Peter Thiel Turned a Roth IRA into a $5B Tax-Free Piggy Bank (2021) | Hacker News Reader

Peter Thiel Turned a Roth IRA into a $5B Tax-Free Piggy Bank (2021)

propublica.org

87 pointsravel58 comments

What's the news here? That he did someone wrong? Because to me it looks like it's working as intended.

The article seems to allege that Roth IRAs are being used as illegal tax shelters by using them to purchase assets at below-market value. It states:

"Thiel paid $0.001 per share — yes, just a tenth of a penny — for 1.7 million shares. At that price, he was able to buy a large stake for just $1,700.

In 1999, $2,000 was the maximum amount you could put into a Roth in a year.

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."

I think we’d like an equitable tax system.

The news here is one way in which it isn’t, so we might want to do something about it.

> it looks like it's working as intended.

That seems rather unlikely.

How was this not "equitable"? Was Thiel playing by a different set of rules? Or are you simply upset that he didn't pay taxes on income that you thought should have been taxed?

Those are three independent questions. But I can answer them:

> How was this not "equitable"?

We could back up and debate why/whether we tax, and who should pay and how much, and based on what, but that's too much for an HN comment thread. Currently, there's a broad consensus that it's equitable to tax a percentage of income. Now, Roth IRAs are an exception to that rule, for the stated purpose of encouraging people to save for their retirement -- and thus reduce the societal problem of a large number of destitute seniors. Here we have a cases where Roth IRAs are protecting very large amounts of income from taxation, yet not for the intended beneficial purpose. So we may want to update the rules for Roth IRAs so they can continue to serve their intended purpose without shielding more income than is necessary from taxation.

> Was Thiel playing by a different set of rules?

Not that I know of.

> Or are you simply upset that he didn't pay taxes on income that you thought should have been taxed?

No, I'm not upset. Tax policy is pretty dry, so I don't feel a lot of emotion one way or the other. And as far as I know this is legal, so, no, obviously he should not pay taxes he's not required to pay. It seems almost silly to have to state that. But if the question is do I think the tax code should be updated to require that taxes be paid on income at that level through a Roth IRA then the answer is yes. (IMO A rule change like that should not apply retroactively to income already accrued though.) Not sure the best way to do it -- the starting point would be to simply cap the amount of income that is tax free, say $5M, after which it's taxed as normal income. There's probably some reason that's too simple, but at least it gives you an idea of the kind of change that could be enacted.

"Equitable" is a meaningless word. Justify a position that actually has tangibles rather than speak at extreme lengths about nothing.

Ya, people get upset about this, but this is one of the points of a Roth IRA — pretty much anyone in the US has the option to do the same thing. If he engaged in insider trading or some other unsavory business practice, that should be the focus, not the Roth IRA

That's not true. This trick only works if you have the power to value stock low, like real low, buy it with your IRA then push it through the roof to get all the tax free profits.

He didn't just invest normally.

That's a fairly unique situation. I certainly can't use an IRA to buy my company at a strike price, knowing I'll be selling or raising capital to increase its value.

> Using stock deals unavailable to most people, Thiel has taken a retirement account worth less than $2,000 in 1999 and spun it into a $5 billion windfall.

> The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges -- Anatole France

I absolutely can not understand how people are even defending massive loopholes or oversights in tax code that allow some billionaires to effectively pay a tiny fraction of ordinary income tax...

Well... many people on the internet will tell you, with an entirely straight face, that taxes are theft.

So. That's how they think about it.

It should at least steal equally.

Well.. except it's not theft.

A ROTH IRA is designed so you pay taxes up front and _never again_. This is the whole point. It is easily available in the USA, I even have one. Peter Thiel used a self directed ROTH IRA to make a ton of money. He will never have to pay taxes on that, because it’s in a ROTH IRA. This is not a tax loophole.

He _may_ have engaged in insider trading or something, in order to make so much money in the Roth. That should be protected, but is really not related to the fact that he used a Roth.

Exactly!

They missed that a Roth IRA needs to be a self-directed IRA to invest as Thiel does, most people don't know this and invest in ETFs or mutual funds giving meager returns. And, you need to have a high net worth to invest in private stock, especially in the formation, pre-IPO, stages of a company, and a high net worth reputation to have venture capital credibility.

Also, the main reason that Roth IRAs passed in Congress is that greedy politicians, on both sides of the aisle, want that tax money upfront instead of waiting decades to collect.

There should never be an argument that the government is some steward of our money and that the insane amount of money they collect from us is somehow wisely spent as our fiduciary.

*prosecuted, lol

> This trick only works if you have the power to value stock low, like real low, buy it with your IRA then push it through the roof to get all the tax free profit

What do you mean "the power to value stock low"? The IRS rules require a fair market value. There is no way around this.

What actually happened was that this was an early investment round, where the company had little to no value, so the stock was assigned a nominal value of something like $0.00001/share, which happens with pretty much every startup when it first issues equity.

And what does "then push it through the roof to get all the tax free profits"? You mean grow a successful business? You just need to "push it through"?

How do you determine fair market value for things not traded on a market?

Comparables, revenue multiples, discounted cash flow. There are multiple methods, none of them are perfect, but you can at least narrow it down.

The IRS isn't stupid. You can't do your own valuation - well you can, but they'll reject it.

Generally you'd hire at outside firm to do a valuation. If the IRS doesn't believe it, they'll come up with their own number and make you pay the taxes they think you owe.

Thiel basically made a bet - early investor when the company made $0, hence the value of the shares was effectively zero. His investment was in the thousands of dollars. He just got lucky that it had a huge pay out.

What's preventing you from buying your firm's shares in an IRA, knowing your firm's growth plans?

AFAIK, that's perfectly legal.

Anyone can create a self-directed Roth and do many creative and lucrative things with it. It’s hardly something only available to billionaires.

The problem is that if you try to do this with only a small amount of wealth, the government will end up characterizing all of your nicely laid out corporate structures and duly filed paperwork as a self dealing tax dodge. These type of schemes only work when you're playing with an outsized amount of resources to involve enough other people and make it a group project. This even applies to the basic dynamic of an LLC itself - if you yourself are performing any role for the company, you can still be held personally liable based on those actions. The limited liability mechanic only works when everything is being done by judgement-proof patsies.

It's not insurmountable. Do you need to be mindful of self-dealing regulations? Of course. However, there are many investment opportunities available to non-wealthy people which can be pursued via self-directed ROTHs and LLCs owned by them. Real estate (financing, bridge financing, rental ownership, distressed property flipping, etc...) is probably the most commonly used one I've seen IRL but I've still seen it used for investing in friends and family rounds of startups, etc...

It's certainly not a "yolo do whatever you want, the IRS won't care" fund but it is still available to the non-wealthy. I know many people who have been making use of it for years without any unfair government characterization or attention. The best I've personally seen is a couple in their early 30s with ~$7 million (real estate related dealings) in their self-directed roth which is a far cry from $5 billion, obviously, but pretty amazing nonetheless.

The article is scant on details, but based on the few data points it throws out and the historic contribution limits, Thiel achieved an average annual return of at least 79% over 22 years. I'm guessing the way he did that is investing tiny amounts of Roth money into very early pre-seed rounds at vanishingly small valuations due to uncertain future prospects, and then making those prospects much more certain by following on with larger taxable investments. Heck if the earlier investment was a senior convertible note, he could probably get his Roth investment back even if the startup ultimately failed down the line.

So no, you're not going to get those kind of gains with real estate. It relies on early stage startups being notoriously hard to value, plus the wealth/connections to make for surefire exits. And if you tried to replicate it at an individual or even familial level, especially repeatedly, those early valuations are going to end up getting challenged. So sure, the same laws apply to everybody and anybody can set up a self-directed IRA. But not everybody can predictably and sustainably achieve such outsized gains with them.

> Do you need to be mindful of self-dealing regulations? Of course. However, there are many investment opportunities available to non-wealthy people which can be pursued via self-directed ROTHs and LLCs owned by them.

The very fact that you're having to be "mindful" of self-dealing shows that people like Thiel are self-dealing, just with more layers of indirection.

If it wasn't self-dealing, you'd not need to be mindful of such regulation.

Your complaint can be boiled down to "this trick only works if you have the connections and wealth to pull it off". Which is almost the entire history of humanity. Who you know is more important than what you do.

This is one interpretation and it's a fair one. Another is that it is not in the spirit of the law to use the IRA to wash taxes off your own company's profits. If it's the letter of the law, the discussion is around whether that should change.

And what this leads to is regular citizens getting fucked over because someone is butthurt about Peter Thiel being fantastically rich. The same people who think you're fantastically rich because years ago you managed to contribute $8000 to your retirement account. If it comes, it will inevitably be in the form of taxes applied to existing Roth IRA contributions.

And it’s a problem for democratic societies in nearly all cases, so that’s why it’s being called out here.

No, they really don't.

"Pretty much anyone in the US" doesn't have the ability to set the value of stocks they are about to buy.

That is illegal behavior, but has nothing to do with it being a ROTH IRA. I basically agree with your stance, I just don’t think ROTH IRA‘s are to blame

I can't tell from the article what he purchased but it wouldn't suprise me if it was a security only available to accredited investors.

"It’s time to face the fact that our tax code needs a dose of fairness when it comes to retirement savings, and that starts with cracking down on massive Roth IRA accounts built on assets from sweetheart, inside deals."

Since the article itself says the thing was intended to be a way for middle class to save for retirement, please clarify how a tax free 2Billion via investments only tech ceos and venture capitalists have access to is in anyway shape or form in line with the intention.

I’m upvoting this post simply for the amount of effort put into the article, I wish most articles were written with the same effort as this one. In saying that, I don’t think Thirl did anything wrong, Americans should take note and do as he and the other investors listed in this article do instead of trying to make them out like some type of villains.

I have a few questions:

Can you buy and sell shares tax-free if the cash > security > cash conversions all happen inside the IRA?

What about capital gains taxes?

Can the money inside the IRA be spent?

Could you borrow against the IRA as collateral?

Can you make exotic investments or are there limitations?

There are no taxes incurred on the gains or losses realized inside a traditional or Roth IRA when trades are executed. With a Roth IRA, the dollars come out tax free within certain constraints (age or account lifetime, roughly speaking), with contributions sourced from after tax earned income. With a traditional IRA, taxes are due when withdrawn. They can only be funded with dollars, not shares or assets. You can direct your investments with a self directed IRA for esoteric asset classes, but the IRS has strong guidelines around this to prevent self dealing as well as requiring transactions to be “arms length”. You cannot borrow against these accounts (although you can roll traditional IRA funds into a 401k and borrow against it there as a fixed term loan at an interest rate set by the plan administrator that follows the benchmark rate).

The loophole Thiel used no longer exists.

https://www.propublica.org/article/lord-of-the-roths-how-tec...

> The loophole Thiel used no longer exists.

What changed? I didn't see anything in the article that says you can't buy startup (or other non-public) stock in an IRA, and if you do and it goes well, your IRA can become very valuable. If I work for a startup again, I'm definitely going to see if I can get early stock into a (Roth) IRA, because it'd be real handy if the stock does well, since you can trade in a IRA without tax consequences. Seems complex to set up though.

You could use a self directed IRA to acquire startup equity in a Roth, but you can't put your grant into the IRA.

Thanks, I appreciate the reply

> Can you buy and sell shares tax-free if the cash > security > cash conversions all happen inside the IRA?

No taxes on Roth IRAs. Even on distributions/withdrawals at a certain age ( I think it's 58 or 60? ).

Roth IRAs are as good a retirement vehicle as you can have.

"Roth IRAs are as good a retirement vehicle as you can have."

Except that contributions are after-tax, and have a lower cap than 401(k) accounts. So there is a tradeoff.

Certain age = 59 1/2 years

I had to trim the original title a bit: "Lord of the Roths: How Tech Mogul Peter Thiel Turned a Retirement Account for the Middle Class Into a $5 Billion Tax-Free Piggy Bank"

Is it just me or does the targeted leaking of private tax data to reporters not seem like the bigger scandal here? Like if it's illegal, prosecute him. But isn't it illegal to leak this kind of data? I'm super confused.

The leaker was sentenced to 5 years in prison.

https://www.justice.gov/opa/pr/former-irs-contractor-sentenc...

Wow. OK. That makes a _lot_ more sense. Interesting that ProPublica did not mention this. I would have thought that definitely deserves a mention. I am almost on his side now...

I'm simply surprised the man only got 5 years plus 3 years supervised release. He did a lot more than just simply "leak" information in a one time go around, he transferred material to unsecured devices including personal iPods and beyond.

That at least deserves a few more years for mishandling material, the judge even said that the man deserved the highest penalties available. Littlejohn should count his blessings for sure, any other unlucky fellow that was "misguided" as he claims would likely not be treated so fairly.

People regularly kill people with their cars and get less time. I don't really see how this is worse.

In a variety of cases where there are minimum penalties from HIPAA to espionage, and there are different levels of clarity, e.g. in HIPAA unknowingly violating patient information and rights leads to a $100 penalty/year along with some type of suspension from the respective medical board if they so deem it necessary. This grows up to $25k a year along with jail time up to 10 years, and in some extreme cases up to $100k a year.

Espionage has increasing penalties all the way up to extreme positions such as treason.

When it pertains to government documents including public documents, CRM 1663, 1664, 1665 all can apply to this man's case. Each one can be a different change, and each one has a penalty of 5 years maximum.

This is literally the first case of this ever happening as well, an example not being made of the man is simply dumbfounding.

A friend of mine was run over and killed crossing the street and all the driver got was a stern talking to*. One might think you can practically get away with murder in America as long as you do it with a car.

* OK, maybe the driver's insurance rate also went up.

People on Hacker News really love to shill for the interests of millionaires and billionaires because they hope they'll be one some day and that they can do the same sorts of ridiculous shit as Peter Thiel.

I beg for your ignorance to shine through on someone else's thread.

You don't have to beg - I'm very good at displaying my own ignorance!

How do you know this was the one that leaked thiel's info? I don't think it mentions thief's name

If we can't find his name then I guess no one wants 5 years of prison to reveal the detailed truth about the second crime.

can you buys shares in a private company with an IRA? Do you have to be an accredited investor to do that?

Well for example.. IC-DISC + Roth IRA can be used in a way which bypasses contribution limits when combined with a Roth IRA and has some tax advantages.

I know this is a thing because executives in a company where I was in leadership were doing it. Too shady for my taste, but there was a well-oiled industry of accountants and lawyers ready to implement it (despite acknowledging that combining IC-DISC with Roth IRAs could look questionable at that time.. maybe still does).

It almost got closed in 2017 and 2021 but Unfortunately it appears to still be a thing. https://www.plantemoran.com/explore-our-thinking/insight/202...

Executives and/or owners of closely held companies can set up a parallel IC-DISC (Interest Charge - Domestic International Sales Corporation) as a sort of shell company and then transfer as much business income to the DISC as allowed (based on international sales) via "commissions". There is no tax assessed to the parent company on the transferred funds.

Some owners of DISCs use their Roth IRA account to buy the DISC before dumping money into it. It's then possible to bypass the contribution limit and amass huge amounts of money in the Roth IRA, far more than a normal person could.

https://www.investopedia.com/taxes/what-disc-tax-break-and-c...

https://www.forbes.com/sites/greatspeculations/2017/03/01/co...

With a self directed IRA you can buy pretty much anything. No you don't have to be an accredited investor, and even if you do, under trump's tax rules you just need to pass a test.

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