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Method: > Yet, from the start, a small number of entrepreneurs, like Thiel, made an end run around the rules: Open a Roth with $2,000 or less. Get a sweetheart

Method: > Yet, from the start, a small number of entrepreneurs, like Thiel, made an end run around the rules: Open a Roth with $2,000 or less. Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value. Pay just fractions of a penny per share, a price low enough to buy huge numbers of shares. Watch as all the gains on that stock — no matter how giant — are shielded from taxes forever, as long as the IRA remains untouched until age 59 and a half. Then use the proceeds, still inside the Roth, to make other investments.

patentatt 5y ago
I also wonder if they can borrow against it. It would seem a pretty low risk loan for a banker to make, and it would allow people to access the money arbitrarily, negating the one downside or limitation. So yet another way that the rich can basically avoid paying any taxes. Does anyone know of any limitations or rules restricting what you can invest the contents of an IRA in? Can you set up a business, sell your IRA shares of the business, then borrow against that value? Basically a foolproof way to avoid paying any taxes ever. The best part is the interest rate just has to be lower than the tax rate, not even the rate of return, right? Incredible. I think Romney was roasted for doing the same thing with his IRA. Seems like any wealthy person could and should be doing this.
- HWR_14 5y ago
  Roths are bad collateral in general, because they are a special asset that survives bankruptcy (up to a certain level). Now, Thiel would actually care about his Roth getting chopped to only a few million, so in this case we'd have to look at what laws prevent that, which I don't know. Edit: Using a Roth as collateral is apparently prohibited under IRS rules 4975(c)(1)(B)
mywittyname 5y ago
I hope a law is passed that hits this kind of behavior with stiff penalties. Thiel isn't the first to do something like this. It is incredibly common. The letter of the law is that annual contributions are capped, and the spirit of that law is that this is done to keep these accounts from becoming tax-free, judgement-proof shelters for insane amounts of wealth. Perhaps caps on Roth the value of Roth IRAs and a limit of the type of assets held in them to certain bonds and publicly traded stocks. Somewhere between $1MM and $10MM with an annual CPI adjustment is probably a fair cap amount.
- prpl 5y ago
  Not the first but there’s not a ton of people who can squirrel away $5B in a Roth IRA, so likely the most egregious.
  - nostrademons 5y ago
    They're not squirreling away $5B in a Roth IRA, they're squirreling away $2000 and putting it in an asset whose value grows from $2000 -> $5B. In theory someone who put Dogecoin in their Roth IRA in 2014 could do the same. It would make sense to limit Roth IRAs to publicly-traded assets. If you're investing in securities that you need to be an "accredited investor" for (> $1M liquid net worth), that's not really a tool for the middle class.
    - lotsofpulp 5y ago
      It would make more sense to get rid of all deductions/credits/exemptions, so that there would be no unintended consequences.
    - ajmurmann 5y ago
      The harm here isn't that he invested in startups, but that it's become such an insanely high profit that's now entirely shielded from taxes. What would preventing startup investments accomplish that a simple cap on shielded gains (let's say 10 or 20 million) wouldn't?
      - NonEUCitizen 5y ago
        What is the harm?
    - deleted 5y ago
      [deleted]
    - megaman821 5y ago
      All the money coming into the Roth IRA is post tax money, whether it was cash or IRA conversion. Once in the Roth IRA, you can sell for a profit and rebuy different stocks without paying tax on that profit. Outside the Roth IRA selling for a profit would be a taxable event. Trading stale stocks for fresh new winners without paying the tax inbetween is an incredible advantage to growing your wealth.
dehrmann 5y ago
> Open a Roth with $2,000 or less You need a MAGI of less than $139,000 to do that. That includes dividends and capital gains, so it's unlikely post-Paypal Thiel ever made that little. Pre-Paypal Thiel might have. > Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value. This might happen for post-Paypal Thiel. Definitely not pre. This is way easier said than done unless you have good access to deal flow (he does) and founders willing to pay for the privilege of having you as an investor vs. some random VC. > Pay just fractions of a penny per share You're not paying fractions of a penny per share for something that has a "good chance of one day exploding in value." This investment doesn't exist. I'd love to see his specific investments. I have a feeling a handful from a specific time window made up the bulk his his returns.
- didibus 5y ago
  > This might happen for post-Paypal Thiel. Definitely not pre. This is way easier said than done unless you have good access to deal flow (he does) and founders willing to pay for the privilege of having you as an investor vs. some random VC. He purchased shares of PayPal at 0.001 when he first founded it using his Roth IRA, it's all explained in the article. > You're not paying fractions of a penny per share for something that has a "good chance of one day exploding in value." This investment doesn't exist That's where the article alludes to something maybe slightly fraudulent, for him to have his PayPal startup at the beginning sell shares to himself at 0.001$, as a special declared "employee discount rate". He then managed to make 28 million in his Roth IRA from the IPO of PayPal which he paid no taxes on, because his private PayPal shares were all in the Roth IRA. Then he took that 28 million and reinvested it in Facebook, his Hedge Fund, his other startup Palantir and others, and those investment further did not get taxed, because the whole pool of money was all in the Roth IRA from this point on.
- temp_praneshp 5y ago
  > > Open a Roth with $2,000 or less > You need a MAGI of less than $139,000 to do that. Is there a reason trad -> roth doesn't work in this scenario?
  - 5y ago
nickpp 5y ago
> buy a stake in a startup that has a good chance of one day exploding in value Sounds easy and straightforward.

patentatt 5y ago

I also wonder if they can borrow against it. It would seem a pretty low risk loan for a banker to make, and it would allow people to access the money arbitrarily, negating the one downside or limitation. So yet another way that the rich can basically avoid paying any taxes. Does anyone know of any limitations or rules restricting what you can invest the contents of an IRA in? Can you set up a business, sell your IRA shares of the business, then borrow against that value? Basically a foolproof way to avoid paying any taxes ever. The best part is the interest rate just has to be lower than the tax rate, not even the rate of return, right? Incredible. I think Romney was roasted for doing the same thing with his IRA. Seems like any wealthy person could and should be doing this.

HWR_14 5y ago
Roths are bad collateral in general, because they are a special asset that survives bankruptcy (up to a certain level). Now, Thiel would actually care about his Roth getting chopped to only a few million, so in this case we'd have to look at what laws prevent that, which I don't know. Edit: Using a Roth as collateral is apparently prohibited under IRS rules 4975(c)(1)(B)

mywittyname 5y ago

I hope a law is passed that hits this kind of behavior with stiff penalties. Thiel isn't the first to do something like this. It is incredibly common. The letter of the law is that annual contributions are capped, and the spirit of that law is that this is done to keep these accounts from becoming tax-free, judgement-proof shelters for insane amounts of wealth. Perhaps caps on Roth the value of Roth IRAs and a limit of the type of assets held in them to certain bonds and publicly traded stocks. Somewhere between $1MM and $10MM with an annual CPI adjustment is probably a fair cap amount.

prpl 5y ago
Not the first but there’s not a ton of people who can squirrel away $5B in a Roth IRA, so likely the most egregious.
- nostrademons 5y ago
  They're not squirreling away $5B in a Roth IRA, they're squirreling away $2000 and putting it in an asset whose value grows from $2000 -> $5B. In theory someone who put Dogecoin in their Roth IRA in 2014 could do the same. It would make sense to limit Roth IRAs to publicly-traded assets. If you're investing in securities that you need to be an "accredited investor" for (> $1M liquid net worth), that's not really a tool for the middle class.
  - lotsofpulp 5y ago
    It would make more sense to get rid of all deductions/credits/exemptions, so that there would be no unintended consequences.
  - ajmurmann 5y ago
    The harm here isn't that he invested in startups, but that it's become such an insanely high profit that's now entirely shielded from taxes. What would preventing startup investments accomplish that a simple cap on shielded gains (let's say 10 or 20 million) wouldn't?
    - NonEUCitizen 5y ago
      What is the harm?
  - deleted 5y ago
    [deleted]
  - megaman821 5y ago
    All the money coming into the Roth IRA is post tax money, whether it was cash or IRA conversion. Once in the Roth IRA, you can sell for a profit and rebuy different stocks without paying tax on that profit. Outside the Roth IRA selling for a profit would be a taxable event. Trading stale stocks for fresh new winners without paying the tax inbetween is an incredible advantage to growing your wealth.

dehrmann 5y ago

> Open a Roth with $2,000 or less You need a MAGI of less than $139,000 to do that. That includes dividends and capital gains, so it's unlikely post-Paypal Thiel ever made that little. Pre-Paypal Thiel might have. > Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value. This might happen for post-Paypal Thiel. Definitely not pre. This is way easier said than done unless you have good access to deal flow (he does) and founders willing to pay for the privilege of having you as an investor vs. some random VC. > Pay just fractions of a penny per share You're not paying fractions of a penny per share for something that has a "good chance of one day exploding in value." This investment doesn't exist. I'd love to see his specific investments. I have a feeling a handful from a specific time window made up the bulk his his returns.

didibus 5y ago
> This might happen for post-Paypal Thiel. Definitely not pre. This is way easier said than done unless you have good access to deal flow (he does) and founders willing to pay for the privilege of having you as an investor vs. some random VC. He purchased shares of PayPal at 0.001 when he first founded it using his Roth IRA, it's all explained in the article. > You're not paying fractions of a penny per share for something that has a "good chance of one day exploding in value." This investment doesn't exist That's where the article alludes to something maybe slightly fraudulent, for him to have his PayPal startup at the beginning sell shares to himself at 0.001$, as a special declared "employee discount rate". He then managed to make 28 million in his Roth IRA from the IPO of PayPal which he paid no taxes on, because his private PayPal shares were all in the Roth IRA. Then he took that 28 million and reinvested it in Facebook, his Hedge Fund, his other startup Palantir and others, and those investment further did not get taxed, because the whole pool of money was all in the Roth IRA from this point on.
temp_praneshp 5y ago
> > Open a Roth with $2,000 or less > You need a MAGI of less than $139,000 to do that. Is there a reason trad -> roth doesn't work in this scenario?
- 5y ago

nickpp 5y ago

> buy a stake in a startup that has a good chance of one day exploding in value Sounds easy and straightforward.