July 1, 2021

Peter Thiel’s Roth IRA Is Erroneously Reported

In a recent report from ProPublica, the Roth IRA activity of Peter Thiel was portrayed as a massive gaming of the system. In short, the government gives various tax incentives to help Americans save for retirement, and Peter Thiel was able to take advantage of that to cheat the country out of well-deserved taxes. The facts themselves are certainly true: Peter Thiel is using a self-directed Roth IRA to make a lot of tax-free profits. However, a careful reading of the situation shows that the Roth IRA is not the villain here. Rather, the negative optics can be blamed entirely on the nature of Thiel’s Roth IRA assets. 

Let’s take a step back and review the Roth structure. The difference between a Traditional IRA and a Roth IRA is when the taxes are paid. In a Traditional IRA the contributions are made with pre-tax dollars, and the taxes are paid when the account holder makes a distribution. In other words, a retiree who starts drawing on their IRA funds has to pay taxes on those funds as they access them. A Roth IRA also pays taxes, but it does so before the funds are contributed to the IRA. In a Roth IRA, the taxes are paid first and then the funds themselves can grow without incurring any further tax liability.    

Is a Roth IRA more profitable than a Traditional IRA? Not necessarily. In most instances, the two taxing systems balance each other out. The future gains made by having paid the taxes first are usually offset by the fact that there were less funds invested to begin with because the taxes were prepaid. The situation where the Roth IRA can significantly profit is when even with post-tax dollars, the account holder is able to max out their contribution. Most upper-class investors have this capability. However, that alone will not create a massive profit within the Roth IRA. For that, you need an incredible investment return, and that brings us back squarely to Peter Thiel. 

Peter Theil was able to grow his self-directed Roth IRA to $5 billion because he got a sweetheart deal. In the words of ProPublica the following occurred: 

“While SEC filings describing that time don’t mention Thiel’s Roth, they show that he bought his first slice of the company in January 1999. 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 other words, Peter Thiel was able to make a fortune because he could buy stock at a ridiculously cheap rate - $0.001 per share! The fact that he did it within a self-directed Roth IRA meant that the profits would be tax-free. But really that was just icing on the cake. Thiel took advantage of an opportunity that almost nobody else has access to, and he got lucky as the investment paid off. The percentage of American workers who can get into these kinds of deals is virtually nil, and for them the self-directed Roth IRA will never result in a $5 billion fortune. 

The United States government actually has rules in place that limit the access of wealthier individuals to the Roth IRA. How much you make in a given year matters, and those who pass the threshold are either limited or outright barred from contributing to a Roth. You can check in with the IRS to see the 2021 income requirements. Peter Thiel was able to get into his Roth IRA because at the time his income salary was fairly negligible.  

The takeaway should be fairly simple – the Roth IRA platform is not the problem. Yes, a few isolated individuals will find themselves in an almost serendipitous situation where they grow a fortune tax-free. However, for the other 99.99% of American workers, the self-directed Roth IRA is just another tool that can help save a little more.  

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