Peter Thiel and the $5 Billion Roth IRA

A ProPublica article recently came out about the fortunes amassed by some of the wealthiest people in America. One of those, PayPal co-founder Peter Thiel, was at the top of this list. He turned less than $2,000 back in 1999 into $5 billion today. The craziest part is that he won’t have to pay taxes on it so long as he waits to cash it in. This is because it’s held in a tax-advantaged Roth IRA account.

Who is Peter Thiel?

Back in 1998, Peter Thiel, along with Max Levchin and Luke Nosek, established “Confinitiy,” which developed security software for mobile devices. Finding no success there, they moved towards a digital wallet, to pay for goods and services electronically. Eventually, Elon Musk got involved as he saw the potential in the new business model. Thiel eventually replaced Musk as CEO of X.com, which had acquired Confinity. It was then renamed PayPal, and the rest is history.

Before going public, Thiel and other executives sought to buy shares in their company with an IRA. They went to Pensco Pension Services, who allowed for all types of IRA investments. Its founder, Tom Anderson, suggested the Roth IRA, which was a newcomer on the retirement scene. Instead of an upfront tax break, a Roth is funded with after-tax money, however, all qualified distributions were tax free.

Since his company was not yet public, there was no value set on it on a public exchange. Thiel reportedly bought 1.7 million shares of PayPal (founder’s stock) at $0.001 – one tenth of a penny each. That’s $1,700 for almost 2 million shares! At the end of 1999, Pensco valued Thiel’s Roth IRA at $1,664, based on PayPal’s own market valuation.

In a years time, his Roth IRA grew to $3.8 million! Then, in 2002, eBay bought PayPal for $1.5 billion. Thiel sold his shares soon after. His IRA balance was now $28.5 million. He used that money to make more investments, including a $500,000 in Facebook. By 2019, his Roth had grown to $5 billion.

The Roth IRA

The Roth IRA is arguably the best retirement savings vehicle, especially for younger folks. It allows for the tax-free growth of your investments. Just like any retirement plan, so long as the investment remains in the plan, you will not pay taxes. In the case of the Roth, you will never pay taxes, so long as you play it right. Essentially, you need to wait until you are age 59 1/2 and any Roth IRA has been opened for at least five years. From the on, any withdrawals made from the account, including a $5 billion distribution, would be tax free!

Obviously, Peter Thiel is a special case. He was in a position most Americans will never be in. He had the opportunity to invest in a start-up, which would revolutionize online payments. Most start-ups fail. Even when they succeed, 99% won’t explode like PayPal, Amazon and eBay. However, you can still follow Thiel’s lead and save smart.

How it Works

While some prefer the immediate tax break of a traditional IRA (you don’t owe taxes on the amount you contribute annually), many are better off choosing the Roth. Why save a few thousand now, when you can save on hundreds of thousands (or millions) later on. There are restrictions for contributing to a Roth. If you earn more than $140,000 or married and earn over $208,000 in 2021, you cannot directly contribute to a Roth. Peter Thiel was smart, as he didn’t take a large salary and was therefore under the income limits back in ’99.

However, if you are above the income limits, you can do a “Backdoor Roth.” You can contribute nondeductible funds to a traditional IRA, and then convert those to a Roth. Learn more about the Backdoor Roth here.

Once your Roth is funded, it’s time to make investments. Unlike Peter Thiel, you’re probably not going to invest in a start-up that sells for over a billion dollars. However, if you do have a start-up, which would create jobs and other opportunities, you should consider a Roth IRA when buying stock in the company. If, like Thiel, you can buy lots of shares for a couple thousand bucks, you won’t be out a lot if the business fails. And you can be in for a huge windfall if it succeeds.

A Roth IRA is not just for start-ups. With a bank-administered plan, you can invest in stocks, bonds, mutual funds and other traditional investments. Even if you have to pay $50, $100 or even $1,000 per share, if it explodes, you can have tax-free gains when you sell. Maybe there’s a a Biotech company that is working on something big you can buy for pennies. If they succeed, so do you!

Further, if you self-direct your Roth IRA with the right company, such as IRA Financial, your investment possibilities are limitless. You can invest in alternative assets like real estate, cryptocurrency, private businesses and precious metals.

Is it Legal?

The Roth IRA is 100% legal and IRS approved. In fact, many financial advisors and retirement planners recommend the plan for their clients. The IRS tried to attack Thiel’s IRA with an audit and failed. Fair market value was paid and no prohibited transaction rules were broken. There are some who argued that Thiel had an unfair advantage and paid too little for his shares. However, the IRS did not find that

Keep in mind, it is important that your Roth IRA remains IRS compliant. The rules can get quite complicated so you must ensure you work with a reputable administrator and/or custodian. There is a steep penalty to pay if you break the IRS rules.

Thiel’s IRA will be part of his estate and will ultimately be taxed at a high rate. Plus, if he passes it along to his children, they would have to deplete the funds from the account within ten years. The money would then flow back into the economy.

What You Can Learn from Peter Thiel

The moral of the story is the power of the Roth IRA. Even if your account is never close to $5 billion, you can have a nice tax-free retirement for the future. Plus, when you pass it on, your loved ones would enjoy the same benefits. Whether you are able to directly fund a Roth IRA or have to use the backdoor, it makes financial sense to at least consider this retirement plan option.

There are some that argue the Roth doesn’t make sense since there is no tax break when you contribute. Plus, if you look to convert a traditional plan to a Roth, you would be hit with a hefty tax bill. We’d agree that the Roth may not be right for everyone, however, you should speak with someone who knows your particular situation before deciding against it. If you have any questions, you can contact us at anytime!

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