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This is just flat wrong. The income contributed to a Roth IRA is post-tax. It is a retirement account that is economically equivalent to a 401k. The only differ

This is just flat wrong. The income contributed to a Roth IRA is post-tax. It is a retirement account that is economically equivalent to a 401k. The only differences are 1) timing on when the gains are taxed and 2) whether you can self-direct it or not. Saying “not intended to allow” is simply nonsense that covers for the abusive 401k system that fleeces individuals at the benefit of the finance industry.

PaulDavisThe1st 5y ago
The "income" in this case is the gains on the stock purchased as part of the Roth IRA, not the income contributed. Nobody cares about Thiel spending a few post-tax dollars on some wierdly cheap stock. The issue is that this stock grew to be worth US$5B within the Roth.
- the_optimist 5y ago
  That’s also incorrect. If he could have done this in a 401k he would have Exactly the Same amount of money.
  - PaulDavisThe1st 5y ago
    He would owe taxes on the amount when he withdrew it from the 401k or traditional IRA. He will not owe taxes on it the gain occured while the stocks are in a Roth IRA.
    - the_optimist 5y ago
      Yes. Again, he will have the exact same amount of money in both cases at the end of the day. Somehow you envision that finding opportunities to return 10.000x on investment are a tax loophole. If have such “loopholes” available simply let me know and I will fund them on a pre- or post-tax basis. Perhaps society should allow more people the freedom to find these lottery tickets on their own and grow instead of demanding the funds and investing them in things like abandoned military equipment in foreign countries.
PaulDavisThe1st 5y ago
Also, I don't know the full scope of 401k's but the one I have is absolutely not post-tax and is equivalent to a traditional IRA, not a Roth.
- the_optimist 5y ago
  You’re missing the point. In all accounts you are either taxed now or later. The exact same amount of $ value in incremental capital gains are untaxed in all qualified accounts, by design and intent.
  - PaulDavisThe1st 5y ago
    One of us is clearly not correctly informed about this. Traditional IRA: contributions are pre-tax, tax paid upon withdrawal. Theory is you will contribute more to avoid taxes while earning, compound growth works to your benefit, but now pay taxes on the full amount in the IRA as you withdraw it. Roth IRA: contributions are post-tax, no tax paid on withdrawal. Conventional theory for typical earnings level is that you will be in a higher tax bracket when you start withdrawing then when contributing, so pay the taxes up front, let compound growth do its thing, then take out the entire amount with no taxes. Ergo, if you can get contributions into a Roth that you know will show enormous amounts of gain, you're going to be able to pull that out entirely tax free. That would not be true for a traditional IRA or 401k, where you will pay taxes as you withdraw.
    - the_optimist 5y ago
      I agree with this. If you do the math, you will recognize that the end amount that you have in your pocket, given the same tax rate, is the same. That is true irrespective of the rate of return.
      - PaulDavisThe1st 5y ago
        That's missing the point entirely. If Thiel had been unable to place that stock into a Roth IRA (i.e. buy it with funds already in the Roth), then the gains on it would end up being subject to taxation. Instead, he will be able to withdraw the $5B or whatever it is without paying any taxes on those gains. For example, had he done this with a traditional IRA, then as he eventually withdrew the money, he would pay tax on the full amount in the IRA. Put pseudo-graphically: Roth: 1: invest $1 of post-tax income in the IRA 2: direct the IRA to purchase $1 of some stock 3: wait N years 4: IRA now worth $5B 5: withdraw $5B tax-free Traditional/401k: 1: invest $1 of pre-tax income in the IRA/401k 2: direct the IRA/401k to purchase $1 of some stock 3: wait N years 4: IRA/401k now worth $5B 5: withdraw $5B and pay income tax rate on $5B - $1 Difference in total benefit: whatever the tax is on $5B - $1

PaulDavisThe1st 5y ago

The "income" in this case is the gains on the stock purchased as part of the Roth IRA, not the income contributed. Nobody cares about Thiel spending a few post-tax dollars on some wierdly cheap stock. The issue is that this stock grew to be worth US$5B within the Roth.

the_optimist 5y ago
That’s also incorrect. If he could have done this in a 401k he would have Exactly the Same amount of money.
- PaulDavisThe1st 5y ago
  He would owe taxes on the amount when he withdrew it from the 401k or traditional IRA. He will not owe taxes on it the gain occured while the stocks are in a Roth IRA.
  - the_optimist 5y ago
    Yes. Again, he will have the exact same amount of money in both cases at the end of the day. Somehow you envision that finding opportunities to return 10.000x on investment are a tax loophole. If have such “loopholes” available simply let me know and I will fund them on a pre- or post-tax basis. Perhaps society should allow more people the freedom to find these lottery tickets on their own and grow instead of demanding the funds and investing them in things like abandoned military equipment in foreign countries.

PaulDavisThe1st 5y ago

Also, I don't know the full scope of 401k's but the one I have is absolutely not post-tax and is equivalent to a traditional IRA, not a Roth.

the_optimist 5y ago
You’re missing the point. In all accounts you are either taxed now or later. The exact same amount of $ value in incremental capital gains are untaxed in all qualified accounts, by design and intent.
- PaulDavisThe1st 5y ago
  One of us is clearly not correctly informed about this. Traditional IRA: contributions are pre-tax, tax paid upon withdrawal. Theory is you will contribute more to avoid taxes while earning, compound growth works to your benefit, but now pay taxes on the full amount in the IRA as you withdraw it. Roth IRA: contributions are post-tax, no tax paid on withdrawal. Conventional theory for typical earnings level is that you will be in a higher tax bracket when you start withdrawing then when contributing, so pay the taxes up front, let compound growth do its thing, then take out the entire amount with no taxes. Ergo, if you can get contributions into a Roth that you know will show enormous amounts of gain, you're going to be able to pull that out entirely tax free. That would not be true for a traditional IRA or 401k, where you will pay taxes as you withdraw.
  - the_optimist 5y ago
    I agree with this. If you do the math, you will recognize that the end amount that you have in your pocket, given the same tax rate, is the same. That is true irrespective of the rate of return.
    - PaulDavisThe1st 5y ago
      That's missing the point entirely. If Thiel had been unable to place that stock into a Roth IRA (i.e. buy it with funds already in the Roth), then the gains on it would end up being subject to taxation. Instead, he will be able to withdraw the $5B or whatever it is without paying any taxes on those gains. For example, had he done this with a traditional IRA, then as he eventually withdrew the money, he would pay tax on the full amount in the IRA. Put pseudo-graphically: Roth: 1: invest $1 of post-tax income in the IRA 2: direct the IRA to purchase $1 of some stock 3: wait N years 4: IRA now worth $5B 5: withdraw $5B tax-free Traditional/401k: 1: invest $1 of pre-tax income in the IRA/401k 2: direct the IRA/401k to purchase $1 of some stock 3: wait N years 4: IRA/401k now worth $5B 5: withdraw $5B and pay income tax rate on $5B - $1 Difference in total benefit: whatever the tax is on $5B - $1