The income has already been taxed. The economics are identical to other qualified retirement plans. This is simply more about restricting freedoms and making excuses for targeting Peter Thiel personally.
What Thiel did was (and is) not illegal, but it is viewed as an abuse of the intent of a Roth IRA that (some in) Congress want to restrict in the future.
Nobody cares about Thiel spending a few post-tax dollars on some wierdly cheap stock. The issue is that this stock grew to be worth US$5B within the Roth.
Traditional IRA: contributions are pre-tax, tax paid upon withdrawal. Theory is you will contribute more to avoid taxes while earning, compound growth works to your benefit, but now pay taxes on the full amount in the IRA as you withdraw it.
Roth IRA: contributions are post-tax, no tax paid on withdrawal. Conventional theory for typical earnings level is that you will be in a higher tax bracket when you start withdrawing then when contributing, so pay the taxes up front, let compound growth do its thing, then take out the entire amount with no taxes.
Ergo, if you can get contributions into a Roth that you know will show enormous amounts of gain, you're going to be able to pull that out entirely tax free. That would not be true for a traditional IRA or 401k, where you will pay taxes as you withdraw.
If Thiel had been unable to place that stock into a Roth IRA (i.e. buy it with funds already in the Roth), then the gains on it would end up being subject to taxation. Instead, he will be able to withdraw the $5B or whatever it is without paying any taxes on those gains.
For example, had he done this with a traditional IRA, then as he eventually withdrew the money, he would pay tax on the full amount in the IRA.
Put pseudo-graphically:
Roth: 1: invest $1 of post-tax income in the IRA 2: direct the IRA to purchase $1 of some stock 3: wait N years 4: IRA now worth $5B 5: withdraw $5B tax-free
Traditional/401k: 1: invest $1 of pre-tax income in the IRA/401k 2: direct the IRA/401k to purchase $1 of some stock 3: wait N years 4: IRA/401k now worth $5B 5: withdraw $5B and pay income tax rate on $5B - $1
Difference in total benefit: whatever the tax is on $5B - $1
This is not true - traditional IRA contributions are made pre-tax.
I'm sorry, but I made a factual statement. The money placed into a traditional IRA is a pre-tax contribution. The treatment of distributions is not relevant here; I am responding to a GP claim that money used in self-directed IRAs is strictly money that has been taxed.
Taxing tends to remove incentive to do something by increasing the cost. We want people to be productive (get paid an income)
Taxing wealth rather than capital gains and income seems far better, once you set aside the enforcement part of the conversation.
Once you bring that part in, you’re basically arguing we should o what’s easy, not what’s right.
Look at property tax, for example. It's a wealth tax and it requires a very complicated apparatus to generate ok-ish numbers every year. But that mostly works because houses are a moderately liquid market, so appraisers can mark to the existing market. And even then there's a lot of dubious stuff around the margins, like the way Trump was giving different valuation numbers depending on whether he wanted a loan or to brag (high valuation number) versus paying taxes (low valuation number).
Uhh... have you heard of capital gains tax? (And capital loss deductions).
Instead - the name is big and bloated. Expanding budget deficits mean expanded spending, which can never go down.
War is peace. Freedom is slavery. Ignorance is strength.