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#66 – Peter Thiel’s $5 Billion Dollar Roth IRA – How He Did It and Was It Legal?

Updated: Mar 5, 2022

Roth IRAs were intended to help average working Americans save, but IRS records show Thiel and other ultrawealthy investors have used them to amass vast untaxed fortunes.

Per ProPublica

This article taken from ProPublica is about billionaire Peter Thiel, a founder of PayPal, who has publicly condemned “confiscatory taxes.” He’s been a major funder of one of the most prominent anti-tax political action committees in the country. And he’s bankrolled a group that promotes building floating nations that would impose no compulsory income taxes.

So Let’s Throw Out Some States

The number of people (Per Fidelity) with more than $1 million in their 401(k) hit a record 233,000 at the end of 2019, up from 133,800 for the same period a year earlier, according to Fidelity Investments. The number of IRA millionaires increased to 208,000, also a record high. The average 401(k), IRA and 403(b) balances increased to record levels as well. The average 401(k) balance rose to $112,300, up from $95,600 in 2018. The average IRA rose 17 percent to $115,400. The average 403(b) — which is typically used by teachers, health care workers and employees of nonprofit organizations — was up 18 percent to $93,100.

For younger investors, a Roth account makes sense because they’re likely to be in a relatively lower tax bracket and the tax-free growth with years of compounding interest can far outweigh the benefit of current-year tax deductions for contributions to a traditional 401(k).

Then as people grow their income it can make sense to lean toward the 401(k) for the tax-deferred, especially if people are in the same or the lower tax bracket in retirement.

Now let’s go back and see how much $5 billion is: If every one of the 2.3 million people in Houston, Texas, deposited $2,000 into a bank today, those accounts still wouldn’t equal what Thiel has in his Roth IRA.

What’s more, as long as Thiel waits to withdraw his money until April 2027, when he is six months shy of his 60th birthday, he will never have to pay a penny of tax on those billions.

The Roth IRA Origins

The Roth IRA was pushed through by a guy named Roth; Senator William Roth Jr., in 1997. The goal was to provide the middle-class with a place to park money away, tax-free, for their retirement.

Further to that, the Clinton administration had a goal not to benefit the wealthy with a tax break. So the limits were put into place for Americans making more than $110,000 ($160,000 for a couple) per year and also capped annual contributions to $2,000.

The Savvy Investors Find Loopholes

To reference this next set of dialogue, ProPublica obtained IRS tax return data on thousands of the country’s wealthiest people, covering more than 15 years.

So Thiel found a way to find a loophole with the rules:

1) Open Roth with $2,000 or less.

2) Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value while paying fractions of a penny per share. Hence, this allowed him to buy a large amount of shares.

3) With after-tax money providing that he waits until he is 59.5, there are no taxes to pay. Or use the proceeds in the Roth, to make other investments

To identify those who have amassed fortunes in retirement accounts, ProPublica scoured the tax return data of the ultrawealthy for IRA accounts valued at more than $20 million. Reporters also examined Securities and Exchange Commission filings, court documents and other records, including a memo detailing Thiel’s wealth that was included in his 2005 application for residency in New Zealand.

One day in early 1999, a deputy of Thiel’s at the company that would become PayPal walked into the San Francisco office of Pensco Pension Services. The company allowed its customers to put nearly any investment they wanted into a tax-advantaged retirement account.

In an interview with ProPublica, Pensco founder Tom Anderson recalled how Thiel and other PayPal executives had wanted to put startup shares of the company into traditional IRAs. Instead they decided to put their shares into the “new Roth” account due to the tax advantages.

In 1999, single taxpayers were only allowed to contribute to a Roth if they made less than $110,000. PayPal offered its top executives low initial salaries and large stock grants. Thiel’s income that year was $73,263, the IRS records show.

SEC filings showed that Thiel in January 1999, paid $0.001 per share for 1.7 million shares for a total cost of $1,700.

Practice Known as Stuffing

Thiel’s unusual stock purchase was arguable that it was overbending the rules designed to prevent IRAs from becoming illegal tax shelters. The reason is that investors aren’t allowed to buy assets for less than their true value through an IRA. The practice is sometimes known as “stuffing” because it gets around the strict limits imposed by Congress on how much money can be put in a Roth.

PayPal later disclosed details about the early history of the company in an SEC filing before its initial public offering. The filing reveals that Thiel’s founders’ shares were among those the company sold to employees at “below fair value.”

At the time Thiel bought his founders’ shares, his own hedge fund had already loaned the new startup $100,000, California and SEC records show.

And soon after the company sold him the shares, millions of dollars poured in from investors, securities filings show. In just a month’s time, the company sold a slice of itself to investors for $500,000. That June and August, another $4.5 million poured in from the venture fund arm of telecom giant Nokia and other investors, those records show.

Then in 2002, eBay purchased PayPal. That same year, Thiel sold the shares, still inside his Roth, his financial assistant later told New Zealand officials. The tax-free proceeds poured into his account. By the end of 2002, Thiel’s Roth was worth $28.5 million, tax records show.

If he had held his shares outside of the Roth in a normal investment account, Thiel would have owed the IRS 20% of his gains and owed another 9% to California tax authorities. Because the shares were in a Roth, he had no tax bill when he sold them, saving him millions.

Thiel used the millions in proceeds from his PayPal windfall to invest in other Silicon Valley startups as well as his own hedge fund, according to his financial assistant’s memo. Once again, Thiel’s Roth scooped up startup shares at bargain-basement prices.

For instance, Thiel and colleagues in 2003 founded Palantir, a data analytics company, helped by an early investment from a CIA-backed venture fund. Thiel used his Roth to buy shares of Palantir when it was still a private company, years before it was listed on the New York Stock Exchange, according to a ProPublica analysis of tax records, an SEC filing and shareholder records included in a civil suit.

In 2004, Thiel invested $500,000, Facebook’s first large outside infusion of cash. Using his Roth ensured that he wouldn’t owe taxes on his early investment in the company. By the end of 2008, the Roth was worth $870 million.

The Tax Breaks That Made it Possible

A secret of Thiel’s is that his fortune was built not just with brains but also with massive tax breaks. By 2019, Thiel’s holdings had grown so vast and diverse that his $5 billion was spread across 96 subaccounts inside his Roth.

“There is good news and bad news,” Thiel told The Washington Post when asked about possibly living more than a century. “The bad news is: If you don’t believe in the good news, you’re not saving enough for retirement and likely to spend much of your old age in poverty.”

Episode Link:

Peter Thiel's $5 Billion Dollar Roth IRA

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