internal Revenue Service publications.| GAO-15-16

Notes: Generally, individual contributions to an IRA or DC plan are limited to the lesser of a specific 

dollar amount or 100 percent of taxable compensation for the year. For a married couple filing a joint 

tax return, combined IRA contributions cannot exceed the taxable compensation reported on the joint 

return regardless of which spouse earned the compensation. Compensation generally includes 

wages, salaries, professional fees, bonuses, and other amounts taxpayers receive for providing 

personal services and from commissions, self-employment income, alimony and separate 

maintenance payments taxpayers receive, and nontaxable combat pay. Taxable compensation does 

not include earnings and profits from property, pension or annuity income, deferred compensation 

received, income from partnerships for which the taxpayer did not provide services that are material 

income-producing factors, and any amounts excluded from income, such as foreign earned income 

and housing costs. N/A = Not applicable. 

a

Under the Employee Retirement Income Security Act of 1974, the contribution limit was originally the 

lesser of $1,500 or 15 percent of the individual’s compensation for individuals not covered by 

employer plans. Pub. L. No. 93-406, § 2002(a), 88 Stat. 829, 958(Sept. 2, 1974). The Economic 

Recovery Tax Act of 1981 increased the contribution limit to the lesser of $2,000 or 100 percent of the 

individual’s compensation and allowed contributions by those covered by employer plans. Pub. L. No. 

97-34, § 311, 95 Stat. 172, 274-283 (Aug. 13, 1981). The Tax Reform Act of 1986 restricted eligibility 
Appendix I: Objectives, Scope, and 

Methodology

Page 65 GAO-15-16 Individual Retirement Accounts

for tax-deductible contributions for individuals covered by employer plans depending on income and 

filing status. Pub. L. No. 99-514, § 1101(a), 100 Stat. 2085, 2411-13 (Oct. 22, 1986). The Taxpayer 

Relief Act of 1997 established and allowed after-tax contributions to Roth IRAs. Pub. L. No. 105-34, 

§ 302(a), 111 Stat. 788, 825-28 (Aug. 5, 1997). The Economic Growth and Tax Relief Reconciliation 

Act of 2001 increased the contribution limit in years beginning in 2002 and indexed the limit for 

inflation (in $500 increments) beginning in 2008 through years beginning in 2010. Pub. L. No. 107-16, 

§§ 601(a) and 901, 115 Stat. 38, 94-95 and 150 (June 7, 2001). The Pension Protection Act of 2006 

made indexing for contribution limits permanent. Pub. L. No. 109-280, § 811, 120 Stat. 780, 996 (Aug. 

17, 2006). 

b

Provisions establishing the most predominant type of DC plan, the 401(k) plan, became effective 

pursuant to the Revenue Act of 1978. Pub. L. No. 95-600, § 135, 92 Stat. 2763, 2785-87 (Nov. 6, 

1978). The Tax Equity and Fiscal Responsibility Act of 1982 reduced the maximum allowable annual 

contribution to a DC plan to the lesser of $30,000 or 25 percent of compensation and suspended all 

cost of living adjustments until 1986. Pub. L. No. 97-324, § 235(a), 96 Stat. 324, 505 (Sept. 3, 1982).

The Tax Reform Act of 1986 imposed a limit on employee elective tax-deferred contributions, but 

maintained the overall annual contribution limit of $30,000 for all employer and employee 

contributions. Pub. L. No. 99-514, § 1105(a), 100 Stat. 2085, 2417-19 (Oct. 22, 1986). The Economic 

Growth and Tax Relief Reconciliation Act of 2001 increased the contribution limit and the employees 

elective deferral for years beginning in 2002 and indexed the limit for elective deferrals for inflation (in 

$500 increments) beginning in 2007 through 2010. Pub. L. No. 107-16, §§ 611(b,) (d), and 901, 115 

Stat. 38, 97-98 and 150 (June 7, 2001). The Pension Protection Act of 2006 made indexing for 

contribution limits permanent. Pub. L. No.109-280, § 811, 120 Stat. 780, 996 (Aug. 17, 2006). 

c

Catch-up contributions for individuals age 50 and older were first allowed in 2002 pursuant to the 

Economic Growth and Tax Relief Reconciliation Act of 2001. Pub. L. No. 107-16, §§ 601(a) and 

631(a), 115 Stat. 38, 94, 111-12 (June 7, 2001). Catch-up provisions were made permanent pursuant 

to the Pension Protection Act of 2006. Pub. L. No. 109-280, § 811, 120 Stat. 780, 996 (Aug. 17, 

2006).

d

The statutory elective deferral and catch-up contribution limits apply to employees who participate in 

401(k), 403(b), most 457 plans, and the Thrift Savings Plan for federal employees. In addition to the 

statutory limits, employers may set plan-specific limits, in part, to ensure that the plans they sponsor 

pass statutory and regulatory requirements, such as the requirement that contributions or benefits not 

be skewed too heavily in favor of highly compensated employees.

Table 6: Assumed Contributions (Including Catch-up) from 1975 to 2011 under Two 

Illustrative Scenarios 

Year

IRA maximum 

contributions, 1975-2011

Maximum DC employer and 

employee contributions, 1980-2011 a

1975

b

1,500 N/A

1976 1,500 N/A

1977 1,500 N/A

1978 1,500 N/A

1979 1,500 N/A

1980 1,500 36,875

1981 1,500 41,500

1982 2,000 45,475

1983 2,000 30,000

1984 2,000 30,000

1985 2,000 30,000

1986 2,000 30,000
Appendix I: Objectives, Scope, and 

Methodology

Page 66 GAO-15-16 Individual Retirement Accounts

Year

IRA maximum 

contributions, 1975-2011

Maximum DC employer and 

employee contributions, 1980-2011 a

1987

b

2,000 30,000

1988 2,000 30,000

1989 2,000 30,000

1990 2,000 30,000

1991 2,000 30,000

1992 2,000 30,000

1993 2,000 30,000

1994 2,000 30,000

1995 2,000 30,000

1996 2,000 30,000

1997 2,000 30,000

1998 2,000 30,000

1999 2,000 30,000

2000 2,000 30,000

2001 2,000 35,000

2002 3,500 41,000

2003 3,500 42,000

2004 3,500 44,000

2005 4,500 46,000

2006 5,000 49,000

2007 5,000 50,000

2008 6,000 51,000

2009 6,000 54,500

2010 6,000 54,500

2011 6,000 54,500

Total contributions $99,500 $1,185,350

Source: GAO analysis | GAO-15-16

Notes: Totals reflect maximum contributions under each scenario and do not reflect any investment 

returns, investment expenses, or administrative fees. N/A = Not applicable. 

a

The IRA scenario reflects maximum allowable contributions (including the catch-up limit for those 

age 50 and older) to a traditional IRA. Individuals may contribute to a traditional IRA, a Roth IRA or 

both, but the total annual IRA contribution for all IRAs cannot exceed the lesser of the annual amount 

or total taxable compensation. For a Roth IRA, the maximum contributions for 1998 to 2011 would be 

$57,000.

b

This scenario reflects the upper bound on annual contributions (including the catch-up limit for those 

age 50 and older) to a single employer DC plan. Our prior work has shown that few contribute at this 

level in any given year. For example, about one-tenth of one percent of DC plan participants 

contributed at or above the combined employer-employee contribution limit for 2010.
Appendix I: Objectives, Scope, and 

Methodology

Page 67 GAO-15-16 Individual Retirement Accounts

To illustrate how much an individual could accumulate under each 

scenario, we reviewed historical stock returns, specifically the Standard & 

Poor’s 500 broad stock index return. Intended to illustrate possible 

accumulations based on the upper bounds on contributions, the two 

contribution scenarios assuming 100 percent investment in the stock 

market are not intended to represent how individuals typically choose to 

invest. As shown in table 7, we also looked at a range of other possible 

asset allocations: (1) a 70-percent investment in the S&P 500 and a 30-

percent investment in corporate bonds; (2) a glide path starting with a 70-

percent investment in the S&P 500 and a 30-percent investment in 

corporate bonds, and shifting over time to end with a 30-percent 

investment in the S&P 500 and a 70-percent investment in corporate 

bonds; (3) a 30-percent investment in the S&P 500 and a 70-percent 

investment in corporate bonds; and (4) a 100-percent investment in 

corporate bonds. For the asset allocations with a mix of stocks and 

bonds, the portfolio was rebalanced annually. We also calculated the DC 

contribution scenario with investment returns equal to historical interest 

rates reported by the Social Security trustees for special-issue 

government bonds as a proxy for an accumulation with a less aggressive 

investment allocation.

7

 The scenarios do not reflect any investment or 

administrative fees and expenses.8 Likewise, the scenarios do not reflect 

any leakage from withdrawals or employer plan loans over the period.9

 

7

We previously calculated the IRA contribution scenario showing investment returns equal 

to historical interest rates reported by the Social Security trustees for special issue 

government bonds. See GAO, Individual Retirement Accounts: Preliminary Information on 

IRA Balances Accumulated as of 2011, GAO-14-878T (Washington, D.C.: Sept. 16, 

2014).

8

Fees charged for such services as investment management, recordkeeping, consulting, 

and customer service, can also reduce accumulated savings. GAO, 401(k) Plans: 

Increased Educational Outreach and Broader Oversight May Help Reduce Plan Fees, 

GAO-12-325 (Washington, D.C.: Apr. 24, 2012). An additional 1 percent annual charge for 

fees could reduce an individual account balance by 17 percent over a 20 year period. 

GAO, Private Pensions: Changes Needed to Provide 401(k) Plan Participants and the 

Department of Labor Better Information on Fees, GAO-07-21 (Washington, D.C.: Nov. 16, 

2006). DC plan fees can range from an average of 0.15 to 1.33 percent of assets 

depending on the size of the plan. GAO, 401(k) Plans: Increased Educational Outreach 

and Broader Oversight May Help Reduce Plan Fees, GAO-12-325 (Washington, D.C.: 

Apr. 24, 2012).

9

As with retirement plans, leakages from IRA accounts may occur when IRA owners use 

their accumulated savings prior to retirement for nonretirement purposes thereby reducing 

the accumulated balances. GAO, 401(k) Plans: Policy Changes Could Reduce the Longterm Effects of Leakage on Workers’ Retirement Savings, GAO-09-715 (Washington, 

D.C.: Aug. 28, 2009).
Appendix I: Objectives, Scope, and 

Methodology

Page 68 GAO-15-16 Individual Retirement Accounts

We also calculated the rate of return necessary to accumulate a balance 

of $1 million or $5 million under each scenario.

Table 7: Alternate Asset Allocation Assumptions and Ending Balances for the 

Maximum Combined Employer-Employee Contribution Scenario, 1980-2011

Asset allocation

Ending balance

($millions)

100 percent S&P 500 stock investment 7.27

Mix of 70 percent S&P 500 and 30 percent in corporate bonds 7.88 a

Glide path starting with 70-percent investment in the S&P 500 and 

30-percent investment in corporate bonds, and shifting over time to 

end with 30-percent investment in the S&P 500 and 70 percent 

investment in corporate bonds 8.59 a

Mix of 30 percent S&P 500 and 70 percent in corporate bonds 7.74 a

100 percent investment in corporate bonds 7.08

Investment returns equal to historical interest rates for Social 

Security 3.38

Source: GAO analysis. | GAO-15-16

Note: This scenario reflects the upper bound on annual contributions (including the catch-up limit for 

those age 50 and older) to a single employer DC plan. Our prior work has shown that few contribute 

at this level in any given year. For example, about one-tenth of one percent of DC plan participants 

contributed at or above the combined employer-employee contribution limit for 2010.

a

For the asset allocations with a mix of stocks and bonds, the portfolio was rebalanced annually.

To examine how IRA balances can become large, we conducted literature 

reviews on IRA investment strategies and held semistructured interviews 

with more than 60 finance industry stakeholders, government officials, 

and academics. We conducted initial literature reviews on general topics 

and key words related to IRAs, contribution limits, and tax policy. We 

selected a first round of interviewees from these literature reviews and 

from referrals from GAO stakeholders who have conducted work on 

retirement, finance, and tax policy. We sought referrals for additional 

interviews from our first round of interviewees, as well as from more 

targeted literature reviews based on our initial reviews. 

We also searched for documentary evidence of the IRA investment 

strategies we identified through our interviews and literature reviews. We 

could not determine IRA investment strategies from IRS data because the 

IRS does not collect data on asset types held in IRAs. Given this 

limitation, we searched publicly available filings with the Securities and 

Exchange Commission, such as the Form S-1 filed by companies seeking 

to conduct an initial public offering of their stock on public markets, to

research the number of nonpublicly traded shares beneficially owned by 

How IRAs Can Become 

Large
Appendix I: Objectives, Scope, and 

Methodology

Page 69 GAO-15-16 Individual Retirement Accounts

directors, executive officers, and holders of more than five percent of any 

class of the company’s voting securities. These individuals often comprise 

the company’s founders. We also searched publicly available Form 5500 

filings with the Department of Labor (DOL) for the employer-sponsored 

DC retirement plans of selected private equity firms and hedge funds, 

primarily 401(k) and profit sharing plans. Specifically, we searched the 

filings of private equity firms and hedge funds that (1) reported holding 

partnership interests; (2) are members of the Private Equity Growth 

Capital Council, an advocacy, communications, and research 

organization and resource center for the private equity industry; or (3) are 

cited in the Forbes list of the highest earning hedge fund managers and 

traders of 2013. The findings of this analysis cannot be generalized to the 

entire population of private equity firms and hedge funds operating in the 

United States but provides insights into one potential alternate strategy 

for accumulating large IRAs.

Our framework for evaluating the performance of tax expenditures draws 

on long-standing criteria we have described—economic efficiency, equity, 

simplicity, transparency, and administrability—that can be used to 

evaluate tax policy.10

To provide context for how certain types of nonpublicly traded shares and 

partnership interests can generate IRA balances of tens of millions of 

dollars, we constructed two examples. The first example demonstrates 

how a company founder can invest in nonpublicly traded shares of a 

In our review, we focus primarily on (1) the extent to 

which strategies a few individuals may use to accumulate large IRA 

balances align with the intended purpose of IRAs; (2) whether tax 

treatment of individuals who may engage in these strategies is fair and 

equitable, and (3) the consequences for the federal budget of these IRA 

strategies.

 

10GAO, Tax Expenditures: Background and Evaluation Criteria and Questions

GAO-13-167SP (Washington, D.C.: Nov. 29, 2012). This guide outlines a series of 

questions and criteria that can be used to evaluate tax expenditures—reductions in a 

taxpayer’s tax liability that are the result of special exemptions and exclusions from 

taxation, deductions, credits, deferrals of tax liability, or preferential tax rates. To develop 

the questions, we reviewed our prior work on tax expenditures, tax reform, results-oriented 

government, and program evaluation, and interviewed experts in tax policy and program 

evaluation. Also, see GAO, Understanding the Tax Reform Debate: Background, Criteria, 

& Questions, GAO-05-1009SP (Washington, D.C.: September 2005). This report 

describes how the criteria can be used to evaluate tax policy. In developing the report, we 

relied on government studies, academic articles, and the advice of tax experts to provide 

us with information on the issues surrounding the tax reform debate.
Appendix I: Objectives, Scope, and 

Methodology

Page 70 GAO-15-16 Individual Retirement Accounts

newly created company using an IRA, and how these nonpublicly traded 

shares can grow in value if the company raises capital from outside 

investors and becomes a publicly traded corporation. The second 

example demonstrates how a key employee at a private equity firm can 

invest in a particular type of partnership interest called a profits interest 

using an IRA or DC plan, and how these profits interests can grow in 

value if the private investment partnership is successful.

To assess IRS’s examinations of IRA rules and provisions, we developed 

criteria for evaluating an enforcement program on IRAs. Generally, the 

basis for the criteria included relevant laws and our previous work on tax 

administration and policy as well as our previous work and other 

organizations’ work on good management practices.11

To apply the criteria, we collected documentation on IRS enforcement 

procedures, such as relevant sections of the Internal Revenue Manual

and other IRS publications on guidance for IRA compliance. We also 

interviewed relevant IRS enforcement officials with Small Business/SelfEmployed (SB/SE); Wage and Investment (W&I); the SB/SE Lead 

Development Center; Large Business and International Global High 

Wealth industry; National Research Program; IRS Chief Counsel; 

Research, Analysis and Statistics; Estate and Gift Tax; and Tax Forms 

and Publications. We then compared the findings of our research with the

From our research, 

we concluded that the seven criteria in table 7 were appropriate. We 

shared the criteria with IRS examination officials. In response to the 

officials’ comments, we considered potential resource and budget 

limitations in applying the criteria.

 

11For prior audits of IRS enforcement of IRA tax laws, see Treasury Inspector General for 

Tax Administration (TIGTA), A Service-wide Strategy Is Needed to Address Growing 

Noncompliance With Individual Retirement Account Contribution and Distribution 

Requirements, 2010-40-043 (Washington, D.C.: Mar. 29, 2010); GAO-08-654; and TIGTA, 

Individual Retirement Account Contributions and Distributions Are Not Adequately 

Monitored to Ensure Tax Compliance, 2008-40-087 (Washington, D.C.: Mar. 28, 2008. 

See also GAO-13-167SP; Managing for Results: Key Considerations for Implementing 

Interagency Collaborative Mechanisms, GAO-12-1022 (Washington, D.C.: Sept. 27, 

2012); Tax Gap: IRS Could Do More to Promote Compliance by Third Parties with 

Miscellaneous Income Reporting Requirements, GAO-09-238 (Washington, D.C.: Jan. 28, 

2009); Results-Oriented Government: Practices That Can Help Enhance and Sustain 

Collaboration among Federal Agencies, GAO-06-15 (Washington, D.C.: Oct. 21, 2005); 

and GAO-05-1009SP. 

Assessing IRS 

Enforcement
Appendix I: Objectives, Scope, and 

Methodology

Page 71 GAO-15-16 Individual Retirement Accounts

criteria. Table 8 summarizes our determination of how IRS performed on 

the criteria.

Table 8: Criteria for Assessing Individual Retirement Account Enforcement

Criteria Basis of criteria Criteria addressed if ...

Summary of the

basis for assessment

Enforcement should 

cover key IRA laws.

- IRS is charged with 

enforcing tax laws, and the 

laws on IRA contributions, 

distributions, rollovers, and 

conversions are part of its 

responsibility.

IRS shows evidence that it 

operates programs that can 

address these laws, as shown by 

program procedures or other 

documentation. In applying this 

criterion, we will consider the 

importance IRS gives to IRA 

issues relative to other 

enforcement concerns, given 

resource limitations.

- W&I’s automated underreporter 

program checks for compliance with 

contributions and distributions using 

matching of taxpayer and third-party 

filings.

- SB/SE’s Abusive Tax and Technical 

Issues (ATTI) program examines 

activity that may not comply with IRA 

laws.

- SB/SE conducts field examinations, 

which can cover IRAs, according to the 

IRS’s Internal Revenue Manual for all 

examinations.

- IRS has or has had special 

compliance projects targeting specific 

aspects of IRA noncompliance, such as 

for conversions and rollovers.

- We also considered indirect activity 

that may surface in other units but does 

not specifically target IRAs, such as 

IRS’s Global High Wealth industry and 

its estate tax enforcement program.

Enforcement procedures 

should take into account 

the cumulative taxrevenue effect of an 

improperly valued asset 

that the taxpayer 

contributed to a plan.

- IRAs may gain value over 

time. What starts as small 

noncompliance may grow 

into large noncompliance 

over the life of the 

investment.

Examination procedures or 

guidance direct examination staff 

to review the value of an IRA 

investment at the time a 

contribution is made and if 

examiners have guidance or 

assistance for determining the 

value of an asset in an IRA.

- IRS examiner guidance generally 

instructs staff on reviewing valuation.

- SB/SE job aides on IRAs instruct 

examiners to review valuation.

- Engineering Department provides 

examination with assistance on 

valuation issues. Examiner guidance 

directs examiners to use Engineering 

Department for assistance.

- IRS is limited in looking back on IRA 

issues because of the 3-year statute of 

limitations.
Appendix I: Objectives, Scope, and 

Methodology

Page 72 GAO-15-16 Individual Retirement Accounts

Criteria Basis of criteria Criteria addressed if ...

Summary of the

basis for assessment

Enforcement 

management should 

collect and use data that 

will enable examiners to 

accurately weigh the 

noncompliance risk of 

potentially misreported 

IRA values.

- GAO/AIMD-00-21.3.1, 

Standards for Internal 

Control in the Federal 

Government. In particular, 

that information should be 

recorded and communicated 

to management and other 

who need it in a form and 

within a time frame that 

enables them to carry out 

their responsibilities.

- Our 2012 guide for 

evaluating tax expenditures, 

GAO-13-167SP, stating that 

tax expenditures should be 

“simple, transparent, and 

administrable.” 

IRS designs forms to enable the 

collection of data from tax forms 

that classifiers and examiners 

could use to efficiently and 

accurately determine whether a 

particular return is at risk of 

violating the key IRA rules 

described in the first criterion. 

- IRS collects information from 

custodians on IRA fair market values, 

rollovers, and conversions from Forms 

5498 and 1099-R.

- Starting in tax year 2014 and required 

for 2015, custodians are to report 

information on IRA asset types, which 

will help show what types of assets an 

IRA contains and help examiners weigh 

the risk of noncompliance. Plans to fully 

compile and digitize the information 

from both electronic and paper-filed 

returns have not been finalized. 
Appendix I: Objectives, Scope, and 

Methodology

Page 73 GAO-15-16 Individual Retirement Accounts

Criteria Basis of criteria Criteria addressed if ...

Summary of the

basis for assessment

IRAs should be 

considered in making 

enforcement plans.

- Office of Management and 

Budget Circular A-11, on 

strategic planning, 

particularly on how 

executives should use the 

Strategic Plan to provide 

guidance to agency 

components for planning 

their program 

implementation.

IRS documentation shows that 

IRS describes IRAs in strategic 

planning documents such as its 

budget, strategic plan, division 

program letter, or similar planning 

tools.. The criterion also could be 

addressed if IRS uses relevant 

data (such as examination 

results), if available, in making 

decisions about and allocating 

resources for IRA enforcement.

- IRS explicitly has emphasized IRAs as 

an examination priority in multiple, 

agency-wide planning documents. For 

example, IRS’s Fiscal Year 2015 budget 

describes the soft-notice tests for 

encouraging compliances with IRAs, an 

initiative to address prohibited 

transactions in IRAs, and requests 

increased funds for enforcement of 

employee retirement plans, which can 

be rolled into IRAs.

- Other IRS strategic priorities could 

overlap with IRA compliance. For 

example, IRS’s strategic plan mentions 

tax exempt retirement programs and 

financial instruments, which can feed 

into IRAs.

- The Department of the Treasury also 

lists as priorities enforcement on early 

distributions from retirement plans and 

offering additional guidance to facilitate 

rollovers and other issues relating to 

lifetime income from retirement plans.

- IRS has a service-wide process for 

assessing the risk of emerging issues, 

which may include IRA noncompliance. 

As part of this process, IRS developed a 

task team to study and make 

recommendations on how to better 

conduct enforcement on IRA 

noncompliance. The task team included 

representation from across IRS.

- IRS examination management uses 

data to manage its workload, including 

the Lead Development Center 

database. Through this kind of data, 

IRS could measure progress toward 

goals, such as examination rates and 

tax changes.

Examiners should be 

trained to identify IRA 

potential compliance 

issues.

- GAO framework on 

training, GAO-04-546G. 

Examiner training and guidance 

materials cover the key IRA rules 

identified in the first criterion, as 

well as the cumulative effect of 

long-term IRA noncompliance.

- Training modules for new examiners 

covers IRA issues.

- Examiners job aides provide direction 

on examining IRA issues.

- New continuing professional education 

training covers prohibited transactions 

related to IRAs.
Appendix I: Objectives, Scope, and 

Methodology

Page 74 GAO-15-16 Individual Retirement Accounts

Criteria Basis of criteria Criteria addressed if ...

Summary of the

basis for assessment

IRS should collaborate 

with the appropriate 

agency on enforcing laws 

on certain prohibited 

transactions that could 

lead to large, 

noncompliant IRAs.

- GAO framework for 

collaboration in GAO-06-15 

and GAO-12-1022. 

IRS shows documentation on how 

the agencies have agreed on an 

approach to share information and 

interpretations or rulings related to 

prohibited transactions that could 

lead to large IRAs.

- For employer plans, IRS has a 

memorandum of understanding with 

DOL setting out procedures for 

collaborating and coordinating in 

carrying out their joint oversight of 

prohibited transactions. For IRAs, IRS 

and DOL officials agreed that they have 

a good working relationship in their 

informal consultation process. 

- IRS is working on procedures to 

streamline its interaction with DOL, 

building off fact patterns similar to those 

in Peek v. Commissioner. IRS officials 

said they have kept DOL informed 

about their plans.

Examination 

management should 

collaborate with its own 

service and outreach 

functions to help the 

public better understand 

laws related to potential 

IRA investment.

- IRS strategic plan and 

examination plan.

- Project Management 

Institute standards.

IRS shows that procedures are in 

place for the examination and 

service functions to help inform 

each other about IRA compliance 

issues. Additionally, current 

guidance should reflect the issues 

identified in examination.

- W&I has conducted tests sending 

letters to certain taxpayers warning 

them of possible noncompliance.

- IRS has a pamphlet warning taxpayers 

to be aware of IRA schemes.

- IRS made IRA noncompliance one of 

its “Dirty Dozen Tax Scams” most 

recently in 2011.

- IRS publishes guidance directed at 

custodians or tax professionals to help 

encourage compliance with IRA rules. 

This guidance can go beyond simply 

filling out the lines on IRA information 

forms. For example, the 5498/1099-R 

instructions caution that investing in 

“nonmarketable securities (i.e. 

alternative assets) raises compliance 

risks.

- Prohibited transaction rules, which are 

complex rules even for pension plan 

sponsors and their service providers, 

are covered on irs.gov and discussed in 

Publication 590 Individual Retirement 

Arrangements (IRAs). However, 

guidance in Publication 590 does not 

explicitly caution taxpayers that 

nonpublic IRA assets are more 

susceptible to prohibited transactions 

than publicly traded assets.

- An ATTI team meets quarterly to 

address new or potentially new issues 

that could pose a compliance risk. If the 

issue is appropriate for outreach, the 

team contacts the correct office. 

Source: GAO analysis. | GAO-15-16
Appendix I: Objectives, Scope, and 

Methodology

Page 75 GAO-15-16 Individual Retirement Accounts

We used statistics from several databases in our work on assessing IRS 

enforcement, including the Audit Information Management System, 

Examination Operational Automation Database, Publication 6961 data, 

Information Return Program Case Analysis System, and Lead 

Development Center database. To ensure the data’s reliability, we 

reviewed documentation on the databases and, where necessary, 

interviewed agency officials. We determined that these data were 

sufficiently reliable for the purposes of this report.

We conducted this performance audit from June 2013 through October 

2014 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.
Appendix II: Illustration of Earnings and Tax 

Effects of Traditional and Roth Individual 

Retirement Accounts

Page 76 GAO-15-16 Individual Retirement Accounts

Figure 10 shows the benefits a taxpayer might receive for investing in a 

tax-advantaged traditional or Roth individual retirement account (IRA) 

compared to taxable account or investments, given certain assumptions 

in four different types of investments: a traditional IRA, a Roth IRA, an 

investment or account that is taxed annually at ordinary income tax rates, 

and an investment that is subject to capital gains tax rules. The figure 

uses a simplified model to show the after-tax rates of return that result 

from these scenarios over a 20-year period.1

 

1

Our model, including the tax and return assumptions, is based on a similar example 

produced in Brady, Peter. Investment Company Institute, The Tax Benefits and Revenue 

Costs of Tax Deferral (Washington, D.C.: September 2012), as well as a Joint Committee 

on Taxation (JCT) publication, JCT, Present Law and Background Relating to the Tax 

Treatment of Retirement Savings, JCX-32-12 (Washington, D. C.: Apr. 13, 2012).

Each case assumes 

earnings of $1,000 before taxes for contribution in year 1 and distribution 

of the accumulated balance in year 20. Investment earnings over the 20-

year period are assumed to be a constant pretax 5 percent. Assuming a 

constant federal ordinary income tax rate of 25 percent, the traditional 

IRA and Roth IRA achieve similar results although the tax benefits have 

different paths. For the traditional IRA, the individual can invest a $1,000 

tax-deductible contribution in year 1, and taxes on the contribution and 

investment earnings are deferred until distribution. For the Roth IRA, the 

individual can invest $750 after tax with investment earnings tax-exempt 

at later distribution. While the amount contributed to the account is 

greater in the first year for the traditional IRA owner, the amount that is 

available for the taxpayer for consumption after taxes on distribution is the 

same for the traditional owner and the Roth owner. The traditional IRA 

owner puts the tax saving in the account to grow to ultimately pay the tax 

on the account; the Roth owner pays the tax upfront and has no further 

tax liability. For both Roth and traditional IRA accounts, the after-tax rate 

of return is 5 percent. In contrast, the taxable account, which is subject to 

taxes on both the original earnings contributed as well as the annual 

investment earnings, has an annual after-tax rate of return of 3.75 

percent. If an investment were held outside of a retirement account and 

subject to capital gains taxes only, there would be no initial deduction of 

amounts invested. Similar to the case of a traditional IRA account where 

tax on income is deferred until distribution, no capital gains tax would be 

owed until the asset was sold and gain was realized, which in the 

example happens at the end of the 20-year period. Upon sale, any gain 

would be subject to the capital gains tax rate. The capital gains tax rate is 

generally lower than the ordinary income tax rate that is applied to 

Appendix II: Illustration of Earnings and Tax 

Effects of Traditional and Roth Individual 

Retirement Accounts
Appendix II: Illustration of Earnings and Tax 

Effects of Traditional and Roth Individual 

Retirement Accounts

Page 77 GAO-15-16 Individual Retirement Accounts

distributions from a traditional IRA. As a result of the deferral of tax until 

sale and the preferential capital gains tax rate, the after-tax rate of return 

for the capital gains asset would be 4.5 percent, less than if the asset 

were held in an IRA of either type but higher than if the investment had 

been made in a taxable account where income earned was taxed 

annually at ordinary income tax rates.

Figure 10: Beginning and After-Tax Ending Balances for $1,000 in Pre-Tax Earnings 

in a Traditional IRA, Roth IRA and Taxable Accounts over a 20-Year Perioda

Notes: Assumptions include a constant pre-tax rate of return on investment of 5 percent and a tax 

rate on ordinary income of 25 percent, no distributions until year 20, and the taxpayer is not subject to 

10 percent early withdrawal additional tax in year 20.

a

For $1,000 in earnings pretax, the individual is assumed to make a tax-deductible contribution of 

$1,000 to the traditional IRA. For the Roth IRA, the income taxable account, and the capital gains 

treatment, the individual contributes $750 after taxes.

The simplified example above showed how contributions to traditional and 

Roth accounts can earn the same rate of return after taxes if tax rates do 

not change over time. If tax rates vary over time, this equivalence may not 

hold. For example, if an individual or household is subject to a relatively 
Appendix II: Illustration of Earnings and Tax 

Effects of Traditional and Roth Individual 

Retirement Accounts

Page 78 GAO-15-16 Individual Retirement Accounts

high tax rate when a contribution is made and a low tax rate when 

earnings are distributed, a traditional account would result in a higher rate 

of return. On the other hand, if tax rates are low when a contribution to a 

Roth account is made and rates are higher when funds are distributed, 

the Roth account would result in a higher rate of return.2

 

2

For further discussion, see JCT, Present Law and Background Relating to the Tax 

Treatment of Retirement Savings, JCX-32-12, (Washington, D.C.: Apr. 13, 2012), 68-71.
Appendix III: Tables from Statistics of Income 

Data for Tax Year 2011

Page 79 GAO-15-16 Individual Retirement Accounts

This appendix shows the confidence intervals for our analysis of the 

Statistics of Income (SOI) data about individual retirement accounts 

(IRA). 

Table 9: Estimated Median IRA Balances by Size of Individual Retirement Account (IRA) Balance, Tax Year 2011* 

IRA Balance

Estimated median

IRA balance ($1,000) 95% confidence interval

Total Taxpayer with IRAs 36 35 36

$1 Million or Less 34 33 35

Greater than $1 million to $2 million 1,282 1,258 1,311

Greater than $2 million to $3 million 2,303 2,235 2,362

Greater than $3 million to $5 million 3,618 3,521 3,658

Greater than $5 million to $10 million 6,044 5,782 6,455

Greater than $10 million to $25 million 12,073 11,469 12,559

Greater than $25 million 69,237 26,822 418,573

Source: GAO analysis of IRS data from Forms 1040, U.S. Individual Income Tax Returns; Forms 5498 IRA Contribution Information. | GAO-15-16

*Notes: The taxpayer, as a taxpaying unit, may have more than one IRA owner. The IRA balance is 

the aggregate value for all IRAs (including inherited IRAs) associated with the taxpayer. We assumed 

the blank IRA fair market values are zero; the blank values could affect these estimates considerably. 

See appendix I for more details.

Appendix III: Tables from Statistics of Income 

Data for Tax Year 2011
Appendix III: Tables from Statistics of Income 

Data for Tax Year 2011

Page 80 GAO-15-16 Individual Retirement Accounts

Table 10: Estimated Percent of Taxpayers with Individual Retirement Account (IRA) Balances of $1 Million or Less and More 

Than $5 Million and IRA Balances by Adjusted Gross Income, Tax Year 2011* 

IRA balance Adjusted gross income

Estimated percent

of taxpayers 95% confidence interval

$1 Million or less 0 or less 1.5 1.4 1.6

$1 to $20,000 13.3 13.0 13.6

$20,001 to $50,000 24.0 23.6 24.4

$50,001 to $100,000 32.0 31.6 32.4

$100,001 to $200,000 21.2 20.9 21.5

$200,001 to $500,000 6.5 6.4 6.6

$500,001 to $1,000,000 1.0 1.0 1.1

Greater than $1,000,000 0.5 0.5 0.5

Greater than $5 Million 0 or less a** a**

$1 to $20,000

a**

a** a**

$20,001 to $50,000

a**

a** a**

$50,001 to $100,000

a**

2.7 0.5 13.6

$100,001 to $200,000 4.2 0.9 17.8

$200,001 to $500,000 35.6 25.2 47.5

$500,001 to $1,000,000 25.9 18.5 35.0

Greater than $1,000,000 29.4 23.4 36.3

Source: GAO analysis of IRS data from Forms 1040, U.S. Individual Income Tax Returns; Forms 5498 IRA Contribution Information.| GAO-15-16

*Notes: The taxpayer, as a taxpaying unit, may have more than one IRA owner. The IRA balance is 

the aggregate value for all IRAs (including inherited IRAs) associated with the taxpayer. We assumed 

the blank IRA fair market values are zero; the blank values could affect these estimates considerably. 

See appendix I for more details. We do not report on taxpayers with IRA balances greater than $1 

million to $5 million to avoid disclosure of taxpayer information.

**a

Estimates suppressed due to small cell counts.

Table 11: Estimated Percent of Total IRA Balances by Size of IRA Balance, by Adjusted Gross Income, Tax Year 2011

IRA balance Adjusted gross income

Estimated percent of 

total IRA balances 95% confidence interval

$1 Million or less 0 or less 1 1 1 

$1 to $20,000 7 7 8 

$20,001 to $50,000 16 15 17

$50,001 to $100,000 31 30 31

$100,001 to $200,000 29 28 29

$200,001 to $500,000 12 12 13

$500,001 to $1,000,000 2 2 3 

Greater than $1,000,000 1 1 1 
Appendix III: Tables from Statistics of Income 

Data for Tax Year 2011

Page 81 GAO-15-16 Individual Retirement Accounts

IRA balance Adjusted gross income

Estimated percent of 

total IRA balances 95% confidence interval

Greater than $5 Million 0 or less a** a** a**

$1 to $20,000 a** a** a**

$20,001 to $50,000 a** a** a**

$50,001 to $100,000 2 5 b***

$100,001 to $200,000 2 5 b***

$200,001 to $500,000 63 27 99

$500,001 to $1,000,000 11 23 b***

Greater than $1,000,000 20 0 39

Source: GAO analysis of IRS data from Forms 1040, U.S. Individual Income Tax Returns; Forms 5498 IRA Contribution Information.| GAO-15-16

*Notes: The taxpayer, as a taxpaying unit, may have more than one IRA owner. The IRA balance is 

the aggregate value for all IRAs (including inherited IRAs) associated with the taxpayer. We assumed 

the blank IRA fair market values are zero; the blank values could affect these estimates considerably. 

See appendix I for more details. We do not report on taxpayers with IRA balances greater than $1 

million to $5 million to avoid disclosure of taxpayer information.

**a

Estimates suppressed due to small cell counts.

***b

The distributions for these estimates are so skewed that the usual estimation methods do not 

produce an accurate lower bound.
Appendix IV: Examples of Strategies to 

Accumulate Large Individual Retirement 

Accounts

Page 82 GAO-15-16 Individual Retirement Accounts

The two examples below demonstrate how a small number of individuals 

could generate large individual retirement account (IRA) balances by 

leveraging their access to nonpublicly traded shares and profits interests.

Figure 11 illustrates an example of how founders of successful 

companies can generate IRA balances of tens of millions dollars by 

investing in nonpublicly traded shares in their newly created company. 

The example is based on Securities and Exchange Commission (SEC) 

filings detailing the transactions of a technology company founder and 

assumes the following:1

• In 2008, the founders of a newly created company authorize the 

issuance of up to 100 million shares with an initial value of $0.00125 

per share.2

• One company founder opens a Roth IRA with an after-tax contribution 

of $5,000, and uses the Roth IRA to purchase 4 million nonpublicly 

traded shares in the company.

• The following year, the company raises money by selling nonpublicly 

traded shares to a private equity fund that focuses on venture capital 

opportunities (venture capital firm) for $10 per share. As part of this 

transaction, the company founder sells 1,000,000 shares from her 

Roth IRA. The founders stipulate that they will retain an “additional 

consideration” in these shares if the outside investors can someday 

sell them for more than $30 per share. Specifically, the company 

founder will receive 20 percent of the profits above $30 per share.

• In 2012, the company offers shares to outside investors through an 

initial public offering of shares at a price of $25 per share. 

• By 2014, the company has enjoyed continuing success and its shares 

trade on public stock exchanges at $60 per share. The founder retires 

 

1

The example is based in part on a filing of SEC Form S-1, which requires disclosure of 

the number of shares beneficially owned at the time of the offering by directors, executive 

officers, and holders of more than 5 percent of any class of the company’s voting 

securities. According to SEC officials, disclosure regarding an individual’s Roth IRA is not 

explicitly required on Form S-1.

2

This example assumes no fees, trading costs, or commissions on transactions.

Appendix IV: Examples of Strategies to 

Accumulate Large Individual Retirement 

Accounts

Example 1: 1onpublicly 

Traded Shares
Appendix IV: Examples of Strategies to 

Accumulate Large Individual Retirement 

Accounts

Page 83 GAO-15-16 Individual Retirement Accounts

and sells the remaining shares in her Roth IRA. Additionally, the 

outside investors of the venture capital firm sell the shares they 

purchased in 2009 for $60 per share.

Figure 11: Founders Can Accumulate Large IRAs with Nonpublicly Traded Shares in Their Company

a

In 2009, as part of an effort to raise money for the company, the founder sells 1 million shares of 

nonpublicly traded shares from her Roth IRA to outside investors at a price of $10 per share. The 

founders stipulate that they will retain an additional consideration in these shares—specifically, 20 

percent of the profits above $30 per share—if the outside investors can someday sell them for more 

than $30 per share. In 2014, the outside investors sell their now publicly traded shares for $60 per 

share and get $60 million, $30 million of which is subject to the founder’s additional consideration. As 

a result, the founder realizes a profit of $6 million from the outside investors’ sale.

Table 12: Summary of Holdings and Transactions in Company Founder’s Roth Individual Retirement Account (IRA)

Year Description Amount

2008 Founder contributes to a Roth IRA

Nonpublicly traded shares issued by company, initial value per share

Number of shares founder purchases using funds in Roth IRA

$5,000

$0.00125

4 million

2009 Number of nonpublicly traded shares sold to outside investors from Roth IRA

Sale price of nonpublicly traded shares to outside investors, per share

Founder’s proceeds from sale

Potential value of remaining shares in Roth IRA, based on sale price

1 million

$10

$10 million

$30 million

2012 Sale price of publicly traded shares in initial public offering, per share

Potential value of remaining shares in Roth IRA, based on initial public offering

$25

$75 million

2014 Number of remaining shares founder sells from Roth IRA on public exchanges

Founder’s proceeds from sale of publicly traded shares

Founder’s proceeds from additional consideration in outside investors’ sale of publicly traded shares

Total Assets in founder’s Roth IRA at the end of 2014

3 million

$180 million

$6 million

$196 million

Source: GAO analysis of publicly available filings with the U.S. Securities and Exchange Commission. | GAO-15-16
Appendix IV: Examples of Strategies to 

Accumulate Large Individual Retirement 

Accounts

Page 84 GAO-15-16 Individual Retirement Accounts

Figure 12 illustrates an example of how a key employee of a private 

equity firm can generate an IRA balance of tens of millions of dollars by 

investing in a profits interest that gives him or her the right to a portion of 

the general partner’s carried interest in a successful fund. The example 

assumes the following about a general partner entity consisting of 10 key 

employees: 

• In 2004, the general partner of a private equity firm that focuses on 

buy-out opportunities contributes $10 million to start a new $1 billion 

buy-out fund.3 The general partner raises the rest of the capital 

needed to start the fund from outside investors, known as limited 

partners.

• The general partner negotiates a performance target that needs to be 

met in order to get paid for managing the fund. If the general partner 

meets this performance target, the limited partners pay the general 

partner a performance fee equal to 20 percent of the fund’s total 

profits, called the general partner’s carried interest in the fund.4

• One key employee of the private equity firm rolls over $500,000 from 

a former employer’s 401(k) plan to an IRA and uses it to purchase a 

profits interest in the general partner. In exchange, the general partner 

will distribute 5 percent of its carried interest to the key employee if 

the fund is successful.

• The general partner and key employees successfully invest in 

portfolio companies over a 10-year period and exceed the 

performance target set for the limited partners.

 

3

This contribution establishes the general partner as a partner in the fund and gives the 

general partner the right to performance fees negotiated with outside investors. These 

performance fees can be disproportionately larger than general partner’s investment if the 

fund is successful. In other words, the general partner’s contribution is to a large extent an 

investment of key employees’ ideas, expertise, and work to make the fund a success 

rather than an investment of capital. If, on the other hand, the fund is not a success, the 

general partner may not receive any performance fees. For this reason, the general 

partner’s contribution is referred to as a profits interest in the fund. According to an 

industry stakeholder. the general partner may also make a larger investment in the fund 

on the same terms as other outside investors, or limited partners.

4

This example assumes no fees other than the general partner’s carried interest in the 

fund. For example, private equity firms generally charge fees both to outside investors for 

managing the fund and to portfolio companies for providing advisory services.

Example 2: Profits Interest
Appendix IV: Examples of Strategies to 

Accumulate Large Individual Retirement 

Accounts

Page 85 GAO-15-16 Individual Retirement Accounts

• On the last day of the fund, the general partner distributes initial 

contributions and 80 percent of the fund’s profits to the limited 

partners.5

• The general partner retains its initial contributions and 20 percent of 

the fund’s profits as a carried interest. The general partner then 

distributes 5 percent of this carried interest to the key employee’s IRA.

Figure 12: Key Employees of Private Equity Firms Can Accumulate Large Individual Retirement Accounts (IRA) with Profits 

Interests

 

5

For simplicity, we assume no distributions until the last day of the investment fund. In 

practice, the timing of distributions varies.
Appendix IV: Examples of Strategies to 

Accumulate Large Individual Retirement 

Accounts

Page 86 GAO-15-16 Individual Retirement Accounts

Table 13: Summary of Contributions and Distributions from a $1 Billion Private Equity Fund 

Year Description Amount

2004 General partner’s contribution to the fund

Outside investors’ contribution to the fund

Beginning fund balance

$10 million

$990 million

$1 billion

2014 Profits from investments in portfolio companies

Initial contributions

Ending fund balance

$2.4 billion

$1.0 billion

3.4 billion

2014 Limited partners get:

Their initial contribution back

80 percent of the fund’s profits

Total distribution to limited partners

$990 million

$1.92 billion

$2.91 billion

2014 General partner gets:

Their initial contribution back

20 percent of the fund’s profits as a carried interest

Total distribution to general partner

$10 million

$478.9 million

$488.9 million

2014 The key employee’s IRA receives a distribution of 5 percent of the general partner’s carried interest $23.9 million

Source: GAO analysis of industry publications and interviews with industry stakeholders. | GAO-15-16
Appendix V: Printable Figure 9 on Form 5498

Page 87 GAO-15-16 Individual Retirement Accounts

The figure below is a printable version of figure 9 found earlier in the 

report.

Appendix V: Printable Figure 9 on Form 

5498
Appendix VI: Comments from the Internal 

Revenue Service

Page 88 GAO-15-16 Individual Retirement Accounts

Appendix VI: Comments from the Internal 

Revenue Service
Appendix VI: Comments from the Internal 

Revenue Service

Page 89 GAO-15-16 Individual Retirement Accounts
Appendix VI: Comments from the Internal 

Revenue Service

Page 90 GAO-15-16 Individual Retirement Accounts
Appendix VI: Comments from the Internal 

Revenue Service

Page 91 GAO-15-16 Individual Retirement Accounts
Appendix VII: GAO Contacts and Staff 

Acknowledgements

Page 92 GAO-15-16 Individual Retirement Accounts

James R. McTigue, Jr., Director, Tax Issues, Strategic Issues, (202) 512-

9110 or mctiguej@gao.gov

Charles A. Jeszeck, Director, Education, Workforce, and Income Security 

Issues, (202) 512-7215 or jeszeckc@gao.gov

In addition to the contact named above, Tamara Cross and MaryLynn 

Sergent (Assistant Directors), Eric Gorman and Tom Moscovitch

(analysts in charge), Amy Bowser, Bertha Dong, Monika Gomez, Gene 

Kuehneman, Ed Nannenhorn, Albert Sim, Walter Vance, Sonya 

Vartivarian, and Craig Winslow made key contributions to this report. Also 

contributing to this report were James Bennett, Joanna Berry, Rachel 

DeMarcus, Ellen Grady, David Lin, Donna Miller, Karen O’Conor, Stewart 

Small, Frank Todisco, and Kathleen van Gelder.

Appendix VII: GAO Contacts and Staff 

Acknowledgements

GAO Contacts

Staff 

Acknowledgements

(451062)
The Government Accountability Office, the audit, evaluation, and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and 

policies; and provides analyses, recommendations, and other assistance 

to help Congress make informed oversight, policy, and funding decisions. 

GAO’s commitment to good government is reflected in its core values of 

accountability, integrity, and reliability.

The fastest and easiest way to obtain copies of GAO documents at no 

cost is through GAO’s website (http://www.gao.gov). Each weekday 

afternoon, GAO posts on its website newly released reports, testimony, 

and correspondence. To have GAO e-mail you a list of newly posted 

products, go to http://www.gao.gov and select “E-mail Updates.”

The price of each GAO publication reflects GAO’s actual cost of 

production and distribution and depends on the number of pages in the 

publication and whether the publication is printed in color or black and 

white. Pricing and ordering information is posted on GAO’s website, 

http://www.gao.gov/ordering.htm. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or 

TDD (202) 512-2537. 

Orders may be paid for using American Express, Discover Card, 

MasterCard, Visa, check, or money order. Call for additional information.

Connect with GAO on Facebook, Flickr, Twitter, and YouTube. 

Subscribe to our RSS Feeds or E-mail Updates. Listen to our Podcasts. 

Visit GAO on the web at www.gao.gov. 

Contact:

Website: http://www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470

Katherine Siggerud, Managing Director, siggerudk@gao.gov, (202) 512-

4400, U.S. Government Accountability Office, 441 G Street NW, Room 

7125, Washington, DC 20548

Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, DC 20548

GAO’s Mission

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Phone

Connect with GAO

To Report Fraud, 

Waste, and Abuse in 

Federal Programs

Congressional 

Relations

Public Affairs

Please Print on Recycled Paper.