Peter Thiel turned a Roth IRA into a $5B tax-free piggy bank

The "theft" here is the undervaluation of the shares with which he purchased at

But that is not the same as intended, which is a stricter bar. Arguably a provision capping the tax-exempt returns to a mere 10000% (just spitballing, surely there are better ways to write such a provision) would have been more in keeping with the intent of the law.

The message is not that Thiel has committed some crime, but that he has cleverly and successfully used an instrument designed for the 'middle class' to shelter billions in earnings. The implication is that we should reform these tax vehicles so that the ultra-wealthy cannot use them - not that Thiel is cheating the system as it exists. The lines which talk about contribution limits to Roths are to emphasize that this was not intended to shelter this kind of wealth.

> This is someone who used the law exactly as intended

I 100% agree Thiel has broken no crime and I think you should be *embarrassed* to say that the people who created the Roth intended this. There is no evidence of that. We should recognize that this Roth IRA is sheltering more money than people expected and make (or refrain from making) regulatory changes in response.

Your argument is along the same lines: Theil followed the law, ergo nothing "sinister" happened.

Which is the same as: "It isn't sinister because there is no law."

Yet, where did laws come from? Oh right, from people who have ethics. Because our ethics do not come from laws; our morals do, but not our ethics. Morality is an invented extension of ethics, which is codified into law when people think something shitty is happening (well, that's how it SHOULD happen... but that's the School-House-Rock version)

IMHO, and many others (sadly, to your "dismay") Theil is being a greedy pig exploiting vagaries of the law for his MASSIVE gain, and there needs to be laws to prevent this kind of behavior because it is only available to the super wealthy, and it makes the elite class even more untouchable (plus a thousand other second-order effects).

I think generally they inherit?

No. Roth IRA's have contribution limits, and at a minimum I'm sure he exploited some loophole to get his adjusted gross income down below $110,000 so he could make that $2000 contribution in 1999 (https://www.irs.gov/pub/irs-prior/p590--1999.pdf). Look at his work history:

> https://en.wikipedia.org/wiki/Peter_Thiel: He then earned his J.D. from Stanford Law School in 1992.[7] After graduation, he worked as a judicial law clerk for Judge James Larry Edmondson of the U.S. Court of Appeals for the Eleventh Circuit, as a securities lawyer for Sullivan & Cromwell, as a speechwriter for former-U.S. Secretary of Education William Bennett, and as a derivatives trader at Credit Suisse. He founded Thiel Capital Management in 1996. He co-founded PayPal in 1999, serving as chief executive officer until its sale to eBay in 2002 for $1.5 billion.

To quote Daniel Ellsberg: the scandal isn't that they're breaking the law, the scandal is that what they're doing is legal.

- “Why, yes, Mr Thiel, I’d love to sell you some of my shares here for your fine tax shelter there, let’s say, hmm, 1.7 million shares.”

- “Aye, let’s do it then, Mr Thiel. Mind you though: you can only sell yourself up to $2000 worth, Mr Thiel, per year. Now say, Mr Thiel, how much are those shares there worth, you reckon, Mr Thiel?”

- “Well, Mr Thiel, I’ll write you receipt over $0.001 per share. What do you say, Mr Thiel?”

- “Very well, Mr Thiel, that sounds about right. $1700, of course, Mr Thiel, just under the $2000 limit, what a happy coincidence, Mr Thiel. You’re so savvy in valuing shares!”

- “Of course, Mr Thiel, thank you, always eager to help, Mr Thiel.”

- “The pleasure is all mine, Mr Thiel. We are so fortunate, are we not?”

The point is that this is one more example of how the wealthy and powerful have more opportunity than others, even given the same laws.

This is no different in that aspect than the problem of rich people being able to hire the best lawyers to defend themselves, while the poor receive overworked public defenders. Everything equal, the wealthy have more opportunity.

If we want a society that is equal opportunity, our laws and regulations need to account for the natural emergent properties of wealth. Our progressive tax system is a narrow, feeble attempt at doing that, but it’s certainly not enough.

I don't think that's remotely true. For a normal person with tens of thousands or even a few hundred thousand in an IRA that money is basically useless.

But for someone with billions in an IRA? He can almost certainly start a public company and use a maze of shell companies to let him do whatever he wants with the money.

If he took all of that money out now he'd be looking at losing half of it to taxes and penalties, leaving him with about $2.5B which is several of orders of magnitude more than he put into it. That's far from "essentially worthless".

I disagree about the Roth IRA being unavailable to him though. He listed it as an asset on his New Zealand citizenship application and it didnt hurt. If push comes to shove he can take any amount out of it and pay the “penalty” which is income tax + 10%, so worst case in this country is around 60% on the portion taken out if the tax residency - that specific year - was in a high tax state instead one of the many zero income tax states where it would just be 47% or so. Some European countries have it worse at relatively low amounts.

Yes. The story is shaped and told to feed the "Capitalism and Wealthy People are Bad" narrative.

Let's say I've taken over management of a private retail firm with a big multibillion-dollar balance sheet that's barely breaking even. Yesterday when my finance firm borrowed $800M to acquire it, I felt like the company was worth $900M, today as I guide it through the bankruptcy process I feel like it's worth $100k, which has no consequences whatsoever except for the $5000 in shares (5% stake) I'm issuing to myself today as a management fee. Tomorrow I'll feel like it's worth $1400M once some of its debts have been renegotiated and I take it public again. My shares just appreciated 1,400,000%.

https://www.theatlantic.com/politics/archive/2012/09/whats-r...

This is a tiny, oversimplified picture of how all this works; Everyone that takes advantage of these structures has their own spin on it. In VC it may take the form of simultaneous dollar-capitalized debt and ownership stakes. It would take an aggressive forensic audit to even know what's been employed here. There are more than enough levers to pull for this sort of compensation scheme to use arbitrary valuations to make a mockery of the program, though. With enough financial lawyers and enough money, they control the vertical and the horizontal here.

That money is tax-free. In this hypothetical, I've ascended to a partnership at this firm at age 59. I get full control of that money at age 65.

The law creating Roth IRAs was intended for middle-class people, not billionaires. Likewise, the law allowing conversions from Traditional to Roth IRAs was intended for the middle-class. A billionaire taking advantage of the Roth conversion to amass a Roth IRA worth billions is not even remotely what the relevant laws were intended for; that it is legal is an oversight on the part of Congress, who did not realize what they were drafting when they wrote the law.

Moreover, it is not as if billionaires need to exploit the IRA rules like this. Typically billionaires will avoid taxes by borrowing against the value of their assets, then deducting the interest they pay on those loans from the income they use to pay the interest (done right, this results in no income taxes). That is an example of the law working as intended.

I agree with the general sentiment of your post, but I think you’re overstating your case a bit. To me it seems pretty obvious that Thiel did stretch the law when he bought shares in his own company at a far lower price than investors payed just months later.

This is a quite common and general loophole in tax legislation. E.g. in Sweden (where I live) capital gains are taxed lower than income. This of course creates an incentive to try and convert income to capital gains, and the tax authorities are constantly on the lookout for such schemes. If you sell shares/options cheaply to yourself or employees just a month before investors pay top dollar then you can expect… trouble.

- Only let publicly traded stocks/investments be part of an IRA

- Stock grants should be included in the maximal income to determine if someone should be able to contribute to an IRA

Honestly with just these two factors he couldn't have done what he did (implicitly nor anyone else with mega IRAs). The intent of the IRA was for a retirement vehicle for the average person, not as an investment vehicle where you could dodge taxes. You're right that he didn't commit any crimes. But that also doesn't make the thing right. When we find people using edge cases and breaking the intent of the system we say "well played" then patch the framework.

This is a tax dodge, just a legal one.

1 https://en.wiktionary.org/wiki/hit_piece According to this definition, the ProPublica is not a "hit piece" because it neither presents false information nor tries to appear objective. The bias is very clear.

how did he get access to paypal shares that's <0.1$/share?

You outraged by this? Then you should be advocating for dramatically simplifying tax code and laws. I know most don't want to hear this on HN but Trump tried to do just that with his tax plan. Obviously did not go all the way unfortunately.

> Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value.

Ummmm that's called being an angel investor.

I've seen a lot of this lately too and it feels coordinated.

If the shares were really purchased below fair value, there's not much in the way of a defense of the activity.

The govt. changed rules couple of years back this so that the max you can now convert to pension phase is AUD $1.6m indexed every few years. The rest of the money stays back in accumulation phase where tax has to be paid.

This closed the loophole where really wealthy people were having $1m tax free pension earnings.

> The magnitude of my Roth IRA is certainly larger than anything I ever would have imagined when I first opened my IRA in 1984 as a 22 year old Junior Financial Analyst making $22,000 a year working for W.R. Grace & Co...

> Upon leaving Grace, I transferred my IRA to a self-directed IRA account at Charles Schwab & Co., giving me discretion over the individual investment made in the account. Over the ensuing 29 years (through the end date you quote of year-end 2018) I invested the account in only publicly-traded securities i.e., all investments in this account were investments that were available to the general public...

> The investing success of this account has been a function of careful stock selection, exceptional luck and a multi-decade time period. To have a sum of this magnitude built up in my Roth IRA is certainly beyond anything that I ever expected but it was implemented in a way that was available to all taxpayers with an appropriately long investment runway, i.e., the result is exceptional but it is not the product of exclusionary tax strategies.

[1] https://www.documentcloud.org/documents/20971124-ted-weschle...

Although yes, the main thrust of the reporting is that the tax laws are set up to hugely benefit the rich and allow them to avoid paying taxes, not that the rich are breaking the laws. With these IRAs in particular though, there does seem to be something very dodgy and possibly illegal about the way the rich are getting around the contribution limits by under-valuing non-publicly-traded stocks.

> Thiel’s unusual stock purchase risked running afoul of rules designed to prevent IRAs from becoming illegal tax shelters. Investors aren’t allowed to buy assets for less than their true value through an IRA. The practice is sometimes known as “stuffing” because it gets around the strict limits imposed by Congress on how much money can be put in a Roth.

> PayPal later disclosed details about the early history of the company in an SEC filing before its initial public offering. The filing reveals that Thiel’s founders’ shares were among those the company sold to employees at “below fair value.”

> Victor Fleischer, a tax law professor at the University of California, Irvine who has written about the valuation of founders’ shares, read the PayPal filings at ProPublica’s request. Buying startup shares at a discounted $0.001 price with a Roth, he asserts, would be indefensible.

> “That’s a huge scandal,” Fleischer said, adding, “How greedy can you get?”

> Warren Baker, a Seattle tax attorney who specializes in IRAs, said he would advise clients who are top executives working at a startup not to purchase founders’ shares with a Roth to avoid accusations by the IRS that they got a special deal and undervalued the shares. Baker was speaking generally, not about Thiel.

> “I would be concerned about the fact that you can’t support the valuation number as being reasonable,” he said.

Not at all, he can withdraw and pay a 10% penalty. He probably will never needed to since, I bet, he has other assets and it makes no sense to pay the penalty. Few people in the world get that option. A characteristic of a Roth IRA is that withdraws are tax free. 5 billion plus decades of tax free growth, wow!

The idea of taxes is for everyone to contribute to the common infrastructure we all need to live in society. It's very unfair for someone to acquire such wealth with out contributing to the system that made it happen.

True it was 100% legal but that's a loophole that needs to be reviewed since it's not a one time case. Other high worth individuals have done the same thing so it's not an out of the ordinary case. As it stands now roth ira's have no upper limit.

Absolutely. But key is the interpretation of "used the law exactly as intended". In the context of ongoing reports of no taxes paid, off shore tax shelters, etc. "intended" takes on new meaning (read: nefarious, or at least should be questioned).

The disgust isn't that he didn't do any wrong, the disgust is that what he did isn't wrong.

I hadn't heard of pro publica until around 2-3 years ago and during that time they've produced some of the most shameful inaccurate reporting I've ever read. I don't know why anyone trusts them at all. They a prime "cancel culture" mover that drives people to hate and shame others for no reason at all.

I asked a friend who has a CPA, but doesn't work in tax law. Their first comment after briefly scanning the legal code is that "disqualified person" is only used within the context of "prohibited transaction". The definition of "prohibited transaction" concerning "disqualified person" doesn't seem to address this case. Instead, it seems to focus on dealing with the Roth IRA assets in a manner to benefits ones accounts outside of the Roth.

But Thiel did not own >= 50% of PayPal.

Director && % must be satisfied simultaneously

The IRS enforces this and thats what they look for

Nobody else is able to interpret that part of the law to cause an action

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.

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.

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.

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.

I think probably they should be public data.

That aside, for very rich people, having them be public is in the interest of the public as it reveals the shady stuff they do to dodge taxes (legally.)

It's about recognizing how the entire system is stacked against working people and that these ultra-rich pay 0% in taxes, while I pay 30%.

The backbone of this nation is funded by the middle class and the poor being taxed, while the rich externalize their expenses to the government and pay little to nothing in taxation.

If some IRS docs need to get leaked, then so be it. The reporting on this has been pretty responsible.

If this was all new information I might disagree with you, but we already knew capital gains is horrendously undertaxed. And knowing the specific dollar amount doesn't change the conversation much, it just makes it that much more incendiary.

Can you point to one instance of some of this data being divulged about random citizen's finances, or used for blackmailing someone? It seems silly to complain about legitimate journalism because the data might, but has not, been used for nefarious purposes.

Google "whistleblowing".

Now if someone just sold the records to TMZ or something, that's a different conversation.

It’s perfectly ok for the wealthy to lobby Congress so that the IRS is neutered, but when a person leaks their info, it’s a crime, huh? Seems like a double standard.

2. Oh, some journos hate you? Then it's totally OK to publish you data, that's a well known exception from privacy.

3. What? Punishing people that revealed private data? Are you crazy? It's the government, they don't get punished ever. But be sure all your private data is protected. Unless, of course, some journo dislikes you, then it's your own fault.

How is what Thiel did an end around? He paid taxes on his contributions - https://www.hrblock.com/tax-center/income/retirement-income/...

The phenomenon's pretty ubiquitous among hedge funds. Tons of funds produce stellar returns at $100 million AUM, then use that track record to grow to a $1 billion+ and all of a sudden put up mediocre results.

It's not an 'end run around the tax system'. It's either legal or it's not. If illegal they run the risk of getting caught. If legal it's legal. Period. Nothing also to prevent a regular person from doing something somewhat similar other than they don't know how to or don't know it even exists to use or exploit. Now you can say 'oh well the rich can hire people who know' but there (in this day and age) nothing to prevent a regular person from taking the time to research and come up with their own schemes using online research and help from others readily available. Of course if you don't have money to be taxed what's the point of that? If you do that takes effort and most people just want to assume what is being done is wrong because someone has or has access to information and importantly knowledge they don't have.

People who are wealthy have many things that regular people don't have.

He purchased shares of his own startup at 0.001 cents, way below market rate.

To me, that's clearly not the intent of Roth IRA. This means any startup founder can simply put their ownership shares into their Roth IRA and never be taxed on their company growth.

It also doesn't seem they singled out Thiel, he has the biggest Roth IRA they know off, seems logical to discuss him the most.

(edit: typo)

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.

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.

Sounds easy and straightforward.

A good litmus test would be, what is the rate of return of a person's investments made outside an IRA vs inside the IRA.

What he did wasn't actually legal. He just got away with it.

> 10/ So.

>Right pointing backhand index 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.

> 11/ 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.

>See where this is going?

The only reason I can think of is ProPublica intended to suggest Thiel committed fraud by misstating the company’s valuation in 1999, but ProPublica wants to maintain plausible deniability because the funding round did not happen in 1999.

It is great that ProPublica is pointing out how tax deductions/exemptions/credits allow for loopholes to exist, but I do not see a reason for them go after specific people for using them.

Edit: copied tweets for easy reference

They really prey on ignorance

The funniest thing I ever saw was an African civil servant who had gone private now telling foreign companies how to fuck the government he used to work for.

No one is claiming Thiel did anything illegal. But it does seem a bit preposterous that billionaires can amass $5B Roth IRA accounts.

... with a few extra "twists" that utterly subvert the intention of the Roth IRA, making it possible to accumulate an astronomical dynastic fortune without having to pay taxes on it like normal people.

With him sometimes Bain Capital made separate share classes, and I think they would give massive dividends periodically to the separate share class that only the 401k investors at Bain Capital would receive. I think its a really great strategy!

Buffett should be doing that in Berkshire Hathaway for their employees instead of being sad about how much tax his secretary pays

> That January, The Wall Street Journal reported that Mitt Romney, the former private equity executive running for the GOP nomination, had listed on a financial disclosure form that he had amassed an IRA worth between $20 million and $102 million. The story ran on the front page and launched waves of coverage in other publications. Romney had a traditional IRA, not a Roth. But how, people wondered, could the account have grown so large, given that the government imposed strict limits on how much money could be put into one of the tax-deferred accounts?

> Citing former company insiders and documents, the Journal reported that during Romney’s time as CEO at investment giant Bain Capital, executives there had effectively bypassed the contribution limits by putting extremely low-valued shares from private equity deals into their IRAs, then watching them balloon.

I think that's what the article is about. If he contributed $5000, bought bitcoin at 1 cent and had the same amount of money now, it would be a non-issue.

What's puzzling is how apparently selective the leaked material all is. ProPublica has all these very specific memos and tax return info about Thiel's Roth IRA, and yet, they are only aware of Thiel's long IRS mega-audit (and that he won 100%), and don't know that it was in fact all about auditing his use of the Roth IRA trick? (Or that Fortune reported about the Paypal mafia's use of the Roth IRA back in like 2009?) Very odd.

Of course, if you're not an accredited investor, you cannot invest in startups. The idea is you could not recover from a loss. So I have no idea why a Roth should be allowed to invest as an accredited investor.

This is inadvisable. There is a legal way to do this. https://en.wikipedia.org/wiki/Roth_IRA#Traditional_IRA_conve...

If you're making direct Roth contributions over the limit, those are disallowed and may come back to bite you. It may be possible to recharacterize your already-done disallowed contributions as Traditional IRA conversions; I would talk with Fidelity or a tax advisor.

He was one of the founders of Paypal. At that stage, the strike price of the shares would have been fractions of a cent. More importantly, the "fair market value" of the shares of a non-public company is what the board says it to be which pre-funding is whatever they choose. Post-funding, there's usually a floor set because outsiders (aka investors) have done some analysis.

Normal people pay X% tax on the difference between strike and FMV. (X varies based on a bunch of things.)

That's all Stock Options 101.

Normal people can take advantage of the situation by executing as soon as they have the strike price. That makes the difference $0 so any % of that is still zero. The risk is that the actual value of the shares could go to zero too.

The "loophole" with Thiel is doing it all with an IRA.. which legally anyone can do BUT it's complicated and requires a specific process.

I've followed RocketDollar the past few years because they help with that and document all of it properly.

This is not financial advice.

Your IRA is a legal entity and you can grant an option to it. It needs the cash to exercise it. Options can have shares at any price in them, such as discounted to nothing but it comes down to which consequences you care about. Making a potentially screwy 409a valuation isn't a big deal, but also avoided if done before other investors come in. Either way it can be a tolerable level of consequence.

They appreciate in value to $1,000 per share.

You sell the shares, now there is $2,000,000 cash value in your Roth IRA, which you can use to make other investments.

Repeat ad infinitum without those transactions incurring any sort of tax burden, as long as you don't withdraw any of that money until you're 60.

It stays in the roth account, but you can buy and sell assets as often as you want with the money you put in.

On Wall street bets they talk about buying options with IRA accounts (famously wsbgod for example) so it happens frequently and with large amounts.

Very arguable. I would take up that argument. I don't believe this too be true.

I don't understand - can you elaborate on why exactly this is heroic?

In his case it was Paypal shares.

Then you have a massive tax-free investment shelter and you can be an angel investor for startups through it and seek out another >100x investment with it.

It helps a lot to have better information and be more plugged into the investment culture than your average person on the street reading the NYT and trying to sort out where to invest their 401k. It also helps to be a sociopath so that all you care about is returns.

There's a bit of an oversight here where the tax-free returns in a Roth shelter are completely unlimited, they probably should have been capped where massive windfalls became taxed some way, but rich people and those who carry water for them, would have flipped out.