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What I don't understand about this whole maneuver is that Roth transactions must be made at arms length; ie, "Transactions must be made at arm’s length and not
by nrmitchi 5y ago
What I don't understand about this whole maneuver is that Roth transactions must be made at arms length; ie, "Transactions must be made at arm’s length and not involve the IRA owner or a member of his or her family."
An example of this is that if you use a Roth to invest in property, you are not allowed to use it personally, not allowed to manage it or do maintenance yourself, etc.
Prohibited transactions risk tainting (and thus exposing) the entire account.
How is Thiel investing in his own company not considered a prohibited investment?
- avelis 5y agoIt is IMO but who is going to actually enforce that?
- vmception 5y agoThats not the issue here
- joshfraser 5y agoMy guess is he used a self-directed IRA that he converted into a Roth.
- vasilipupkin 5y agodid he place the shares into IRA before any outside round though? because otherwise, he would have violated contribution limits?
- lotsofpulp 5y agoI would assume he did, unless there is any proof otherwise. ProPublica specifically omitted this information, so assuming that it was all kosher seems reasonable.
- joshfraser 5y agoHe would have deposited them at company formation when they were essentially worthless.
- lotsofpulp 5y agoRight, so this is an example of journalism that reduces people’s trust. Or at least it did mine with regards to ProPublica, which I had previously held in higher regard.
- vasilipupkin 5y agoright, but then how did he convert them to roth? roth has contribution limits, right? Ah, there are no limits for backdoor conversion.
- nrmitchi 5y agoYou're also not allowed to put ISOs or anything "earned" into a Roth IRA (or buy it from yourself). The problem here is that this was clearly a prohibited transaction, but the IRS state of limitations is effectively 3 years for stuff like this (unless you have really pissed someone off). It's likely that by the time the stock was worth enough (in terms of 409A guesstimate) to look in to, or there was any kind of reportable transaction showing a gain, the time frame on investigating the initial transaction was long past.
- TAForObvReasons 5y ago> IRS records show that in 1999 Thiel purchased 1.7 million shares of his startup, which would soon become PayPal, for just $1,700 — a tenth of a penny per share > Even though Thiel's startup received millions in funding within months, Pensco still told the IRS these founders' shares were worth less than $1,700 at the end of 1999. Under certain circumstances, there is no statute of limitations. If Pensco did knowingly misrepresent the value of the shares, and if the funding round did imply a wildly different valuation, IRS could still pursue the case.
- lotsofpulp 5y ago> The problem here is that this was clearly a prohibited transaction I have been unable to find any source for this claim. Even ProPublica, the people with the original documents and the most incentivized to break the news, do not claim this.
- vmception 5y agoIRAs can be shareholders in anything. They can be 100% shareholders as well. They can even form their own companies from the beginning. Being a minor shareholder in a corporation isn't a prohibited transaction or run afoul of self dealing regulations. Even in circumstances that they would, you having less than X% of voting shares mitigates that, the X depending on what type of tax deferred or exempt entity is in question. SOME tax deferred/exempt entities have stricter self dealing regulations and even they wouldnt have had an issue here as Peter Thiel was one of several co-founders.
- klipt 5y agoBut if you work for a company owned mostly by your Roth IRA, that's easily abused. Suppose you're a consultant and your one-person consulting company is owned by your Roth IRA. You could deliberately draw a very small taxable salary, so that most of your work goes towards increasing the company's untaxed value in your IRA. You're basically making your earnings tax free. Obviously, your Roth IRA's company employing you at below market rate isn't a fair, arms length transaction.
- vmception 5y agoOkay. Don't mess it up.
- s1artibartfast 5y agoThe problem would be buying the company with the roth, not the wages afterwards. It is completely legal to own a company and pay yourself below market rate, or even not at all. In fact, it is how many small business work. In your example, the company still has to pay corporate tax, even though it is owned by the IRA. The only tax advantage to your consulting scheme would come at the time you sold it to someone else, or liquidated it.
- bklyn11201 5y agoIt is not legal to own an USA S-Corp and pay yourself a below market rate.
- ABCLAW 5y ago>"How is Thiel investing in his own company not considered a prohibited investment?" It should be, but the IRS doesn't catch every cheat, and as with most other white collar crime, the responsibility can be laundered through a number of accountants and other professional staff, resulting in fines rather than jail time. So a lot of rich people make a lot of questionable calls regarding how their assets are categorized and if they get caught out they generally just pay what they're supposed to have paid, or sometimes slightly less (some countries have legislation prohibition tax authorities from accepting settlement offer at under-assessed amounts, but there are ways around that too). If they're particularly risk-averse and ballsy, they'll ask for an advance ruling certificate or another pre-emptive ruling on their filings to confirm they're correct beforehand. You can bake those too, if needed.
- fny 5y ago1. Thiel was not rich when he did this. He was 32 with $2K tucked away in a Roth, maybe more in a standard IRA. 2. What he did was in no way illegal. He did not cheat the system. The IRS would have come down on him with a hammer already, and they haven't managed to figure out how to do it for the last decade.
- s1artibartfast 5y ago1. Thiel was not Mega rich, but he had money, he had worked as a lawer for a few years and managed his own venture capital firm. Either way, this is irrelevant as he met the income requirements to contribute to an IRA. 2. It very well may have been illegal, as mentioned in the top level post. The purchase price was the legal value, but using an IRA as a vehicle to invest in your own company appears be prohibited by IRA regulations. At the time, it was a purchase <$2000, and may not have been reviewed. If paypal was someone else's company, there would be no legal issue.
- Taniwha 5y agoessentially it seems that his venture capital firm IS his Roth IRA - and it was making the investments - definitely not hands off
- deleted 5y ago[deleted]
- fny 5y agoEasy. He doesn't own the company, shareholders do, and he happens to be a shareholder. If you work for Microsoft, can you buy Microsoft shares in your IRA? Yes. This is why the IRS can't do squat about this. It's completely legal. If he owned a controlling interest (>50%) things would have been different. If you bought the property as part of an incorporated entity, it would be entirely legal for you to do work or be contracted by that entity.
- runako 5y agoIt appears this transaction would invalidate the IRA under today's law because he was an officer of the company. (Unclear whether the original law was written that way or whether this loophole was closed sometime after.)
- fny 5y agoIt's still completely legal. These disqualifications only kick in when you own a controlling interest (more than 50%) of an entity. [0]: https://www.irafinancialgroup.com/learn-more/self-directed-ira/investing-your-ira-in-a-business-you-work-at/ https://www.irafinancialgroup.com/learn-more/self-directed-i...
- runako 5y agoKeep reading the disqualified persons section: https://news.ycombinator.com/item?id=27621342 https://news.ycombinator.com/item?id=27621342 It specifically sweeps in classes of people with responsibilities that are held by typical active co-founders: "(H) an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10 percent or more of the yearly wages of an employer) of a person described in subparagraph (C), (D), (E), or (G)" Very difficult to a) be a cofounder with meaningful equity b) not do any work so this provision doesn't trigger c) keep your equity and d) have it be worth anything.
- jklein11 5y ago
- marris 5y agoI can think of two reasons: (1) It was not his own company when the IRA made the investment. That is, the IRA invests alongside other investors at the founding. Anyone who wants to buy shares at 0.01 is able to do so. He is not dictating some special price that only he gets. (2) If some investors create an SPV to invest in PayPal (e.g. to limit liability), then his IRA becomes an investor in that SPV. He loses management control over that portion of the investment, but when the SPV sells its PayPal shares, it distributes the cash to all investors, including to the IRA.
- onetimemanytime 5y agoAll is OK, until they take a closer look (and IRS, I assume will now)
- TuringNYC 5y ago>> What I don't understand about this whole maneuver is that Roth transactions must be made at arms length; ie, "Transactions must be made at arm’s length and not involve the IRA owner or a member of his or her family." Wouldnt this be as simple has investing in another company (managed by external managers) that then invests in your company? I'm sure the wealthy have all sorts of ways to get around this.