4 ms·

But 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 klipt 5y ago

But 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 ago
Okay. Don't mess it up.
s1artibartfast 5y ago
The 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 ago
  It is not legal to own an USA S-Corp and pay yourself a below market rate.
  - s1artibartfast 5y ago
    That is a good point. S-Corps are an exception, because the corporations do not handle income tax the way a C-corp would.
jklein11 5y ago
>But if you work for a company <i>owned mostly by your Roth IRA</i>, that's easily abused. As I understand it, you can't own a company that you(or a relative) own a controlling interest in with your IRA. I can see the sense in this because if own 20% the person(people) who own the other 80% have an incentive to make sure I'm not playing any kind of games with the finances. In the case of Thiel, it seems like he took $2000 and made a moonshot investment in Paypal. At that point his investment could have just as easily went to $0 as it was to hit $5 billion. He took the risk, why shouldn't he have gotten the reward?
- vkou 5y ago
  > He took the risk, why shouldn't he have gotten the reward? And he should get the reward, minus capital gains tax. This country provided an environment for that investment to turn into five billion. He couldn't have done the same thing in Somalia, or Vietnam, or Greece. Why shouldn't it reap its share? Nearly everyone else pays their fair share of taxes.
  - jklein11 5y ago
    He invested a tax advantaged $2000. If he had invested that $2000 in the S&P 500 in 1995 he would have a tax advantaged $25,000. He would have been out that tax advantaged $25,000 if paypal didn't take off. Instead he decided to make a much longer shot bet and for him it paid off. I can understand adding legislation that would tax distributions on Roth IRA's for billionaires. Thiel would be fine if he had to pay taxes on that windfall. I just think that it is a mischaracterization that he isn't paying his fair share of taxes. To me, it doesn't seem like he did anything wrong. He took advantage of a system that is accessible to everyone.
    - Retric 5y ago
      The issue is as far as people can tell he illegally invested 2000$ from an IRA. You’re not allowed to invest in a company with an IRA if: 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) https://uscode.house.gov/view.xhtml?hl=false&edition=1994&req=granuleid%3AUSC-2000-title26-section4975&num=0 https://uscode.house.gov/view.xhtml?hl=false&edition=1994&re... Being the CEO clearly qualifies. That said, the statute of limitations means you can often get away with things if they go unreported for long enough. It may be he’s currently in the clear.
      - mattferderer 5y ago
        The article says he was audited. > In 2011, Thiel caught the attention of the IRS. The agency launched an audit, tax records show. The records don’t spell out what the IRS was looking at or if it involved Thiel’s Roth. Whatever the case, the audit was closed years later and Thiel didn’t owe any more taxes, tax records show.

by klipt 5y ago

vmception 5y ago

Okay. Don't mess it up.

s1artibartfast 5y ago

The 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 ago
It is not legal to own an USA S-Corp and pay yourself a below market rate.
- s1artibartfast 5y ago
  That is a good point. S-Corps are an exception, because the corporations do not handle income tax the way a C-corp would.

jklein11 5y ago

>But if you work for a company <i>owned mostly by your Roth IRA</i>, that's easily abused. As I understand it, you can't own a company that you(or a relative) own a controlling interest in with your IRA. I can see the sense in this because if own 20% the person(people) who own the other 80% have an incentive to make sure I'm not playing any kind of games with the finances. In the case of Thiel, it seems like he took $2000 and made a moonshot investment in Paypal. At that point his investment could have just as easily went to $0 as it was to hit $5 billion. He took the risk, why shouldn't he have gotten the reward?

vkou 5y ago
> He took the risk, why shouldn't he have gotten the reward? And he should get the reward, minus capital gains tax. This country provided an environment for that investment to turn into five billion. He couldn't have done the same thing in Somalia, or Vietnam, or Greece. Why shouldn't it reap its share? Nearly everyone else pays their fair share of taxes.
- jklein11 5y ago
  He invested a tax advantaged $2000. If he had invested that $2000 in the S&P 500 in 1995 he would have a tax advantaged $25,000. He would have been out that tax advantaged $25,000 if paypal didn't take off. Instead he decided to make a much longer shot bet and for him it paid off. I can understand adding legislation that would tax distributions on Roth IRA's for billionaires. Thiel would be fine if he had to pay taxes on that windfall. I just think that it is a mischaracterization that he isn't paying his fair share of taxes. To me, it doesn't seem like he did anything wrong. He took advantage of a system that is accessible to everyone.
  - Retric 5y ago
    The issue is as far as people can tell he illegally invested 2000$ from an IRA. You’re not allowed to invest in a company with an IRA if: 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) https://uscode.house.gov/view.xhtml?hl=false&edition=1994&req=granuleid%3AUSC-2000-title26-section4975&num=0 https://uscode.house.gov/view.xhtml?hl=false&edition=1994&re... Being the CEO clearly qualifies. That said, the statute of limitations means you can often get away with things if they go unreported for long enough. It may be he’s currently in the clear.
    - mattferderer 5y ago
      The article says he was audited. > In 2011, Thiel caught the attention of the IRS. The agency launched an audit, tax records show. The records don’t spell out what the IRS was looking at or if it involved Thiel’s Roth. Whatever the case, the audit was closed years later and Thiel didn’t owe any more taxes, tax records show.