Ya, people get upset about this, but this is one of the points of a Roth IRA — pretty much anyone in the US has the option to do the same thing. If he engaged in insider trading or some other unsavory business practice, that should be the focus, not the Roth IRA
That's not true. This trick only works if you have the power to value stock low, like real low, buy it with your IRA then push it through the roof to get all the tax free profits.
He didn't just invest normally.
That's a fairly unique situation. I certainly can't use an IRA to buy my company at a strike price, knowing I'll be selling or raising capital to increase its value.
> Using stock deals unavailable to most people, Thiel has taken a retirement account worth less than $2,000 in 1999 and spun it into a $5 billion windfall.
> The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges -- Anatole France
I absolutely can not understand how people are even defending massive loopholes or oversights in tax code that allow some billionaires to effectively pay a tiny fraction of ordinary income tax...
A ROTH IRA is designed so you pay taxes up front and _never again_. This is the whole point. It is easily available in the USA, I even have one. Peter Thiel used a self directed ROTH IRA to make a ton of money. He will never have to pay taxes on that, because it’s in a ROTH IRA. This is not a tax loophole.
He _may_ have engaged in insider trading or something, in order to make so much money in the Roth. That should be protected, but is really not related to the fact that he used a Roth.
They missed that a Roth IRA needs to be a self-directed IRA to invest as Thiel does, most people don't know this and invest in ETFs or mutual funds giving meager returns. And, you need to have a high net worth to invest in private stock, especially in the formation, pre-IPO, stages of a company, and a high net worth reputation to have venture capital credibility.
Also, the main reason that Roth IRAs passed in Congress is that greedy politicians, on both sides of the aisle, want that tax money upfront instead of waiting decades to collect.
There should never be an argument that the government is some steward of our money and that the insane amount of money they collect from us is somehow wisely spent as our fiduciary.
> This trick only works if you have the power to value stock low, like real low, buy it with your IRA then push it through the roof to get all the tax free profit
What do you mean "the power to value stock low"? The IRS rules require a fair market value. There is no way around this.
What actually happened was that this was an early investment round, where the company had little to no value, so the stock was assigned a nominal value of something like $0.00001/share, which happens with pretty much every startup when it first issues equity.
And what does "then push it through the roof to get all the tax free profits"? You mean grow a successful business? You just need to "push it through"?
Comparables, revenue multiples, discounted cash flow. There are multiple methods, none of them are perfect, but you can at least narrow it down.
The IRS isn't stupid. You can't do your own valuation - well you can, but they'll reject it.
Generally you'd hire at outside firm to do a valuation. If the IRS doesn't believe it, they'll come up with their own number and make you pay the taxes they think you owe.
Thiel basically made a bet - early investor when the company made $0, hence the value of the shares was effectively zero. His investment was in the thousands of dollars. He just got lucky that it had a huge pay out.
The problem is that if you try to do this with only a small amount of wealth, the government will end up characterizing all of your nicely laid out corporate structures and duly filed paperwork as a self dealing tax dodge. These type of schemes only work when you're playing with an outsized amount of resources to involve enough other people and make it a group project. This even applies to the basic dynamic of an LLC itself - if you yourself are performing any role for the company, you can still be held personally liable based on those actions. The limited liability mechanic only works when everything is being done by judgement-proof patsies.
It's not insurmountable. Do you need to be mindful of self-dealing regulations? Of course. However, there are many investment opportunities available to non-wealthy people which can be pursued via self-directed ROTHs and LLCs owned by them. Real estate (financing, bridge financing, rental ownership, distressed property flipping, etc...) is probably the most commonly used one I've seen IRL but I've still seen it used for investing in friends and family rounds of startups, etc...
It's certainly not a "yolo do whatever you want, the IRS won't care" fund but it is still available to the non-wealthy. I know many people who have been making use of it for years without any unfair government characterization or attention. The best I've personally seen is a couple in their early 30s with ~$7 million (real estate related dealings) in their self-directed roth which is a far cry from $5 billion, obviously, but pretty amazing nonetheless.
The article is scant on details, but based on the few data points it throws out and the historic contribution limits, Thiel achieved an average annual return of at least 79% over 22 years. I'm guessing the way he did that is investing tiny amounts of Roth money into very early pre-seed rounds at vanishingly small valuations due to uncertain future prospects, and then making those prospects much more certain by following on with larger taxable investments. Heck if the earlier investment was a senior convertible note, he could probably get his Roth investment back even if the startup ultimately failed down the line.
So no, you're not going to get those kind of gains with real estate. It relies on early stage startups being notoriously hard to value, plus the wealth/connections to make for surefire exits. And if you tried to replicate it at an individual or even familial level, especially repeatedly, those early valuations are going to end up getting challenged. So sure, the same laws apply to everybody and anybody can set up a self-directed IRA. But not everybody can predictably and sustainably achieve such outsized gains with them.
> Do you need to be mindful of self-dealing regulations? Of course. However, there are many investment opportunities available to non-wealthy people which can be pursued via self-directed ROTHs and LLCs owned by them.
The very fact that you're having to be "mindful" of self-dealing shows that people like Thiel are self-dealing, just with more layers of indirection.
If it wasn't self-dealing, you'd not need to be mindful of such regulation.
Your complaint can be boiled down to "this trick only works if you have the connections and wealth to pull it off". Which is almost the entire history of humanity. Who you know is more important than what you do.
This is one interpretation and it's a fair one. Another is that it is not in the spirit of the law to use the IRA to wash taxes off your own company's profits. If it's the letter of the law, the discussion is around whether that should change.
And what this leads to is regular citizens getting fucked over because someone is butthurt about Peter Thiel being fantastically rich. The same people who think you're fantastically rich because years ago you managed to contribute $8000 to your retirement account. If it comes, it will inevitably be in the form of taxes applied to existing Roth IRA contributions.
That is illegal behavior, but has nothing to do with it being a ROTH IRA. I basically agree with your stance, I just don’t think ROTH IRA‘s are to blame
"It’s time to face the fact that our tax code needs a dose of fairness when it comes to retirement savings, and that starts with cracking down on massive Roth IRA accounts built on assets from sweetheart, inside deals."
