Peter Thiel Turned a Retirement Account into a $5B Tax-Free Piggy Bank (2021)
propublica.org
propublica.org
Propublica does good work, but they reduce their credibility when they put out clickbait to induce rage at a single person playing by the rules. Guess it is easier to get people riled up against one “evil” person than the myriad representatives the populace voted for.
> Yet, from the start, a small number of entrepreneurs, like Thiel, made an end run around the rules: Open a Roth with $2,000 or less. Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value. Pay just fractions of a penny per share, a price low enough to buy huge numbers of shares. Watch as all the gains on that stock — no matter how giant — are shielded from taxes forever, as long as the IRA remains untouched until age 59 and a half. Then use the proceeds, still inside the Roth, to make other investments.
I wonder how the author determined PayPal had a “good chance of exploding in value”? Can they predict the future? Or is it using hindsight to make things seem less risky than they were.
Would you recommend a young person today to max out their Roth contribution with the equity of a startup they are working on?
The article also does not mention any of the downsides of Roth accounts.
They also talk about the system, how it came to be, etc., for example:
“About a decade after the creation of the Roth, Congress made it even easier to turn the accounts into mammoth tax shelters.”
> Would you recommend a young person today to max out their Roth contribution with the equity of a startup they are working on?
In some sense, one could view the detailed reporting as a guidebook for how anyone can do this too!
True, I should credit the article for giving the background, but I would have preferred it to be the focus instead of someone who won the lottery.
>In some sense, one could view the detailed reporting as a guidebook for how anyone can do this too!
Roths have never been a secret. They just have had very low caps (still only $6k per person), and most people would rather 95% chance of getting 5% returns on their $6k investment rather than a 0.00001% chance of getting 1,000,000% return on their $6k investment.
Obviously, a richer person has more ability to gamble and thus profit from this, but the article frames it as a guaranteed mechanism to evade taxes (uses the term “side step”), when in reality, it is still very much a gamble (assuming there is no fraud).
Alternatively: "About a decade later, politicians continued to demonstrate an inability to make hard tradeoffs and goosed short-term tax revenue in exchange for long-term tax-free growth of these accounts. Now, some people are mad about that."
This article was a nothingburger. Alternate headline: “man wins lottery with Roth investments and has to pay no taxes”
Unlike many tax shelters and other billionaire only toys, this Roth stuff is accessible to literally everyone.
If I had put in $5k of Roth money every year into Apple stock I similarly would’ve minted money.
This is not obvious to me, as it would have been trivial for legislators to specify a CPI adjusted maximum for the tax advantaged gains.
>And a pretty easy regulatory update to cap the value of Roth withdrawals.
Yes, and I encourage Congress to do that. That has always been one of the risks with opting for Roth.
1) non-public investment opportunities in combination with tax-free status
2) no sanity threshold to collect some taxes after your Roth balance becomes large enough
1 is maybe a violation of the spirit of what a Roth was designed to be used for. You should be able to invest (cash only would be dumb), but you shouldn't get tax free returns for every kind of investment you make. Public shares might be tax free, but using the Roth for venture capital or private investing seems a little wrong.
2 is just silly to me, and I blame lawmakers for that. No one needs $5b tax free, especially since you can't ever reach that with contribution limits.
Unfortunately there is not much "myriad" in the candidate choices. To even reach a level of opportunity to compete in an election means to already sell out to some special interests. It just costs too much money to run with any hope of getting elected.
Both parties in the US cater to wealthy supporters, whether those supporters are actual humans, corporations as humans, or PACs. Those who want to protect their wealth spend a lot of money to ensure that all likely candidates will make or modify rules that benefit them.
It is very reasonable for us to direct our ire toward the wealthy individuals who make very public efforts to affect policies (very selfishly). And with the recent tally of $880 million spent by billionaires on the recent midterm elections, it's even more clear where we should direct our attention.
Sure, but how does that apply in this case? Roth account legislation was passed in 1997, and PayPal was started in Dec 1998.
There are so many ways to avoid paying taxes if you are wealthy, only a few of which have been publicized (Warren Buffett vs secretary, Mitt Romney and the Bain Capital leak, Panama Papers revelations, etc.)
Regular people don't have those options; and a vastly greater percentage of their income (which is directly taxed already) goes into local taxes on gas, essentials, and any luxury purchases.
When we see another reminder of how unfair these systems are, and we know that their design comes from the people who benefit from them (like Thiel), it is reasonable to direct our ire toward them.
And finally, this doesn't even touch on the overt criminal tax avoidance that is well known to persist amongst this group. The Swiss bank leaks exposed some of these, and the US tax amnesty programs have further illustrated it. Even so, there's surely a lot more money hiding away that has not and never will be taxed.
Nevertheless, the super rich ‘legally’ avoiding the proportional contribution to society nominally expected of them _because they can_ is still anti-social behaviour and however the laws came to be is irrelevant in my opinion. Democracy is so flawed especially at the individual policy level I consider the argument that ‘the populace voted for this’ conservative in the worst most nebulous way, defending the status quo for no reason other than it is the status quo.
Of course policies that protect the super rich are beyond the normal reach of democracy because lobbying and donations are so prevalent.
Do we approve of this behaviour in a normative sense? That seems like a more important thing to keep in mind than if individual’s playing of the game is technically above board. Or how the rules came about. To me the details of the case amount to details of a symptom and what is of more interest is the underlying condition which is revealed.
FWIW I don’t know the details of the case I’m just trying to nudge the discourse in a direction I find more interesting.
Why do you put legally in quotes? Is it because you think there was zero downside risk to maxing out a Roth contribution with start up stock? The article conveniently leaves out all the possible downsides.
Seems like the problem is wealth inequality, and going after people who follow the rules (that they had no part in influencing) is a waste of time, and reduced quality of discourse due to decrease in trust.
I’m just saying that it’s still okay to condemn (just as an act of casting judgement) rule following when it’s anti social and the question of what sort of society we would like to live in is the more prescient point to bare in mind.
I put legally in quotes because I think legality is an unsound basis for reasoning about whether something is normatively okay or not okay.
What is the approximate amount of taxes for Mr. Thiel of which you would approve of? How much wealth should he retain?
If a single individual does not have the right to confiscate your wealth, but a collective body does, how many voters are required to confiscate your wealth?
Where exactly is this demarcation point? Is there a limbo zone where the morality of forcible confiscation begins to bend?
I'd even go as far to say that the $5k/yr contribution limit of Roth account makes it pretty clear that Roth was not supposed to be used to gain tax privilege on vast sums of money.
It's a retirement account. How much money do people need for retirement? 22B? Give me a break.
Intent doesn't matter now. The rule is the rule.
You can't call foul and say it's "wrong" when someone plays by the rules and wins.
If you want to advocate for changing the rules that's fine. But don't forget to consider the non-billionaire Roth holders out there, the ones that are "right", who may be affected by a rule change.
... but that doesn't mean that he gets to keep it either. There's an obligation to society, as much as the libertarian crowd hates to admit it. I think that there was an oversight in the rules, and with new data, we should change the rules. How about 1B max in your IRA? Or 500MM max? or 100MM max?
I will not cry over the loss of hundreds of millions of dollars in tax-sheltering privilege, and neither should you.
I'm not sure about that. Ever heard of a "mega backdoor Roth"? It's a legal way for high income earners to contribute much more than the normal limits.
Besides, you're free to load up on TQQQ or penny stocks in your Roth if you're feeling lucky. If you lose it all, you will have squandered a great opportunity to gain tax-free wealth. Or, maybe you'll hit the jackpot and end up with a pile of tax-free money. Then if the rules change and you have to give it back you'll probably ease off of that whole "obligation to society" line.
How is this clear? By the same reasoning, one could say the lack of specification of maximum tax free gains makes it pretty clear that Roth was supposed to be used to gain tax privilege on vast sums of money.
Are you implying that the government was trying to create a lottery for tax shelter? Or a shelter that at the minimum benefits the wealthiest class? Sure--it's available to everyone, but how much wealth is being sheltered by the lowest 90% vs the top 10%?
Source? As far as I know, everyone can contribute to a Roth retirement savings account.
>And clearly this wasn’t a deliberate loophole , it just got exploited into one.
Are you suggesting Thiel, in 1999, knew for a fact that his $2k worth of Paypal equity, would be worth far more in 2022? In which case, the fair market value of the equity would not have been $2k, and hence Thiel committed fraud?
But I disagree on mischaracterizing someone’s actions to paint them in a bad light to advance a political cause.
(Also, what this article only briefly touched upon but others get into more details of -- the way people like this get hundreds of MM in IRAs is by buying early stage stakes that aren't generally available to the public at "pennies per share". Banning these from IRAs would be one way to end this sort of thing).
They are pennies per share because they are huge gambles worth approximately nothing right now. Anyone can make their own LLC and contribute the max equity into their IRA right now. It just does not make sense for most since it will probably perform worse than buying SP500.
The government should still come after him for fraudulently misvaluing his company if the statute of limitations hasn’t expired. There is no chance Peter would’ve sold that stock to investors for whatever the Roth limit was.
Imagine a series of multiplications, one of them being 0.80 to the taxpayer and the other 0.20 to the government. Then a series of transactions multiplies that account value by a value less than 1 (for losing investments) or greater than 1 (for winning investments).
Multiplication is commutative. Whether the 0.20 to the government is paid at the start or the end, it seems fair to me. The fact that the government got their money early and did not invest it as well as the Roth account holder is not a tax policy concern in my view.
For every case where a taxpayer invested well and won big, there are thousands of people who made a Roth conversion, paying taxes at that moment, and made investments that went to zero. In those cases, the government got paid more taxes than they’d have gotten without the Roth conversion.
Articles that cherry pick a rare example to cause outrage are attempting to change the rules. Thiel played by the rules and got lucky with his Roth. That doesn't change the fundamental promise of the account.
That said, when this topic came up last year on Hacker News, it did make me rethink my own personal tax-sheltered strategy. (I'm in Canada, so I'm thinking about TFSA instead of Roth IRA). Before I had been following the advice to shelter my high-tax items, which for Canada would be bonds. But after reading about this, I've rearranged things to instead shelter (hopefully) high growth items (e.g. VTI). The idea being that by growing room in my sheltered accounts I can eventually save more on taxes than I would by sheltering bonds
I'd be interested in other people's comments on tax-sheltered-account strategies for tech workers.
Anyone could, provided they had an investment that gained as much as Thiel’s, do this.
Maybe there should be lifetime caps on tax protected withdrawals to prevent this kind of edge case, but that’s not how the laws were written.
There are other ways for wealthy to dodge taxes. Invest, borrow, die works slightly worse since you’re paying loan interest instead of capital gains taxes. But it’s still not paying taxes.
So yes, this is kind of interesting, but not that much more effective than the current tax dodging strategies.
This is exactly how to solve this problem, but people would rather get angry at the rich for being rich than think sensibly about it.
Exotic offerings are not going to be available to regular people, but if you could get access to bespoke financial product, like some exotic swap or derivative, or something else that would increase in value 1000000% or something else crazy, and you’re all set.
There are specific restrictions to what can go in a Roth, but I think all financial products are allowed.
You can’t put “a lottery ticket” in the IRA and win the lottery with that ticket and have it be tax protected, but only because it’s a physical object like a collectible.
If you do it through stonks though it’s fine the ways the laws are written.
I am most curious about this little detail they just gleeful dropped in. I want THAT thread pulled. Who bribed who to leak this data?
The desire to use blood transfusions from the young for life extension is very old.
The Ancient Greeks and Leonardo da Vinci wanted to do it too.
Everyone expects that one day a total fund limit will be introduced, but not so far.
[1] https://www.hl.co.uk/news/articles/isa-millionaires-how-did-...
£1 million is a completely reasonable retirement savings balance to target (and is lower than my family's own target), especially if you lived your life and want to retire in the most populated urban center in the UK.
Peter Thiel turned a Roth IRA into a $5B tax-free piggy bank - https://news.ycombinator.com/item?id=27616090 - June 2021 (775 comments)
Peter Thiel Has Accumulated $5B in a Roth IRA - https://news.ycombinator.com/item?id=27675736 - June 2021 (56 comments)
Peter Thiel’s $5B Roth IRA Tax Haven Is the Hottest New Investing Tip - https://news.ycombinator.com/item?id=27743427 - July 2021 (68 comments)
Congress keeps threatening to stop this by forcing accounts over some limit to make an immediate withdrawal, with all the negative tax consequences that would result. This pro publica piece implies that they don't think it will ever happen.
It’s more interesting the people who actually publicly traded with their small inputs and now have millions per year that they can withdraw tax free.
Citation needed. Investopedia (and the widespread and open existence of self-directed IRAs) disagrees with your claim.
https://www.investopedia.com/articles/retirement/11/impermis...
This is false. A very wide range of investments are allowed, including real estate and derivatives.
False, I have no idea where you got that impression- self directed IRAs exist. I actually have one.
As a great African American poet once said, "don't hate the playa' - hate the game."
Both statements have equal validity.
Rothbard coopted the term, which was then long established.
https://home.kpmg/xx/en/home/insights/2021/07/kuwait-thinkin...
- buyers and sellers (trade) create markets.
- Taxation can happen via either currency or goods.
- Governments manage societies, most happen to fund themselves via taxes.
I'm not sure what you mean by public purpose.
Nope, markets are created by governments.
> - Taxation can happen via either currency or goods.
It's true that many early currencies are named after some commodity (shekel being a good example) because governments imposed a tax in a commodity and that then became the unit of account. It's the same principle though.
> - Governments manage societies, most happen to fund themselves via taxes.
Taxation is the sole means by which a government provisions resources away from the private sector, and to the public sector, unless your society is simple enough that you can run it without money (which is a pretty small society).
> I'm not sure what you mean by public purpose.
Things that we get by dint of belonging to a society, such as schooling and libraries.
The point being that organized societies consists of contracts, and I'm all for making that more so in the sense of letting those who feel coerced into them opt out. But the natural extension of that is that if you choose to owe a government nothing, then it and those who choose to remain part of what it govern has no duty to let you take part of its benefits either, as forcing them to do so would be just as much theft as taxation.
You don't get to expect to be able to choose one or the other.