Peter Thiel’s $5B Roth IRA Tax Haven Is the Hottest New Investing Tip
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[1] https://sftaxcounsel.com/can-you-utilize-an-llc-to-hold-stoc...
IRAs simply cant have assets contributed to them, only USD cash. With that USD they can purchase anything.
Additionally, stock options aren’t relevant here when it can also just buy shares directly, easy when you have executive authority over the company to sell shares.
Thiel had under 10% ownership of PayPal quick enough that year to comply with regulations (he had 3.5% ownership in 2002 when it was sold)
OR Thiel paid the penalty of $2,000 (100% penalty if transaction not undone) and didnt unwind the transaction, and still appreciated all the upside
OR the IRS took too long to discover the issue to levy the $2,000 fine
Doesn’t matter we don’t have the details, those are the possibilities and universe of consequences
If you're arguing that these stock units were purchased when the "company" was created in 1998, then you're talking about Confinity (not "PayPal"), which only had 3 founders. Thiel was clearly a >10% shareholder at the time. Or are you trying to argue that Thiel had a 0% stake, because his IRA had all of his stake?
You're using a 3.5% number from 3 years later, after merging with x.com, and raising ~$170M.
> OR Thiel paid the penalty of $2,000 (100% penalty if transaction not undone) and didnt unwind the transaction, and still appreciated all the upside
This is the biggest cop-out excuse of "valid". By this logic I can sell myself (into my Roth) all of my assets every year for $1, pay a $1 penalty, and everything is a-okay.
The other side of the logic is that the ownership percentage can be bound to the tax year instead of just the moment of the transaction. So you would be using an average % ownership which could have changed rapidly.
And of course there is the simple reality that he paid a $2000 fine
The financial engineering has always been available, obviously for 20+ years, many people just hadnt been inspired to do it until now. There are plenty of similar possibilities available that considers multiple state paths of value to generate massive returns.
But tax details are private and between Thiel and the IRS.
> “You want to put in [to a Roth IRA] highly undervalued assets that could grow massively in value,” Joshua Sheats, the host of the show, said on an episode that extensively praised Thiel’s strategy.
So the "investing tip" is to gamble on wildly speculative investments rather than invest in index funds. Investing in highly undervalued assets - it's so simple, why didn't I think of that sooner!?
This will make a few wildly rich, and many more will underperform the market. On average, everyone will do just as well as an index fund would've, because averaging is the entire point of index funds.
I'd be way more interested in repeatable advice for how to turn $2000 into $5B than I am in how to avoid paying taxes on it.
I don't think that's as useless a tip as you make it sound.
Suppose everybody invests in exactly the S&P 500. Nevertheless, each person can decide to hold the more speculative stocks in their Roth IRA and the others in a regular IRA, 401k, or taxable account.
That doesn't require identifying the best investments, just the relatively volatile ones.
So it seems like logical advice that is practical to implement, to me.
Nobody here thinks people can do that. I asserted the tip is meaningful even assuming people can't pick winners.
The universe of available stocks contains different companies, with different market capitalizations, and different historical volatilities.
Assuming you can't select the best performing ones, you can still select the ones that are smaller and more volatile.
Do you have an issue with the assertion that owning foreign stocks, mutual funds, ETFs, etc (for a US person) is best done in a taxable account and not an IRA? Or does market efficiency indicate to you that shouldn't matter?
May or may not find them to be willing, but you also won't know until you try.
You can withdraw the original principal tax free after five years and profits can be withdrawn at any time by paying income taxes and a 10% penalty.
If you have any other assets it’d be stupid to withdraw it though. Tax-free accounts are the last one you want to draw from.
1. Contribute cash to the IRA. Use IRA cash to buy stock options from someone who holds those options (e.g. yourself). Ensure that you have real paperwork to back up the price that you're paying because if you don't the IRS is going to eat you alive!!!
2. Wait until options have value.
3. Contribute additional cash to IRA.
4. Use cash to exercise options.
There might be a slightly different flow to contribute the options, consult someone who knows what they're doing.
Non-arms-length transactions, which includes you selling something to "yourself", are prohibited transactions with respect to IRAs (for pretty obvious reasons).
Sadly, I didn't think to ask the startup I worked for about this. Would have been nice to not pay taxes to diversify.
Employee stock options are earned income, and you can't assign earned income into an IRA to escape taxation.
Before you ask, you're also not allowed to sell your stock options to your IRA.
As for how Thiel did it? It was arguably a prohibited transaction at the time and he's likely arguing that the statute of limitations has long past.
In my opinion, the entire IRA should be considered tainted and have taxes owed on all gains since 1999.
There could also be the argument that this constitutes tax fraud (depending on whether or not the $0.001 price was significantly under the market price that investors were offered at the same time), which as far as I know means the statute of limitations doesn't apply.
But this isn’t really so complicated, a Roth IRA can own normal options, an options contract can be for anything, you just need someone to sell it to you and you need enough capital in the roth to exercise it.
this isn’t controversial just reality
tl;dr
> Rather than dump his money into index funds or some other safe investment, Thiel spent $1,700 for 1.7 million shares of PayPal (a company he cofounded), at $.001 per share, inside his Roth. Within a year, the value of his PayPal shares skyrocketed from $1,664 to $3.8 million. Thiel then sold those shares (still within the Roth), meaning the value of his Roth became millions.
Be at the right place at the right time and have everything work out in your favor, lol
Sensationalist reporting.
As to why it’s illegal, selling an arbitrary number of shares in your private company to yourself for 1$ then buying it back from yourself at say 1 billion dollars is normally legal. So, without such limits everyone could move unlimited money into a Roth IRA.
and the penalties are also clear, up to 100% penalty of the value of the transaction if it isnt unwound
Thiel could have paid that $2,000 and not unwound the transaction
It is not possible for the court to hear any other perspective
The timing of his “investment” is also off, he put the funds in after a seed round. Therefore those shares where worth far more than the annual Roth IRA contribution limit.
You can sell shares at arbitrary discounts especially when there are not liquid markets. If stock options are more necessary to circumvent accounting then in the money options can be used as well, with the Roth purchasing the stock options instead of earning it and getting more money in future years to purchase the in the money stock.
Now the government doesn’t go after the vast majority of criminals be that the IRS, FBI, or your local cops. However, that has no impact on what is or isn’t breaking the law as written. As such this was clearly tax evasion because it’s illegally reducing taxes he would owe and it’s fraudulent activity because it’s falsifying financial records for personal benefit. Hell was likely also wire fraud depending on how he submitted tax documents, not that such charges are normally tacked on to such cases but they still apply.
You know, 22 years later you can still do this as well and it wouldn’t be tax fraud or wire fraud.
You can do it even better now, than then, by doing backdoor Roths.
Play the game by a more efficient set of assumptions because yours are just self limiting.
Not if he used am old pre round validation after the investment occurred at a higher valuation as has been reported.
Also your penalties where off: However, if the individual for whom the IRA was established or the IRA’s beneficiary engages in a PT with respect to the IRA, the sanction is the loss of the tax-exempt status of the IRA as of the first day of the taxable year in which the PT occurs.
As such, all transactions after the original transaction lack their tax exempt status. As such based on listed rules and including interest and penalties and he’s potentially facing a multi billion dollar tax bill.
I just don’t see how another perspective can be reached with the same information
Put aside some money for the future.
Invest the money into company stocks, generally.
(Hopefully) having made good investments, have more money in retirement.
Retire and have some tax free money.
Most investments don't apprechiate quite so much, of course, but there were no rules on investment returns, only about contributions (and restrictions on self-dealing which may very well apply)
I found the article inspiring. How many people would have the foresight to do what he did and delay gratification by locking up that kind of wealth until the age of 59.
You are at no greater advantage in growing your money after tax unless the tax code changes. (tax code change risk is the only reason people go with a roth). It just provides certainty.
A roth IRA does not save you money unless the tax code changes unfavorably and at the time you exit the capital.
The math of taking the tax cut upfront (and then compounding your investment within) vs taking the tax cut later (after compounding) is actually the same.
I mean, just look at how Thiel did it, it's not like he was trying to decide how to stash $1700. He saw it specifically as a way where he could buy a large amount of his shares at basically nothing because he knew if it grew he'd have a large amount of tax free cash to play with.