How very clever

And also rather risky but still:

Billionaire Peter Thiel, one of the founders of PayPal, has used a retirement account designed to help ordinary Americans save for their golden years to amass a $5bn tax-free nest egg, according to records obtained by ProPublica.

Thiel, a vocal opponent of higher taxes, is one of a number of ultra-rich Americans to use a Roth individual retirement account (IRA) to amass a tax-free fortune.

Roth IRAs were established in 1997 to encourage middle-class Americans to save, tax-free, for retirement. In 2018 the average Roth IRA held $39,108. The proceeds of a Roth IRA are tax-free as long as they are not withdrawn before the account holder reaches 59.5 years old.

Records obtained by ProPublica show that Thiel, 53, placed 1.7m shares of then-private PayPal into a Roth IRA in 1999. At the time annual contributions to the plans were capped at $2,000. The shares were valued at just $0.001 per share.

Within a year, the value of Thiel’s Roth increased from $1,664 to $3.8m. Thiel then used his Roth to make highly lucrative investments in Facebook and Palantir Technologies, according to tax records and other documents obtained by ProPublica. By 2019, Thiel’s Roth held $5bn “spread across 96 subaccounts”.

The whole investment gig has been run through his IRA. Entirely, wholly, legal and all that.

One implication of all this is that he’s long term investing. Putting it to use in the economy for decades, none of this short term profit making for him. But of course they’ll be screaming about that too.

10 thoughts on “How very clever”

  1. This was, I believe, the origin of the internet myth that McDonalds and other US companies were funding terrorism when some moron misread “contribution to IRA” in their accounts.

    No chance of such largess here in the UK where the Tories have decided that £1m is plenty enough to provide a pension (current annuity rates of 4% or less would hardly put you in Ferrari and yacht territory) and the bastards are considering dropping this to £800,000. Anything above this gets taxed at 55%. Bastards.

  2. Money is paid into a Roth IRA after tax, akin to an ISA in the UK; only with more restrictions on withdrawals. You can withdraw the contributions you’ve made at any time; but the returns on those contributions remain locked up until you’re 59½. (Other exceptions apply too: college fees, buying your first home, or medical expenses; it stinks of political meddling.)

    There are plenty of ISA millionaires in the UK; probably no ISA billionaires though.

  3. Man obeys law. Guardian reader is outraged! Ho humm. Glad you read it so we don’t have to.

    Andrew C: I think this must be a deliberate strategy to shut the NHS, because so many GP’s and consultants are retiring early to avoid the pension super-duper tax.
    I cannot think of any other logical reason.
    Or of course, they are brainless f*ckwits that haven’t any idea what they are doing, but we’d never vote someone so stupid into power, would we?
    No doubt the Guardian solution is to force all the ‘retired’ GPs to work for free…

  4. My first thought was that you couldn’t get a Roth IRA into the $ billion range due to the contribution limits. Ah, but the stock was valued at $0.001 per share when it was contributed. That might be worth a look, within a year it went from $1,664 to $3.8M, might have gamed the system a wee bit on the initial valuation.

  5. Good luck to him. PayPal may be thoroughly loathsome these days but that wasn’t always the case.

  6. @Esteban, In 1999 Paypal was still nothing but a gamble. It’s one of the “success stories” of the internet age, but at the time it could just as easily have bombed big time.
    The original valuation was pretty much accurate, because no-one in his right mind would have predicted the insane growth of this little floater of an idea, which basically ran on the logic that the european banks would never adopt credit cards on a large scale, and people needed something besides credit cards to pay for stuff on the internet.

    You may as well complain about the original valuations of Apple, Microsoft, Intel and others….

  7. “The proceeds of a Roth IRA are tax-free as long as they are not withdrawn before the account holder reaches 59.5 years old.”

    59.5? Not 60? Eh? Is this a way of coping with some other regulation?

  8. A $0.001 valuation suggests that the shares went into his Roth shortly after the corporation was formed but before any investment was put into the firm. It may have been just a shell at the time and therefore worth nothing. It wouldn’t be unusual for founders’ stock in a startup to be similarly valued. The shares are sold to early founders for next to nothing before someone actually invests anything in the firm. What’s clever was putting them into a ROTH, but it was speculative at the time as to how much they might one day be worth.

    Since the very start of Individual Retirement Accounts some people would make a fortune parlaying a very small investment into something big, and whenever word of that crept out there have been calls that retirement accounts were never intended to be used for that purpose. Nothing new here, though there will probably once again be calls to cap the amounts that can be kept in an IRA, ROTH or otherwise.

  9. I’m mildly surprised that we don’t have a lifetime allowance for the capital in an individual’s ISAs. It would work easily because if you went over the limit you could just withdraw a bit, which you can do at any age, and that bit is tax-free.

    By contrast we do have a lifetime allowance for the capital in an individual’s pensions. It doesn’t work well because if you go over the limit you can’t just withdraw a bit if you are under 55, and what you do withdraw is – in part – taxable.

    Bonkers. Mind you, I wish it were a problem for us.

  10. @ dearieme
    “Bonkers” – yes, or just schizophrenic.
    There seem to be two lots of bureaucrats, one of them supports tax exemption for pensions because they are just deferred remuneration so if they are taxed on withdrawal (except for the 25% which is a perk for civil servants and a few lucky individuals in the private sector) then they can be tax-free during deferral; the others noticed that the initial reason why they were tax-exempt during deferment was in order that the guys (at the time, guys) should not after retirement be a burden on the rates so there was no need for special tax-exemptions above a threshhold that ensured that the individual did not need a subsidy in his old age, nor did his wife.
    I find I have more sympathy with the views of the latter group – and would have much more if they applied their logic to civil servants – but I have to qualify my comments with the observation that I have never bothered to generate a pension fund that breaches the Lifetime Allowance Limit (albeit my pension is more than a new 65-year-old would get from a DC fund of £1.25m) so I am not a victim of the new rules.

Leave a Reply

Your email address will not be published. Required fields are marked *