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Comment by aeturnum | Hacker News Reader

I think you're missing the thrust of ProPublica's reporting. This is not an article claiming that laws have been broken. It is pointing out the difference in intent and reality for a part of our financial law. It is not that Thiel is getting huge windfalls from this account now (he is a billionaire, he does not need them), it's that this is another example of a billionaire getting abnormally large absolute benefits from a financial instrument.

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.

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The problem is not Peter Thiel. it's not rich people. It's the fact that our elected legislature has created a nightmare boondoggle of a tax code. Rich people have the resources to hire CPAs to dig through tens of thousands of pages of tax law and create strategies to use the law to their advantage. If the law were simple, there would be no way to do this kind of gamesmanship.

Personally, I think that we should ditch the entire tax code, set a flat income tax rate - a single rate that applies to everyone and every kind of income - and a standard deduction of say, 1.5x - 2x of whatever "poverty level" income is.

Such a system is triple-progressive: first, high income earners pay more because x% of a lot of income is a lot bigger than x% of a little income. It's progressive in that poor people pay nothing due to the standard deduction, and middle income earners pay a pittance for the same reason. And it's progressive in that it eliminates all loopholes so there's no way for high earners to game it. But it only works if you eliminate all deductions and special income treatments including the sacred cows (mortgage deduction and capital gains).

Of course this is fantasy; lobbyists for CPAs and for attorneys would never support anyone who voted for this kind of simplification.

And, Congress would f** it up immediately by restarting the "let's use the tax code to reward our donors and punish our enemies" process.

Sigh.

Yup. This is why I encourage everyone to do their own taxes. It would help people see how stupid it is. So complicated for no reason .

You think that the legislature exists in a vacuum? That it writes out all these loopholes for fun? That other nations are just broken with their simpler tax code? This is yet another "American exceptionalism" thing where _somehow_ America is the only developped nation in the world with this level of issue yet seems to think it's sort of... intrinsic to the world.

The most prescient thing I saw about the Panama Papers leaks was that the biggest reason so few americans were present in those is that America is basically already a tax haven for rich people.

A flat income tax rate is not progressive by the usual definition, even with a flat deduction (imagine trying to scale _that_ to inflation and the endless debates). And we already have a solution for what you propose: gradual increase in the tax rate based on income levels! It has the added advantage of actually handling inflation (since the dollar amounts will go up over time anyways), and don't require a single "big tax number".

If you believe what you say, just argue to remove various deductions and exceptions. We already have percentage-based tax system, there's no need to be that much cleverer.

> You think that the legislature exists in a vacuum? That it writes out all these loopholes for fun? That other nations are just broken with their simpler tax code? This is yet another "American exceptionalism" thing where _somehow_ America is the only developped nation in the world with this level of issue yet seems to think it's sort of... intrinsic to the world.

I missed the part where they are suggesting any of these things.

> If you believe what you say, just argue to remove various deductions and exemptions.

That's exactly what they are arguing?

> where they are suggesting any of these things

>> Of course this is fantasy; lobbyists for CPAs and for attorneys would never support anyone who voted for this kind of simplification.

>> And, Congress would f* it up immediately by restarting the "let's use the tax code to reward our donors and punish our enemies" process.

I think it's a bit defeatest to just say that it's just intrinsincly impossible for better things... but I'm maybe reading into those comments too harshly.

They're arguing to rip out everything and replace it with a flat tax + a deduction.

What I'm arguing instead is to do a line-by-line removal of exceptions and deductions, and don't try a "novel" flat tax (instead sticking to a tax with income brackets and different rates, that we _already have_), as it is a better system. And you get the advantage of the optics of "making the tax code simpler" rather than "replacing the tax code".

A universe in which we just removed the number of IRS forms that exist is _roughly_ as good as the universe in which replaced all the forms with one form, except that removing the number of forms and still having a W2 would be much easier to migrate to, and doesn't involve nearly as much philosophical debate (even if the result is roughly equivalent). We don't need a novel solution here, we can just move more towards what other nations do (and where we are actually not that far from!)

That's fine, there's plenty of reasonable debate to be had about specific policy reform, but OPs main point, to me, is how exactly do you intend to get Congress too enact it?

Their campaigns are bankrolled by the people benefiting from the loopholes.

The reason it's so byzantine because taxation is control. The government wants to control your behavior, and when it's prohibited by law from doing it by threat of violence or coercion, it still can do it by employing the tax code. What happens if the court finds the government can't force people to buy health insurance? We declare it a tax on not-buying health insurance. What happens if the government wants to ban something, but is concerned the courts would find it overstepping its boundaries? Tax it until nobody can afford it. Want people to do something? Declare tax credit for it. Want to subsidize certain company? Issue them tax credits. Etc. etc. Nobody would be willing to give up such a versatile tool.

The tax code is structured this way by design, by rich people. If rich people wanted a simplified tax code without loopholes, then they would actively lobby for this, and I guarantee congress would act to simplify the tax code.

Many politicians also feel that a flat tax rate isn't sufficiently progressive; that only by taxing higher incomes at higher percentages than lower incomes is it "truly" progressive.

OTOH, many politicians do want to see the tax code vastly simplified- they want the sort of system where you could fill out your taxes on a form small enough to fit on the back of a post card.

Everyone has their favorite thing that they want exempted (farms, capital investments, social security / welfare disbursements, medical expenses, school expenses, mortgage interest, rent, etc), and there are millions who would be put out of work by it- accountants, tax preparers, much of the IRS would be redundant, etc.

All of these competing interests keep us where we are. Blaming it on the "rich people" is lacking in any sort of honest intellectual rigor.

The tax code is like everything else created by the US legislature: a product of many decades of compromise between competing ideas. I'm pretty sure none of it was designed.

No. There aren't enough "rich people" to get a politician elected. Most of these things in the tax code are one small chip at a time to make some ordinary person favor a particular politician. Including things like "Roth IRAs" The fact that they have unintended consequences is another story.

I don't think the fact that Peter Theil has a billion dollars hurts me in any way, and no I'm not some unrealistic person who thinks that I, too, can be a billionaire! Only a petty person would be disturbed that someone else has more money than him. It's not a zero-sum game. The fact that there are some outlier billionaires doesn't hurt the ordinary Joe.

If rich people were actually determining the US tax code, the top 10% wouldn't be paying most of the taxes in the US, and the US tax code wouldn't be hyper progressive. The US would have, at worst, a flat tax approach to income taxes, were the rich determing the tax code.

ProPublica had to commit intense intellectual fraud recently - in their recent tax propaganda rush which is being directed by the Biden White House as part of its hike taxes program - to try to pretend the rich weren't paying their fair share. The rich and upper class are the only ones paying their fair share in fact. Everyone else in the US pays extraordinarily low tax rates by and large. ProPublica had to pretend that unsold stock assets should be called income, that we should calculate rich persons income tax rates based on unsold stock holdings (and the con-artists at ProPublica of course invented new terminology to shoehorn the fraud in), and then that we should lambast those rich people for not paying enough income taxes for said unsold stock. What a joke.

All that's going on right now is the culmination of decades of wildly irresponsible fiscal behavior in Washington DC, and the bill is finally coming due, so they have to drastically increase taxes just to keep the government solvent and to keep the entitlement programs from collapsing. To assist with that agenda, outlets like ProPublica are willing to lie as much as necessary to spin whatever message is required to get the job done.

How would you handle stocks not paying a dividend? It is a clear moral hazard and with a flat tax you could expect even more companies to adopt this practice of only doing stock buybacks.

A flat tax would presumably have the same rate for dividends and capital gains, so I guess it would be pretty much the same for companies?

Stock buybacks aren’t capital gains, until the stock is eventually sold to trigger the capital gains event. More recently, we have seen that wealthy people just never sell the stock and take out low interest loans against it, effectively paying a tax ratr of just a few %.

Nothing wrong with that, it’s like a mortgage. The loan must be repaid at some point and so will the tax on capital gains.

I came here to write basically this same comment. Big fan of the negative income tax as a better (IMO) version of UBI as well. But as you say, it’s probably never going to happen.

> because x% of a lot of income is a lot bigger than x% of a little income.

If you make $10k a year, vs someone who makes $10M a year, and both are taxed the same, the lower income person loses more purchasing power. At 15%, The hit of $1.5k is a harder loss than than the $1.5M.

$10k is definitely under the 1.5-2x poverty threshold proposed by the comment you're replying to. Under their proposal, the $10k earner would pay no income tax at all.

Numbers for illustrative purposes. A graduated tax is more fair from a purchasing power perspective.

ProPublica ran a series a couple years back about Intuit (who owns TurboTax) doing all the lobbying and bribery to keep the tax code complicated:

https://www.propublica.org/article/inside-turbotax-20-year-f...

> And, Congress would f* it up immediately by restarting the "let's use the tax code to reward our donors and punish our enemies" process.

The only way to stop this process is a grassroots wave of politicians who refuse the support of corporate donors and have the political will to ban corporate political donations and put something like a $500 yearly cap on individual political donations. This would basically be the end of lobbying. I hope to see this happen in my lifetime. It seems like something zoomers might be willing to do in 20 years when they have more political relevance and the boomers are dying out.

What specifically are you arguing against?

Roth IRAs are not some bizarre tax loophole. They're an extremely common vehicle for people planning for retirement - unless their income is too high, that is. Many companies even offer Roth 401(k)s or other Roth vehicles for retirement as well. And taxes are indeed paid when the money is put in.

If someone follows the rules and is extremely successful with their investment strategy with money in a Roth IRA, then what's the problem?

Seems the law is working as intended.

You will never convince me in a million years that $2k was actually the fair market value of his investment that was later worth $5 billion. No one is lucky enough to pick an investment like that with the tiny amount of initial capital you can put into an IRA.

There are clearly some kind of shenanigans going on to artificially lower the price he paid to smuggle it into the IRA. Those shenanigans may well be legal, but they shouldn't be.

Since you're beyond convincing, I won't try to. Maybe the article itself can?

> In an interview with ProPublica, Pensco founder Tom Anderson recalled how Thiel and other PayPal executives had wanted to put startup shares of the company into traditional IRAs.

> Anderson dangled something sweeter.

> “I said, ‘If you really think this is going to be big, you know, you might want to consider this new Roth,’” recalled Anderson, who is now retired. If the investment ballooned, he remembered saying, “‘you’re not going to pay tax on it when you take it out.’ It’s a no-brainer."

> The math was compelling. Thiel wouldn’t get a tax break up front, but he’d avoid an immense tax bill later on if the investment surged in value.

For everyone else who is open minded:

Thiel's IRA held Confinity shares. In 1999, Confinity wasn't worth much. In 2021 the company now known as PayPal is worth quite a bit. Confinity could have just as easily folded, been a victim of the dot com bubble, failed to make a deal with Elon Musk's x.com and lost to them, or had any number of disasters along the way that would have wiped out that portfolio.

Even ProPublica's reporting admits this was a risk. The investment adviser's words are "If you really think this is going to be big, you know, you might want to consider this new Roth."

Ironically, because startups fail so much more frequently than they succeed and because the federal government doesn't tax wealth but income, which can be artificially minimized in relatively simple ways, the government would probably be better off if all startup shares in all companies were held in Roth IRAs, since they'd be taking an up-front cut of a likely failed investment.

Thiel's vast fortune held in a Roth IRA is a corner case, but any talk of it "depriving" the government of revenue when he pre-paid taxes in good faith according to the law and thereby took a fairly significant risk without the benefit of hindsight seems like pure envy.

> the government would probably be better off if all startup shares in all companies were held in Roth IRAs, since they'd be taking an up-front cut of a likely failed investment.

Only if the alternative was holding it in some other tax-advantaged account like a traditional IRA.

Most start-up shares are held in normal taxable accounts because the holders haven't performed shady sales below market value to launder them under the IRA contribution limit. Compared to that the government only loses money by having them in a Roth account.

> Only if the alternative was holding it in some other tax-advantaged account like a traditional IRA.

How much revenue (income tax, capital gains, whatever) does the IRS receive for an investment whose value drops to $0?

Also, no fraud needed to happen. He earned the money from Confinity, paid taxes on it, invested in some of his (very risky) shares with the IRA and then it paid off over the next 2+ decades.

If you have evidence of this kind of fraud, please let us know. If it were to exist, you'd probably see some evidence (e.g. parallel books, skepticism from investors). ProPublica has tax and other records and they seem to have no evidence that supports your claim whatsoever.

Isn't the most likely story that he put his shares in this account, his company did take off and now he has continued to grow it?

From my memory of how early stage startups work:

The company’s future is very unclear and subjective, and informed investors make bets using their experience and the market determines the price.

But that’s for the preferred stock.

The employees are compensated with common stock, which is valued at some fraction of that. There is often no market price since it’s not sold to investors. It’s also very unclear and subjective, and the reported value is picked by the company in a situation where everyone wants it to be low.

The first result Googling it (DLA Piper) says it often used to be determined by just dividing the preferred stock price by 10, until accounting rule changes in the early 2000s.

I think “fraud” is a bit strong here - it’s very subjective after all - but it may not exactly be a fair market price either.

I'm not claiming fraud. I'm claiming he bought the shares for less than the fair market value.

It's probably not illegal, but it should be (buying below market value in an IRA, not buying below market value in general), because it makes a mockery of the contribution limits for IRAs.

> It's the fact that our elected legislature has created a nightmare boondoggle of a tax code.

I wonder who is financing campaigns of people who keep those loopholes open?? It must be illuminati.

Its a open 'secret' that organised lobbing entities control legislature on a tight leash. Doesn't matter if you vote blue/red/purple the outcome will be the same, you just get different packaging.

"I think you're missing the thrust of ProPublica's reporting. This is not an article claiming that laws have been broken. It is pointing out the difference in intent and reality for a part of our financial law."

If that is what it is trying to point out then it is failing.

This is the intent of a Roth IRA. This is not an accidental feature or a weird corner-case or an unintended consequence. One cannot borrow against a Roth IRA and one cannot withdraw from it without paying taxes. AFAICT there is nothing interesting here other than the dollar value.

"... and I think you should be embarrassed to say that the people who created the Roth intended this."

I am not your comment-parent but I think they should neither be embarrassed nor not-embarrassed.

Are you embarrassed that Billionaires can deduct mortgage interest on their primary residence ?

Are you embarrassed that Apple Computer can write off business lunches ?

> Are you embarrassed that Billionaires can deduct mortgage interest on their primary residence ?

I was embarrassed to live in a country that had that law, yes (I don't any more). It's a real indictment of a political system that would allow such a thing.

If you’re embarrassed that corporations with billions and trillions can expense expenses then the problem may be you.

A political system that has different expense rules for different company sizes sounds like a nightmare of dipshits trying to micro issues.

Set the rules that are fair on first principles, make sure taxes are proportionate, stick with that.

Rules that are fair on first principles are exactly what I want. The mortgage interest tax deduction is nothing of the sort; it's a grotesque carve-out that distorts the tax system for the sole purpose of transferring common wealth to the people who least need it. It's just obscene.

The mortgage tax deduction is only for the first $375 (or $750 for couples).

It seems pretty fair as billionaires don’t even notice such a tiny deduction.

If anything it gives money to the middle/upper class but encouraging home ownership is an overall positive force.

It encourages debt and buying larger homes (e.g. the common advice to get the biggest mortgage you can), which doesn't necessarily increase overall home ownership (larger homes means fewer homes). Even if it does encourage home ownership, why is that a social positive worth spending tax money on - especially when we're talking about putting tax money straight into the pockets of the top ~half of the population (the bottom ~half don't own homes at all), and the more expensive your house the more you get? Even with a cap, that's just backwards.

What is your limit on how much money should be "sheltered" by a Roth IRA?

At the time Thiel was not an ultra-wealthy billionaire. From the article.

“I said, ‘If you really think this is going to be big, you know, you might want to consider this new Roth,’” recalled Anderson

The Roth IRA is intended to be a retirement vehicle for people to make contributions too with the intention of it not being touched till after retirement. As a perk, it is not taxed.

Maybe its not within the "spirit" of the law, but I hardly see how trying to create incredibly granular restrictions on start up founders or people that believe they have a better investing strategy is the right approach.

What about making it easier for normal people to have access to the same IPOs that Thiel had access to?

And Roth IRAs are funded post-tax. That means he paid taxes on the income already, before he put the money into the IRA. That's why it's "tax-free".

I think that's fair, although, and correct me if I am wrong. Its his current income tax, so it's highly likely that his income tax bracket is lower than the cap gains tax that would normally be applied on investments like this.

That being said, I tend to agree. Its to prevent double tax in which you're trying to promote a better investment. Your long term health and retirement.

I'm correcting you: Unless he makes less than $40,000 in salary, the capital gains tax rates are going to be lower than the tax rate for ordinary income. The chart in this article reveals more: https://www.investopedia.com/articles/personal-finance/10151...

Are you suggesting any investment that is made after you've paid taxes on it should be tax free regardless of growth? Roth is an exception, not the rule. Tax is cyclical, not a one time thing, by design. It was never the case that you only ever paid tax once, and it's confusing to me that it's even being suggested otherwise. Roth is a very special exception to this.

Not just anything, but the other kind of IRA lets you put money in without paying income tax first.

Why are you ignoring the most significant difference with the other kind of IRA?

That with a Roth IRA you pay the tax rate when you're working, and a normal one you pay according to the tax rate when you're retired?

Once again you are leaving out an important detail. The amount of money that you pay the tax on for a Roth is often orders of magnitude less than a traditional IRA, regardless of rate. You are avoiding A LOT more tax with a Roth. It's a fixed initial payment with a Roth, yet it scales indefinitely with a traditional IRA. It's a huge difference.

I was never clear on how much difference it made. Either you pay (say) 20% up front or you pay 20% later. With compound growth multiplying in the middle, does it really make a difference to how much you have at the end?

0.8 * (1.07 ^ 20) == (1.07 ^ 20) * 0.8

Your math is wrong.

(0.8 * 1.07) ^ 20 and (1.07 ^ 20) * 0.8, which are not equal. I'm assuming that 0.8 is the percentage after tax, 1.07 is the deposit, and 20 is the growth.

No, your mathematics is wrong. The growth rate (1.07) is what's compounded, not the deposit.

No, my assumptions are wrong then - what does "20" represent here? and does the "^" symbol represent the power function?

Yeah sorry for being cryptic. It's 20 years compounding at 7% per year. Scenario one: take your starting investment, subtract 20% for taxes, then do the compound growth. Scenario two: take your whole starting investment, do the compound growth, then subtract 20% of the result.

It's totally possible that I missed modeling some part of the situation that somehow makes more money from the Roth way of doing things. But the models above produce the same results.

Imagine I’m Peter Thiel and I have obtained 1 million shares of PayPal at $.01 each. After 20 years I’m going to be able to sell these at $1000 each (all numbers made up). Thiel can now do one of two things:

1. Roth IRA: Pay taxes on the value of the principal up front, but not pay taxes on appreciation. Let’s say a 20% tax rate (made up for simplicity), so 20% x .01 x 1M = $2,000. Thiel writes a check for this relatively small number.

2. Traditional IRA: pay no (immediate) taxes on the principal up front, but pay taxes on the appreciated value. So assuming the same tax rate: 20% x 1M x $1000 = $200M.

Your math is correct, of course. The mistake is assuming that Theil would pay taxes by selling 20% of his inordinately valuable $.01 PayPal shares, even though technically (after appreciation) those would be worth $200M. That would be stupid —- obviously he wouldn’t do that, he would just write a check from his bank account — selling that principal would be absurd since such shares can’t be purchased or sold on any liquid market. The entire purpose of using a Roth IRA here was that Theil had access to a unique, non-liquid asset with a potential for extremely high appreciation, and he wanted to insure himself against paying taxes in the likely event that happened.

IMHO a part of the problem here is that the initial “price” of PayPal wasn’t determined by the market. So allowing Theil to pay taxes at that rate made it absurd for Theil to sell any of his principal to pay taxes. Even if you grant that PayPal was basically a lottery ticket, we shouldn’t use a middle class tax vehicle to shield taxes on assets that the middle class (broadly) doesn’t have access to in public markets.

The difference I don't get is: why is buying $1,667 of stock and paying $333 in tax different from buying $2,000 of stock that you will later realize 80% of? You spend the same total amount up front and get the same result later.

> The difference I don't get is: why is buying $1,667 of stock and paying $333 in tax different from buying $2,000 of stock that you will later realize 80% of? You spend the same total amount up front and get the same result later.

If $1,667 is a correct valuation for the stock -- meaning, the stock is valued by a liquid and well-functioning market -- then maybe there is no difference! From that perspective, there's no difference between writing a cash check for $333 and keeping the principal, vs. selling $333 of your principal and having a lower return in the long run. The long-term expected value is basically the same, you're just investing your money in a lottery ticket. But the lottery ticket is available to anyone else, and it's (in theory) fairly valued by the market.

But let's suppose that $1,667 isn't a fair value determined by a liquid and well-functioning market. Let's suppose you have strong reason to believe that this stock will be worth quite a bit of money, and moreover the market valuation is low because it's an asset that only you have access to purchase (e.g., because you're a founder with pre-IPO shares that can't be purchased for any price on any liquid market, and so the valuation is something absurdly, comically low that your lawyer scribbled on an Operating Agreement in order to minimize your taxes.) You're certainly not going to sell $333 of your massively undervalued assets to pay the taxes.

In that case the whole logic of the Roth IRA falls apart. The Roth IRA is supposed to be a savings vehicle for the middle class, where investors pay a tax on income received, then get a tax deduction on appreciation (i.e., one that is subsidized by the US tax payer.) But what is a "fair" way to calculate your income when it includes illiquid stocks? For certain assets, the "fair price" is literally whatever my lawyer says it is. So allowing highly illiquid (and not-well-priced) assets into this system seems like an invitation for abuse.

There is a separate question about whether the total Roth IRA tax benefit should be capped to something like $10m in your lifetime even when restricted to fairly valued liquid assets. After all: the US taxpayer is subsidizing this as a middle-class retirement program. But disallowing the inclusion of weird, illiquid assets might be a good idea as well.

> What is your limit on how much money should be "sheltered" by a Roth IRA?

This is what I am saying the article is raising!

I'd limit it to $10m myself. Seems like that would be enough to retire on. Probably tie it to inflation?

What number would you pick?

> What about making it easier for normal people to have access to the same IPOs that Thiel had access to?

I would be fine with that but it seems like a separate issue?

How about freedom and no limit? Why limit?

I'm not sure I would pick a number if I am honest, but I can understand that a number probably exists.

If this wasn't Thiel but rather someone else who made 60k/yr or 120k/yr, I don't think this would even be a conversation. So what if they turned their Roth IRA into 100 million.

In my opinion that is encouraging the right behavior and the intent. Investing 2,000 per year of their wages and trying to be somewhat forward thinking about their retirement.

Now there is the open question of if an average person is able to truly analyze such investments, but I think that is a separate issue as well.

I'm fine with limiting additional contributions to the Roth IRA once its value passes some number (and around $10M, indexed to CPI, feels reasonable).

I'm not bothered by investments whose value grows beyond that figure, to be honest, mostly because it's not clear what you'd actually do about it without trying to value unrealized positions and more likely compel transactions. (Valuing listed shares is relatively straightforward, but compelling transactions is abhorrent to me.)

I would go so far that additional gains above $10 million are exposed to capital gains, as contributions are inconsequential compared to the compounding of the account’s assets at that account value.

This is in line with QSBS tax treatment of corporation shares, where if certain conditions are met, there are no capital gains on the first $10 million.

https://www.brownadvisory.com/us/theadvisory/qsbs-tax-exempt...

Any balance in excess of ten million dollars at end-of-year should be a mandatory distribution. That’s a simple and very fair way to address the Romney-Thiel issue.

>What about making it easier for normal people to have access to the same IPOs that Thiel had access to?

I agreed with everything you said but the above. It gets weird when financially illiterate have access to 'Private companies'. Look at what happened to dogecoin.

Edit: Financially literate is a loose term, but a million in assets not including real estate does seem excessive.

Honest question: do you think it’s a good idea to protect people from themselves?

The answer isn’t binary, it’s a sliding scale between 0 (zeroism, nobody is allowed to be harmed by anything) and 1 (do whatever you want).

Seat belts, road signs, the FAA, the FCC, the FDA … all these are protecting people from harming themselves.

I don’t think it’s possible to have a functioning society at 0 or 1, but whether 0.35 or 0.55 is a better setpoint is hard to say for sure.

So more like yes for some cases, no for others. But how do you choose?

Consensus. Either direct or indirect, because that's part of what a society is.

> successfully used an instrument designed for the 'middle class' to shelter billions in earnings

A Roth IRA is beneficial if positions are being changed (taxable events), because those taxes are deferred. For very long term holding, the benefit caps out at 20% in exchange for tying up the assets for decades.

He will eventually benefit, if the company is still valuable when he comes of retirement age, by avoiding the single long term capital gains hit he would otherwise pay. It'll be more of a story, then, if the stock is near an all time high value, but frankly, this is not a scalable investment strategy for the wealthy sheltering their wealth (which would be a more interesting story). This only worked because he has been an exceptionally prescient investor. This wouldn't be a good strategy for every startup founder, because even if the startup was mega-successful, the founders would not be rich until retirement.

He has been constantly changing his positions and using the proceeds to invest in other companies. The benefit isn't one time, it is compounding over time, because he gets to keep investing the 20% of extra money he would have had to pay in capital gains, over and over again, as he shifts his money between investments. It would pay off anyways even if he did have to pay 20% when he eventually withdraws, but the fact that he gets it all tax-free makes it pay off massively.

He also doesn't have to keep all of his wealth in this Roth IRA, just a percentage. And it clearly is a scalable strategy because lots of people are doing it.

Nothing is deferred with a Roth IRA. There are no taxes owed on distributions.

This worked because he used a self directed IRA that most likely invested in some LLC with a marginal amount. It's very probable he also invested in the same company via some other investment vehicle, possibly direct ownership. The managing members simply assigned more benefits to the self directed IRA instead of the other account...

What does not seem fair is that most people think you can only invest in stocks and bonds in an IRA. You go to a bank or brokerage to open an IRA account... They offer you mutual funds, etfs, stocks, bonds... not much else... No one ever tells you that you can do this a different way and invest in different ways... Why? It's just too complicated for most people...

https://trustprovident.com/self-directed-investing-in-a-limi...

Yes it does suck for the rest of us but if you have money you have good advisors that can construct this IRA and all of its transactions in a legitimate manner.

What really sucks is I never got the opportunity to invest in PYPL at $0.001 per share. That’s the part that actually confused me. Sure its pre-IPO, but I’ve never seen any that are pricing their shares that low in the beginning, did I miss something?

oh yes the par value of stock...

https://www.nolo.com/legal-encyclopedia/what-is-par-value-st...

I think he went the route of his IRA's investment llc membership units being assigned a super large assignment of income distribution vs his initial investment.

just guessing...

I’m still not really following, what are you saying about assigning income distribution?

But so the way the article made it sound then is his IRA paid for the shares at par value ($1700 = 1700000 shares IIRC). Even though they were of course worth more than par value, so then he owes money to the company for the difference but if that wasn’t paid out of the IRA that would seem an incredible and surely illegal tax dodge so I don’t think that could be the case.

my bad you are correct,

https://sdirahandbook.com/self-directed-ira-investing/fund-s...

it is in section: Need to Know #1: Prohibited Transactions

https://sdirahandbook.com/self-directed-ira-investing/fund-s...

looks ok

> 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.

I remember when I was young and maxed out my Roth, also converted a lot into it, and a tax accountant warned me that the government could change the rules so the gains are taxed. I thought, "no way, they couldn't do that!"

Now I see they very well could as a response to arguments such as yours.

I can't say I'm a fan of Thiel's business or writings however many of us rely on Roth remaining as-is. It already has limits. Thiel simply made good investments. We shouldn't punish that unless there was something like insider trading occurring. And that should not impact the existence of the Roth.

> Now I see they very well could as a response to arguments such as yours.

I think the parent is arguing that a Roth should be limited to some reasonable ceiling, e.g. $1M, $5M, etc.

You would disincentivize good investments and reduce GDP as a result.

You can only put earned income into a Roth, you can only put up to 6K per year, and you are only eligible to put anything at all for a given year if your total earned income was below a fairly modest threshold. Roth IRA already has plenty of restrictions. The fact that one man happened to be some combo of smart/lucky to make the modest initial investment turn into billions is definitely not an indication of whether the Roth is problematic. I think the parent may be confused about the exact details of a Roth.

You can rollover to get around contribution limits [1], and the government gets your money now rather than later,

> A Roth IRA rollover (or conversion) shifts money from a traditional IRA or 401(k) into a Roth. You can get around Roth IRA income limits by doing a rollover. You'll owe tax on any amount you convert, and it could be substantial.

Limiting the max amount would reduce near-term government tax revenue. So I don't think it would happen.

[1] https://www.investopedia.com/how-to-do-a-rothira-rollover-47....

Interesting, I thought there was an income limit on rollover as well but apparently that was axed in 2010. In any event Thiel couldn't have used this.

This is happening because it's Peter Thiel, and he's an enemy of progressives, or at least, he is in their mind.

If it came out this was someone they like and hold dear, there'd be no article. That's why this whole article is pathetic.

By Law of Large Numbers alone, we're almost guaranteed there's another person with another Roth IRA with another outcome almost just like Peter's... but we'll never hear about it because that person didn't vocally endorse Donald Trump for president, doesn't do blood transfusions with 18 year old donors for mesenchymal stem cells, and isn't a thorn in the progressive side.

"exactly as intended"

I would say it's exactly the opposite of intended. ROTH IRAs were never intended for professional investors to avoid taxes.

Perhaps disqualify accredited investors from ROTHs? Or make it convert if the holder makes so much $$ they become an accredited investor.

Or if the individual has paid AMT or less than 20% average tax through age 59.5 then tax all withdraws as ordinary income.

I believe that in some countries the equivalent to a Roth is limited to exchange traded companies and relatively low risk funds and bonds. If the intention is for normal people to save for retirement this makes sense to me.

I mean...it was intended for everyone to use, and the intended use was to avoid taxes (in this one, very limited context). And professional investors are part of "everyone".

So...I mean....it really is the intended use.

The intention was not to create tax shelters for the ultra-wealthy. Hence the income limits.

Thiel used a loophole to grow his wealth using the Roth as the vehicle.

Is the loophole investing well?

It was at least not a public intention, but I know more than one multi millionaire that has used this "loophole". Peter thiel isn't some super rare exception

Backdoor Roths are a thing. The income limits don't matter in practice. The trick is getting appreciable money into the necessary accounts in the first place.

He didn't use any loophole. He didn't make more than the allowable yearly contribution, which is small. If someone can turn that into billions good for them. The vast majority of wealthy people could not, hence why this is a weird anecdote like OP was saying, not an actual problem with tax code. And there are many such actual problems we should be focusing on.

There's all the evidence it's exactly what Roth IRA is for in its very design. If whoever designed it meant it to have caps - they would make it have caps. They know how to do caps - they did caps on contribution, they did caps on income for being allowed to contribute (which btw is super low). They didn't put caps on the account size because they didn't intend to have them, not because everybody who designed it suddenly had a stroke and forgot caps are possible.

All systems with rules have outliers. If Roth IRAs are hugely beneficial to a large swath of the middle class and at the most extreme outlier it lets a billionaire dodge what is, at the end of the day, a barely significant amount of taxes maybe the correct response is to not care. If policy reaches a local maximum for distributing good and you're upset that someone is wealthy, maybe it's your own envy that's at play.

What is the goal here: to make revenue for the government or to punish successful investors?

Thiel paid taxes on his Roth IRA - when he put the money in. As a result, the government didn't have to wait till he was 59.5 years old to get their cut. Thiel for his part was willing to use that money for risky investments. As in, the cash deposited in that account could have well gone to $0 if not for the fact that Thiel is a gifted investor. In that case, the IRA would have been worth nothing but the government would have still gotten their cut ahead of time.

Management and mitigation of risk - both for individuals AND the government - is literally the reason Roth IRAs exist. This is indeed the law working absolutely as intended.

Anyone could follow the Thiel strategy, except for the fact that ordinary Americans are forbidden from investing in risky investments because they're deemed too stupid by that same government and that Thiel is probably a better investor than just about anyone else.

And Thiel is not alone. Max Levchin also dodged taxes by putting his early investments in an IRA.

If the act is not an official tax dodge, then it’s a breach of fiduciary for a large investor like Max or Theil AND the company to fail to disclose the IRA lock-up. For Max or the company to show the cap table or advertise the investment on a roadshow yet fail to communicate the illiquidity of the holding— that’s materially misleading.

You misunderstand it. The holding is not illiquid. It's fully liquid, it's just that Peter and Max's access to the cash proceeds aren't. If someone buys the shares in the Roth, their position is fully liquid: they can sell the next day and use the cash for anything. And the sellers can take the cash and use it for anything that looks like an investment. Like, invest it into another company, or into real estate (like a mansion or yatch)

That's wrong. Holding something in an IRA doesn't prevent you from selling it, only from taking the proceeds and putting them in your personal checking. The proceeds continue to be property of the IRA/401k, and can be re-invested elsewhere, without incurring a taxable event.

You can day-trade in your self-directed 401k or IRA until you're broke or Thiel-level rich, and the IRS will never get involved.

I mostly agree with the top-level comment, here; ProPublica is losing a lot of credibility for their mildly misleading and black-and-white framing of these tax issues, and I'm someone who genuinely believes that wealth inequality is a problem that can and should be addressed by the state.

Can one hold and trade crypto in such a vehicle?

Theoretically, yes. You'd have to use a self-directed IRA, but it can be done.

I do

In Theil’s and Max’s case, the proceeds account for 99.9% of the account’s value, no? The investments appreciated over 100x. Thus the entire position is locked up / faces withdrawl penalty. Maybe the position could be liquidated but the ROI would be lower. As a VC, the action signals such a friendly relationship with the founder that the VC doesn’t care about the returns. That materially affects incentives—- especially voting incentives.

You're still misunderstanding how the retirement trust works: selling shares does not imply a withdrawal, it just means that instead of owning stock, the retirement account now owns cash. Because selling is not a withdrawal, there is no withdrawal penalty, and no influence on the trustee's ability or willingness to sell.

> This is not an article claiming that laws have been broken. It is pointing out the difference in intent and reality for a part of our financial law.

There's always a difference between intent and reality. A hammer can be used for many things other than hitting nails.

If they intended something else, then why didn't they write the rules to reflect "else"? The truth is that they didn't think that any Roth IRA investor would be as successful as Thiel. He showed that he can be. Good for him.

The law is an evolving code as we discover new scenarios. This reporting is exploring one of those unexpected scenarios so we can understand the need to change the law.

Not to mention that rich people can pay the smartest legal scholars and financial gurus to find workarounds and engineer ways to make more money.

> If they intended something else, then why didn't they write the rules to reflect "else"?

If the web server didn't intend to allow a buffer overflow on POST requests, why did it improperly allocate memory?

I agree with you that we have a choice: should this be allowed? If not, how do we transition? If yes, do we want to place any limits on it in the future?

Why wouldn't it be allowed? If my investments into my Roth IRA performed so we'll i became a billionaire, I wouldn't want to be treated differently. And I wouldn't want my mom or my neighbor to either. They essentially got lucky, they're not taking anything from me in being so fortunate.

The "problem" in this case is that Thiel was already a billionaire to begin with, and such luck on top of existing wealth is what irrationally bothers people.

We have a progressive tax system, which generally taxes higher incomes at greater rates. Maybe we do want the Roth to be an unlimited shelter, but that has generally not been the approach we have taken.

> The "problem" in this case is that Thiel was already a billionaire to begin with, and such luck on top of existing wealth is what irrationally bothers people.

This isn't how I feel and I don't actually think that is the case ProPublica is making. Tax breaks can also be understood as payments - is it in the interest of the US to pay Thiel to put his money in a Roth? How much should the US pay? How many of your tax dollars would you want to go to funding tax breaks for Thiel?

I am sure people are vindictive as well, but the tax questions seem both meaningful and work asking to me.

> Is it in the interest of the US to pay Thiel to put his money in a Roth? How much should the US pay? How many of your tax dollars would you want to go to funding tax breaks for Thiel?

I submit that yes, it is in the interest of the US to do this, provided that Thiel is creating value for the US (and to some extent the world) with that money. $5B is approximately one day of US government spending (maybe less now). Letting Thiel invest $5B may not be the best investment decision that the USG has ever made (e.g. Internet funding, Telsa support), but it is way higher than the mean decision.

I think this is a strange zero-sum way of interpreting things. It assumes tax income is fixed in some way, and that some not being taxed means others always get taxed more. That's false.

The difference is also that the investments your mom or your neighbor put into their Roth IRA are going to be publicly traded companies and similar. Thiel, an accredited investor and startup founder, tweaked his salary to be low enough for a Roth and sold himself shares of his own company at a very low price to put into his white glove managed Roth IRA.

The average person does not have the ability to do this.

When you create a tax shelter, someone always asks "what if someone uses this to create an enormous amount of wealth"? This is not just true for the US tax code, but has been true for probably every tax code in history. When that question is raised, the first thing to contemplate is how likely it is to occur. And if it is not considered likely, then this risk is accepted.

Fuzzing may be a good analogy. Fuzzing can be used to test POST request processing when the logic is too complicated to validate via more formal means. We try a large sample of inputs. If they pass, then the test passes, even though we cannot be confident that the code will handle every input string correctly.

Right, but like - if you later find a buffer overflow that the fuzzing missed - you'll fix it right?

Sure, if you can reproduce the input and if you agree that it is misuse. This is a scenario where we don't know the formula to create $5B, and and there is no consensus that it ("making an extremely successful investment in a tax shelter") is misuse.

Are you seriously trying to say that lawmakers can't write buggy code with edge cases they didn't consider?

Sure they can.

Here, I think some lawmakers probably thought (a) "if someone can use this tool that well, then more power to him", or (b) I don't like it, but it is so unlikely, and I can probably live with it.

I don't think it was a scenario of someone failing to "consider the case."

I think you are missing the point of GP. There is nothing billionaire specific about what Thiel did. You could have done the same with the same Roth contributions. If the law is changed it will not only limit Peter Thiel from doing this but also you and me.

> If the law is changed it will not only limit Peter Thiel from doing this but also you and me.

That obviously not necessarily true. One can imagine a change in law that limits tax sheltering of this type for any individual to say, 10mm. A tiny fraction of the population would be affected.

> That obviously not necessarily true. One can imagine a change in law that limits tax sheltering of this type for any individual to say, 10mm. A tiny fraction of the population would be affected.

Or limit the types of assets that can be held in an IRA to those that are publicly traded and can be bought on the open market. It seems like an important part of this scheme was Thiel basically got to set the price of some shares he sold himself, because they weren't publicly traded at the time.

Then you are limiting what people can do with their money 2 inflating stock prices of giant companies. What if I want to invest in a friend's business or buy a rental property. Are you saying it should be illegal for me to do that with my IRA?

> Then you are limiting what people can do with their money 2 inflating stock prices of giant companies.

So? It's what 99.999% of them do anyway.

> What if I want to invest in a friend's business or buy a rental property. Are you saying it should be illegal for me to do that with my IRA?

Yes.

No. IRA is funded with your money, so you should be able to do with it what you please. Next you'll be telling people they can only buy ETFs because stocks are too risky.

Better yet, they can only invest in blue-chip companies

> No. IRA is funded with your money, so you should be able to do with it what you please.

No. You can't even do what you please with money that's not in an IRA. And I mean, you already have to accept other restrictions to enjoy the tax advantages of an IRA, so what's so bad about adding another small one to solve this problem?

All money is yours legally. The gov can tax it.

Some things are are illegal to do with money and assets, but that doesn't mean that everything belongs to the government

If you can legally invest in an asset in a taxable account, you should be able to invest in the same when its an IRA. Anyone can take advantage of this. Why do you want to restrict the way people invest their retirement funds?

The gains over doing the same at a taxable accounts are not your money, but public funds (the taxes not paid on those).

With taxable accounts, it is legally your assets, gains or not. You pay taxes when you sell. Just like with a traditional, non-Roth IRA: you pay taxes when you withdraw. The IRS makes the rules.

The IRS doesn't make the rules, but enforces them.

Unlike a somewhat popular opinion on this website, the law isn't an algorithm, but a codification of societal norms, like that we all share the expanses of living in civilized society.

Yes, the TRANSFER of assets happens at time of sell or withdrawal, but the share taxes was painted such when we (the people, through legislation. Not the IRS!) decided that such share should be dedicated to society.

This isn't about letter of the law, and never was: it's being an asshole.

That doesn't even make sense. The "share" is not known until the assets are sold or withdrawn, and also subject to change based on whatever tax law happens to be at the time. If I hold a stock long term, instead of day trading and accruing short term gains and associated taxes, am I being an asshole?

You can do what you please with your money and one of your choices is to put it in an ira or not. If you've decided to put it in a specially tax advantaged shelter defined by the government then you follow the rules they define for that status, if you don't want to then you don't put it in an ira

It always amazes me how quick people are to needlessly take away freedoms and fuck others over as a knee-jerk reaction.

Putting restrictions on others should have careful thought and clear rationale.

> It always amazes me how quick people are to needlessly take away freedoms and fuck others over as a knee-jerk reaction.

What freedoms? We're talking about tax advantaged investment accounts intended for a very specific public purpose, which are already restricted in many ways because of that.

If you don't like restrictions, we could also solve this problem by abolishing IRAs then. Does that sound better to you?

You are proposing adding new restrictions on what people can do with their money. That is taking away their freedom. It is worse because you propose it as a solution to problem that doesn't even exist.

Your being very optimistic here and changes will make the existing v poor US pensions system worse.

edge cases make bad law eg using the small number of social security cheats to reduce entitlements to all or the tiny tiny number of cases of elector fraud to disenfranchise the poor and BAME.

Dunblane and the Dangerous dogs act in the UK are related.

This is the sort of thing that fringe "hobbyist" activists do assuming they aren't paid agent provocateur's

> Your being very optimistic here

I'm not being optimistic or pessimistic, just pointing out a logical fallacy.

“The law, in its majestic equality, forbids rich and poor alike to sleep under bridges, to beg in the streets, and to steal their bread.”

I think there are about 4 billion billionaire-specific things Thiel is getting out of this arrangement that aren't accessible to me (or, I suspect, to you).

That's the point. It should limit temporarily embarrassed billionaires like you and me from doing this if we regain our riches.

It's clear that the IRA system was created to encourage saving for retirement through tax deferral.

It was not intended for billionaires, because for them it serves no purpose in encouraging them to save for retirement. (Financial security in retirement is not something billionaires worry about.)

The idea that there is no way the law could exclude this sort of benefit while not hurting the middle class is absurd. There are any number of ways to do it: for example, any plan with more than $10 million in capital gains could have gains above that amount lose their tax-exempt status.

>It's clear that the IRA system was created to encourage saving for retirement through tax deferral.

It is not clear to me that IRAs were created for this reason. As far as I can tell, they seem to exist only to provide plausible deniability (and poorly at that) for 401ks giving an advantage to big businesses that can afford to implement them (pre Vanguard/cheap passive investing days) over smaller businesses that could not afford to implement 401ks.

Otherwise, I see no reason why people who work for employers that can afford to offer 401ks should have a leg up in tax advantaged retirement savings over people who do not and have to rely on IRAs (which have drastically lower contribution limits).

>It was not intended for billionaires,

It would have been simple to write in a limit for maximum amount of tax free gains in Roths.

There is actually something millionaire specific about what Thiel did. He was an accredited investor that was able to buy private shares that the general public cannot buy.

If IRAs were only allowed to purchase publicly-listed stock, this wouldn't have happened.

Which also gives the accredited investors another advantage: with less capital available, the valuations are inherently depressed.

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