3 ms·

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 le

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.
    - nostrademons 5y ago
      That's the intended benefit of Roth IRAs though, even for middle-class investors. That you can buy & sell within them without paying capital gains tax. It's not usually a huge problem in the public markets because they're extremely liquid, with generally symmetric information across all participants, and that liquidity makes it hard to generate extremely excessive investment returns except by luck. But private companies are illiquid, oftentimes with huge asymmetries of information, and that lets you generate 10,000%+ investment gains by happening to have an opportunity to invest in a rocket ship that other people can't get into.
Chris2048 5y ago
There is no "spirit of that law", law is as written. If there is a spirit that the letter excludes, then it is the fault of the lawmakers - why shouldn't they face penalties instead?
- ABCLAW 5y ago
  There are many legal traditions in the world, and most of them (both by number, volume of territory, amount of people governed, etc) take the opposite approach. Only a very narrow English line of black letter law that ascribes to the black letter above all else... and even in that system a completely twinned system of courts allowed for ethical adjustments to law through the courts of equity. Most continental systems of law and currently standard constitutional constructions provide very clear, very codified release valves for situations in which the written law is bullshit. Which is often.
ajmurmann 5y ago
I'm not sure if it's bad that he invested in startups with that money. It's quite risky and if discourage it for that reason. If we implemented your proposal of capping the amount of shielded returns the problem would be gone. Most of this problem word be gone even with a very high cap in the tens millions. On the other hand, are we optimizing for an edge case that gets media attention but is ultimately insignificant? Edge cases often make bad laws.
- mywittyname 5y ago
  This isn't an edge case though. This is a common case. And it's frankly, a common abuse case. This stuff is famous for the being used by the Mitt Romneys and Pete Thiels of the world, but I know people who've bragged about doing the same thing on a much smaller scale. It just happens to work better the more money/influence one has. All you need is a tax attorney and enough money to found a business to exploit this cheat. Start a business worth $5000, and move it into a Roth. Then shovel other investments into this new business and viola, you have a several million bucks parked in a tax-free, judgement-proof vehicle that can be passed onto your kids and grow until the end of the USA. The longer we wait to fix this, the more it's going to distort our economy. An asset cap is a simple solution and it hurts nobody who using this as an actual retirement vehicle. But there are other solutions as well that, again, don't hurt people who intend to take distributions in retirement but prevent abuse like this (minimum required distributions, like 401ks have); dissolution of the Roth upon transfer due to death of the owner, etc.

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.
  - nostrademons 5y ago
    That's the intended benefit of Roth IRAs though, even for middle-class investors. That you can buy & sell within them without paying capital gains tax. It's not usually a huge problem in the public markets because they're extremely liquid, with generally symmetric information across all participants, and that liquidity makes it hard to generate extremely excessive investment returns except by luck. But private companies are illiquid, oftentimes with huge asymmetries of information, and that lets you generate 10,000%+ investment gains by happening to have an opportunity to invest in a rocket ship that other people can't get into.

Chris2048 5y ago

There is no "spirit of that law", law is as written. If there is a spirit that the letter excludes, then it is the fault of the lawmakers - why shouldn't they face penalties instead?

ABCLAW 5y ago
There are many legal traditions in the world, and most of them (both by number, volume of territory, amount of people governed, etc) take the opposite approach. Only a very narrow English line of black letter law that ascribes to the black letter above all else... and even in that system a completely twinned system of courts allowed for ethical adjustments to law through the courts of equity. Most continental systems of law and currently standard constitutional constructions provide very clear, very codified release valves for situations in which the written law is bullshit. Which is often.

ajmurmann 5y ago

I'm not sure if it's bad that he invested in startups with that money. It's quite risky and if discourage it for that reason. If we implemented your proposal of capping the amount of shielded returns the problem would be gone. Most of this problem word be gone even with a very high cap in the tens millions. On the other hand, are we optimizing for an edge case that gets media attention but is ultimately insignificant? Edge cases often make bad laws.

mywittyname 5y ago
This isn't an edge case though. This is a common case. And it's frankly, a common abuse case. This stuff is famous for the being used by the Mitt Romneys and Pete Thiels of the world, but I know people who've bragged about doing the same thing on a much smaller scale. It just happens to work better the more money/influence one has. All you need is a tax attorney and enough money to found a business to exploit this cheat. Start a business worth $5000, and move it into a Roth. Then shovel other investments into this new business and viola, you have a several million bucks parked in a tax-free, judgement-proof vehicle that can be passed onto your kids and grow until the end of the USA. The longer we wait to fix this, the more it's going to distort our economy. An asset cap is a simple solution and it hurts nobody who using this as an actual retirement vehicle. But there are other solutions as well that, again, don't hurt people who intend to take distributions in retirement but prevent abuse like this (minimum required distributions, like 401ks have); dissolution of the Roth upon transfer due to death of the owner, etc.