Hacker News new | past | comments | ask | show | jobs | submit login
Peter Thiel turned a Roth IRA into a $5B tax-free piggy bank (propublica.org)
521 points by giuliomagnifico 35 days ago | hide | past | favorite | 775 comments



Utterly astounded and dismayed to see this much of HN's audience completely fail to comprehend what they've read here and paint this as some sort of sinister theft.

This is the law functioning as intended. Thiel's case is a one-in-100-million+ event. He may have the only Roth IRA in existence that's valued at over $5 billion. But he didn't do it by exploiting some sort of "loophole" or paying high-priced accountants to shield his assets in foreign entities offshore. He put his investments in a Roth IRA just like any of you can do. The only difference is his investments were in the top 0.0001% in terms of performance. That's generally how people get to be billionaires.

And that's not even to mention that the assets in a Roth IRA are essentially worthless to him - he's not old enough to make withdrawals or take distributions tax-free and you can't borrow against a Roth IRA. The funds are essentially unavailable to him for years to come unless he wants to pay taxes and penalties.

Again - this isn't a tax dodge. This is someone who used the law exactly as intended without any illegal or shady dealings and happened to be incredibly fortunate.

The whole article is a hit piece designed to get whip people into a furor. And lately I've been noticing propublica publishing a lot of those.


I think you're missing the thrust of ProPublica's reporting. This is not an article claiming that laws have been broken. It is pointing out the difference in intent and reality for a part of our financial law. It is not that Thiel is getting huge windfalls from this account now (he is a billionaire, he does not need them), it's that this is another example of a billionaire getting abnormally large absolute benefits from a financial instrument.

The message is not that Thiel has committed some crime, but that he has cleverly and successfully used an instrument designed for the 'middle class' to shelter billions in earnings. The implication is that we should reform these tax vehicles so that the ultra-wealthy cannot use them - not that Thiel is cheating the system as it exists. The lines which talk about contribution limits to Roths are to emphasize that this was not intended to shelter this kind of wealth.

> This is someone who used the law exactly as intended

I 100% agree Thiel has broken no crime and I think you should be *embarrassed* to say that the people who created the Roth intended this. There is no evidence of that. We should recognize that this Roth IRA is sheltering more money than people expected and make (or refrain from making) regulatory changes in response.


The problem is not Peter Thiel. it's not rich people. It's the fact that our elected legislature has created a nightmare boondoggle of a tax code. Rich people have the resources to hire CPAs to dig through tens of thousands of pages of tax law and create strategies to use the law to their advantage. If the law were simple, there would be no way to do this kind of gamesmanship.

Personally, I think that we should ditch the entire tax code, set a flat income tax rate - a single rate that applies to everyone and every kind of income - and a standard deduction of say, 1.5x - 2x of whatever "poverty level" income is.

Such a system is triple-progressive: first, high income earners pay more because x% of a lot of income is a lot bigger than x% of a little income. It's progressive in that poor people pay nothing due to the standard deduction, and middle income earners pay a pittance for the same reason. And it's progressive in that it eliminates all loopholes so there's no way for high earners to game it. But it only works if you eliminate all deductions and special income treatments including the sacred cows (mortgage deduction and capital gains).

Of course this is fantasy; lobbyists for CPAs and for attorneys would never support anyone who voted for this kind of simplification.

And, Congress would f** it up immediately by restarting the "let's use the tax code to reward our donors and punish our enemies" process.

Sigh.


You think that the legislature exists in a vacuum? That it writes out all these loopholes for fun? That other nations are just broken with their simpler tax code? This is yet another "American exceptionalism" thing where _somehow_ America is the only developped nation in the world with this level of issue yet seems to think it's sort of... intrinsic to the world.

The most prescient thing I saw about the Panama Papers leaks was that the biggest reason so few americans were present in those is that America is basically already a tax haven for rich people.

A flat income tax rate is not progressive by the usual definition, even with a flat deduction (imagine trying to scale _that_ to inflation and the endless debates). And we already have a solution for what you propose: gradual increase in the tax rate based on income levels! It has the added advantage of actually handling inflation (since the dollar amounts will go up over time anyways), and don't require a single "big tax number".

If you believe what you say, just argue to remove various deductions and exceptions. We already have percentage-based tax system, there's no need to be that much cleverer.


> You think that the legislature exists in a vacuum? That it writes out all these loopholes for fun? That other nations are just broken with their simpler tax code? This is yet another "American exceptionalism" thing where _somehow_ America is the only developped nation in the world with this level of issue yet seems to think it's sort of... intrinsic to the world.

I missed the part where they are suggesting any of these things.

> If you believe what you say, just argue to remove various deductions and exemptions.

That's exactly what they are arguing?


> where they are suggesting any of these things

>> Of course this is fantasy; lobbyists for CPAs and for attorneys would never support anyone who voted for this kind of simplification.

>> And, Congress would f* it up immediately by restarting the "let's use the tax code to reward our donors and punish our enemies" process.

I think it's a bit defeatest to just say that it's just intrinsincly impossible for better things... but I'm maybe reading into those comments too harshly.

They're arguing to rip out everything and replace it with a flat tax + a deduction.

What I'm arguing instead is to do a line-by-line removal of exceptions and deductions, and don't try a "novel" flat tax (instead sticking to a tax with income brackets and different rates, that we _already have_), as it is a better system. And you get the advantage of the optics of "making the tax code simpler" rather than "replacing the tax code".

A universe in which we just removed the number of IRS forms that exist is _roughly_ as good as the universe in which replaced all the forms with one form, except that removing the number of forms and still having a W2 would be much easier to migrate to, and doesn't involve nearly as much philosophical debate (even if the result is roughly equivalent). We don't need a novel solution here, we can just move more towards what other nations do (and where we are actually not that far from!)


That's fine, there's plenty of reasonable debate to be had about specific policy reform, but OPs main point, to me, is how exactly do you intend to get Congress too enact it?

Their campaigns are bankrolled by the people benefiting from the loopholes.


The reason it's so byzantine because taxation is control. The government wants to control your behavior, and when it's prohibited by law from doing it by threat of violence or coercion, it still can do it by employing the tax code. What happens if the court finds the government can't force people to buy health insurance? We declare it a tax on not-buying health insurance. What happens if the government wants to ban something, but is concerned the courts would find it overstepping its boundaries? Tax it until nobody can afford it. Want people to do something? Declare tax credit for it. Want to subsidize certain company? Issue them tax credits. Etc. etc. Nobody would be willing to give up such a versatile tool.


The tax code is structured this way by design, by rich people. If rich people wanted a simplified tax code without loopholes, then they would actively lobby for this, and I guarantee congress would act to simplify the tax code.


The tax code is like everything else created by the US legislature: a product of many decades of compromise between competing ideas. I'm pretty sure none of it was designed.


Many politicians also feel that a flat tax rate isn't sufficiently progressive; that only by taxing higher incomes at higher percentages than lower incomes is it "truly" progressive.

OTOH, many politicians do want to see the tax code vastly simplified- they want the sort of system where you could fill out your taxes on a form small enough to fit on the back of a post card.

Everyone has their favorite thing that they want exempted (farms, capital investments, social security / welfare disbursements, medical expenses, school expenses, mortgage interest, rent, etc), and there are millions who would be put out of work by it- accountants, tax preparers, much of the IRS would be redundant, etc.

All of these competing interests keep us where we are. Blaming it on the "rich people" is lacking in any sort of honest intellectual rigor.


If rich people were actually determining the US tax code, the top 10% wouldn't be paying most of the taxes in the US, and the US tax code wouldn't be hyper progressive. The US would have, at worst, a flat tax approach to income taxes, were the rich determing the tax code.

ProPublica had to commit intense intellectual fraud recently - in their recent tax propaganda rush which is being directed by the Biden White House as part of its hike taxes program - to try to pretend the rich weren't paying their fair share. The rich and upper class are the only ones paying their fair share in fact. Everyone else in the US pays extraordinarily low tax rates by and large. ProPublica had to pretend that unsold stock assets should be called income, that we should calculate rich persons income tax rates based on unsold stock holdings (and the con-artists at ProPublica of course invented new terminology to shoehorn the fraud in), and then that we should lambast those rich people for not paying enough income taxes for said unsold stock. What a joke.

All that's going on right now is the culmination of decades of wildly irresponsible fiscal behavior in Washington DC, and the bill is finally coming due, so they have to drastically increase taxes just to keep the government solvent and to keep the entitlement programs from collapsing. To assist with that agenda, outlets like ProPublica are willing to lie as much as necessary to spin whatever message is required to get the job done.


No. There aren't enough "rich people" to get a politician elected. Most of these things in the tax code are one small chip at a time to make some ordinary person favor a particular politician. Including things like "Roth IRAs" The fact that they have unintended consequences is another story.

I don't think the fact that Peter Theil has a billion dollars hurts me in any way, and no I'm not some unrealistic person who thinks that I, too, can be a billionaire! Only a petty person would be disturbed that someone else has more money than him. It's not a zero-sum game. The fact that there are some outlier billionaires doesn't hurt the ordinary Joe.


What specifically are you arguing against?

Roth IRAs are not some bizarre tax loophole. They're an extremely common vehicle for people planning for retirement - unless their income is too high, that is. Many companies even offer Roth 401(k)s or other Roth vehicles for retirement as well. And taxes are indeed paid when the money is put in.

If someone follows the rules and is extremely successful with their investment strategy with money in a Roth IRA, then what's the problem?

Seems the law is working as intended.


You will never convince me in a million years that $2k was actually the fair market value of his investment that was later worth $5 billion. No one is lucky enough to pick an investment like that with the tiny amount of initial capital you can put into an IRA.

There are clearly some kind of shenanigans going on to artificially lower the price he paid to smuggle it into the IRA. Those shenanigans may well be legal, but they shouldn't be.


Since you're beyond convincing, I won't try to. Maybe the article itself can?

> In an interview with ProPublica, Pensco founder Tom Anderson recalled how Thiel and other PayPal executives had wanted to put startup shares of the company into traditional IRAs.

> Anderson dangled something sweeter.

> “I said, ‘If you really think this is going to be big, you know, you might want to consider this new Roth,’” recalled Anderson, who is now retired. If the investment ballooned, he remembered saying, “‘you’re not going to pay tax on it when you take it out.’ It’s a no-brainer."

> The math was compelling. Thiel wouldn’t get a tax break up front, but he’d avoid an immense tax bill later on if the investment surged in value.

For everyone else who is open minded:

Thiel's IRA held Confinity shares. In 1999, Confinity wasn't worth much. In 2021 the company now known as PayPal is worth quite a bit. Confinity could have just as easily folded, been a victim of the dot com bubble, failed to make a deal with Elon Musk's x.com and lost to them, or had any number of disasters along the way that would have wiped out that portfolio.

Even ProPublica's reporting admits this was a risk. The investment adviser's words are "If you really think this is going to be big, you know, you might want to consider this new Roth."

Ironically, because startups fail so much more frequently than they succeed and because the federal government doesn't tax wealth but income, which can be artificially minimized in relatively simple ways, the government would probably be better off if all startup shares in all companies were held in Roth IRAs, since they'd be taking an up-front cut of a likely failed investment.

Thiel's vast fortune held in a Roth IRA is a corner case, but any talk of it "depriving" the government of revenue when he pre-paid taxes in good faith according to the law and thereby took a fairly significant risk without the benefit of hindsight seems like pure envy.


> the government would probably be better off if all startup shares in all companies were held in Roth IRAs, since they'd be taking an up-front cut of a likely failed investment.

Only if the alternative was holding it in some other tax-advantaged account like a traditional IRA.

Most start-up shares are held in normal taxable accounts because the holders haven't performed shady sales below market value to launder them under the IRA contribution limit. Compared to that the government only loses money by having them in a Roth account.


> Only if the alternative was holding it in some other tax-advantaged account like a traditional IRA.

How much revenue (income tax, capital gains, whatever) does the IRS receive for an investment whose value drops to $0?

Also, no fraud needed to happen. He earned the money from Confinity, paid taxes on it, invested in some of his (very risky) shares with the IRA and then it paid off over the next 2+ decades.

If you have evidence of this kind of fraud, please let us know. If it were to exist, you'd probably see some evidence (e.g. parallel books, skepticism from investors). ProPublica has tax and other records and they seem to have no evidence that supports your claim whatsoever.

Isn't the most likely story that he put his shares in this account, his company did take off and now he has continued to grow it?


From my memory of how early stage startups work:

The company’s future is very unclear and subjective, and informed investors make bets using their experience and the market determines the price.

But that’s for the preferred stock.

The employees are compensated with common stock, which is valued at some fraction of that. There is often no market price since it’s not sold to investors. It’s also very unclear and subjective, and the reported value is picked by the company in a situation where everyone wants it to be low.

The first result Googling it (DLA Piper) says it often used to be determined by just dividing the preferred stock price by 10, until accounting rule changes in the early 2000s.

I think “fraud” is a bit strong here - it’s very subjective after all - but it may not exactly be a fair market price either.


I'm not claiming fraud. I'm claiming he bought the shares for less than the fair market value.

It's probably not illegal, but it should be (buying below market value in an IRA, not buying below market value in general), because it makes a mockery of the contribution limits for IRAs.


Yup. This is why I encourage everyone to do their own taxes. It would help people see how stupid it is. So complicated for no reason .


> It's the fact that our elected legislature has created a nightmare boondoggle of a tax code.

I wonder who is financing campaigns of people who keep those loopholes open?? It must be illuminati.

Its a open 'secret' that organised lobbing entities control legislature on a tight leash. Doesn't matter if you vote blue/red/purple the outcome will be the same, you just get different packaging.


> And, Congress would f* it up immediately by restarting the "let's use the tax code to reward our donors and punish our enemies" process.

The only way to stop this process is a grassroots wave of politicians who refuse the support of corporate donors and have the political will to ban corporate political donations and put something like a $500 yearly cap on individual political donations. This would basically be the end of lobbying. I hope to see this happen in my lifetime. It seems like something zoomers might be willing to do in 20 years when they have more political relevance and the boomers are dying out.


ProPublica ran a series a couple years back about Intuit (who owns TurboTax) doing all the lobbying and bribery to keep the tax code complicated:

https://www.propublica.org/article/inside-turbotax-20-year-f...


How would you handle stocks not paying a dividend? It is a clear moral hazard and with a flat tax you could expect even more companies to adopt this practice of only doing stock buybacks.


A flat tax would presumably have the same rate for dividends and capital gains, so I guess it would be pretty much the same for companies?


Stock buybacks aren’t capital gains, until the stock is eventually sold to trigger the capital gains event. More recently, we have seen that wealthy people just never sell the stock and take out low interest loans against it, effectively paying a tax ratr of just a few %.


Nothing wrong with that, it’s like a mortgage. The loan must be repaid at some point and so will the tax on capital gains.


I came here to write basically this same comment. Big fan of the negative income tax as a better (IMO) version of UBI as well. But as you say, it’s probably never going to happen.


> because x% of a lot of income is a lot bigger than x% of a little income.

If you make $10k a year, vs someone who makes $10M a year, and both are taxed the same, the lower income person loses more purchasing power. At 15%, The hit of $1.5k is a harder loss than than the $1.5M.


$10k is definitely under the 1.5-2x poverty threshold proposed by the comment you're replying to. Under their proposal, the $10k earner would pay no income tax at all.


Numbers for illustrative purposes. A graduated tax is more fair from a purchasing power perspective.


"I think you're missing the thrust of ProPublica's reporting. This is not an article claiming that laws have been broken. It is pointing out the difference in intent and reality for a part of our financial law."

If that is what it is trying to point out then it is failing.

This is the intent of a Roth IRA. This is not an accidental feature or a weird corner-case or an unintended consequence. One cannot borrow against a Roth IRA and one cannot withdraw from it without paying taxes. AFAICT there is nothing interesting here other than the dollar value.

"... and I think you should be embarrassed to say that the people who created the Roth intended this."

I am not your comment-parent but I think they should neither be embarrassed nor not-embarrassed.

Are you embarrassed that Billionaires can deduct mortgage interest on their primary residence ?

Are you embarrassed that Apple Computer can write off business lunches ?


> Are you embarrassed that Billionaires can deduct mortgage interest on their primary residence ?

I was embarrassed to live in a country that had that law, yes (I don't any more). It's a real indictment of a political system that would allow such a thing.


If you’re embarrassed that corporations with billions and trillions can expense expenses then the problem may be you.

A political system that has different expense rules for different company sizes sounds like a nightmare of dipshits trying to micro issues.

Set the rules that are fair on first principles, make sure taxes are proportionate, stick with that.


Rules that are fair on first principles are exactly what I want. The mortgage interest tax deduction is nothing of the sort; it's a grotesque carve-out that distorts the tax system for the sole purpose of transferring common wealth to the people who least need it. It's just obscene.


The mortgage tax deduction is only for the first $375 (or $750 for couples).

It seems pretty fair as billionaires don’t even notice such a tiny deduction.

If anything it gives money to the middle/upper class but encouraging home ownership is an overall positive force.


It encourages debt and buying larger homes (e.g. the common advice to get the biggest mortgage you can), which doesn't necessarily increase overall home ownership (larger homes means fewer homes). Even if it does encourage home ownership, why is that a social positive worth spending tax money on - especially when we're talking about putting tax money straight into the pockets of the top ~half of the population (the bottom ~half don't own homes at all), and the more expensive your house the more you get? Even with a cap, that's just backwards.


What is your limit on how much money should be "sheltered" by a Roth IRA?

At the time Thiel was not an ultra-wealthy billionaire. From the article.

“I said, ‘If you really think this is going to be big, you know, you might want to consider this new Roth,’” recalled Anderson

The Roth IRA is intended to be a retirement vehicle for people to make contributions too with the intention of it not being touched till after retirement. As a perk, it is not taxed.

Maybe its not within the "spirit" of the law, but I hardly see how trying to create incredibly granular restrictions on start up founders or people that believe they have a better investing strategy is the right approach.

What about making it easier for normal people to have access to the same IPOs that Thiel had access to?


> What is your limit on how much money should be "sheltered" by a Roth IRA?

This is what I am saying the article is raising!

I'd limit it to $10m myself. Seems like that would be enough to retire on. Probably tie it to inflation?

What number would you pick?

> What about making it easier for normal people to have access to the same IPOs that Thiel had access to?

I would be fine with that but it seems like a separate issue?


I'm not sure I would pick a number if I am honest, but I can understand that a number probably exists.

If this wasn't Thiel but rather someone else who made 60k/yr or 120k/yr, I don't think this would even be a conversation. So what if they turned their Roth IRA into 100 million.

In my opinion that is encouraging the right behavior and the intent. Investing 2,000 per year of their wages and trying to be somewhat forward thinking about their retirement.

Now there is the open question of if an average person is able to truly analyze such investments, but I think that is a separate issue as well.


I'm fine with limiting additional contributions to the Roth IRA once its value passes some number (and around $10M, indexed to CPI, feels reasonable).

I'm not bothered by investments whose value grows beyond that figure, to be honest, mostly because it's not clear what you'd actually do about it without trying to value unrealized positions and more likely compel transactions. (Valuing listed shares is relatively straightforward, but compelling transactions is abhorrent to me.)


I would go so far that additional gains above $10 million are exposed to capital gains, as contributions are inconsequential compared to the compounding of the account’s assets at that account value.

This is in line with QSBS tax treatment of corporation shares, where if certain conditions are met, there are no capital gains on the first $10 million.

https://www.brownadvisory.com/us/theadvisory/qsbs-tax-exempt...


Any balance in excess of ten million dollars at end-of-year should be a mandatory distribution. That’s a simple and very fair way to address the Romney-Thiel issue.


How about freedom and no limit? Why limit?


>What about making it easier for normal people to have access to the same IPOs that Thiel had access to?

I agreed with everything you said but the above. It gets weird when financially illiterate have access to 'Private companies'. Look at what happened to dogecoin.

Edit: Financially literate is a loose term, but a million in assets not including real estate does seem excessive.


Honest question: do you think it’s a good idea to protect people from themselves?


The answer isn’t binary, it’s a sliding scale between 0 (zeroism, nobody is allowed to be harmed by anything) and 1 (do whatever you want).

Seat belts, road signs, the FAA, the FCC, the FDA … all these are protecting people from harming themselves.

I don’t think it’s possible to have a functioning society at 0 or 1, but whether 0.35 or 0.55 is a better setpoint is hard to say for sure.


So more like yes for some cases, no for others. But how do you choose?


Consensus. Either direct or indirect, because that's part of what a society is.


And Roth IRAs are funded post-tax. That means he paid taxes on the income already, before he put the money into the IRA. That's why it's "tax-free".


Are you suggesting any investment that is made after you've paid taxes on it should be tax free regardless of growth? Roth is an exception, not the rule. Tax is cyclical, not a one time thing, by design. It was never the case that you only ever paid tax once, and it's confusing to me that it's even being suggested otherwise. Roth is a very special exception to this.


Not just anything, but the other kind of IRA lets you put money in without paying income tax first.


Why are you ignoring the most significant difference with the other kind of IRA?


That with a Roth IRA you pay the tax rate when you're working, and a normal one you pay according to the tax rate when you're retired?


Once again you are leaving out an important detail. The amount of money that you pay the tax on for a Roth is often orders of magnitude less than a traditional IRA, regardless of rate. You are avoiding A LOT more tax with a Roth. It's a fixed initial payment with a Roth, yet it scales indefinitely with a traditional IRA. It's a huge difference.


I was never clear on how much difference it made. Either you pay (say) 20% up front or you pay 20% later. With compound growth multiplying in the middle, does it really make a difference to how much you have at the end?

0.8 * (1.07 ^ 20) == (1.07 ^ 20) * 0.8


Your math is wrong.

(0.8 * 1.07) ^ 20 and (1.07 ^ 20) * 0.8, which are not equal. I'm assuming that 0.8 is the percentage after tax, 1.07 is the deposit, and 20 is the growth.


No, your mathematics is wrong. The growth rate (1.07) is what's compounded, not the deposit.


Imagine I’m Peter Thiel and I have obtained 1 million shares of PayPal at $.01 each. After 20 years I’m going to be able to sell these at $1000 each (all numbers made up). Thiel can now do one of two things:

1. Roth IRA: Pay taxes on the value of the principal up front, but not pay taxes on appreciation. Let’s say a 20% tax rate (made up for simplicity), so 20% x .01 x 1M = $2,000. Thiel writes a check for this relatively small number.

2. Traditional IRA: pay no (immediate) taxes on the principal up front, but pay taxes on the appreciated value. So assuming the same tax rate: 20% x 1M x $1000 = $200M.

Your math is correct, of course. The mistake is assuming that Theil would pay taxes by selling 20% of his inordinately valuable $.01 PayPal shares, even though technically (after appreciation) those would be worth $200M. That would be stupid —- obviously he wouldn’t do that, he would just write a check from his bank account — selling that principal would be absurd since such shares can’t be purchased or sold on any liquid market. The entire purpose of using a Roth IRA here was that Theil had access to a unique, non-liquid asset with a potential for extremely high appreciation, and he wanted to insure himself against paying taxes in the likely event that happened.

IMHO a part of the problem here is that the initial “price” of PayPal wasn’t determined by the market. So allowing Theil to pay taxes at that rate made it absurd for Theil to sell any of his principal to pay taxes. Even if you grant that PayPal was basically a lottery ticket, we shouldn’t use a middle class tax vehicle to shield taxes on assets that the middle class (broadly) doesn’t have access to in public markets.


The difference I don't get is: why is buying $1,667 of stock and paying $333 in tax different from buying $2,000 of stock that you will later realize 80% of? You spend the same total amount up front and get the same result later.


> The difference I don't get is: why is buying $1,667 of stock and paying $333 in tax different from buying $2,000 of stock that you will later realize 80% of? You spend the same total amount up front and get the same result later.

If $1,667 is a correct valuation for the stock -- meaning, the stock is valued by a liquid and well-functioning market -- then maybe there is no difference! From that perspective, there's no difference between writing a cash check for $333 and keeping the principal, vs. selling $333 of your principal and having a lower return in the long run. The long-term expected value is basically the same, you're just investing your money in a lottery ticket. But the lottery ticket is available to anyone else, and it's (in theory) fairly valued by the market.

But let's suppose that $1,667 isn't a fair value determined by a liquid and well-functioning market. Let's suppose you have strong reason to believe that this stock will be worth quite a bit of money, and moreover the market valuation is low because it's an asset that only you have access to purchase (e.g., because you're a founder with pre-IPO shares that can't be purchased for any price on any liquid market, and so the valuation is something absurdly, comically low that your lawyer scribbled on an Operating Agreement in order to minimize your taxes.) You're certainly not going to sell $333 of your massively undervalued assets to pay the taxes.

In that case the whole logic of the Roth IRA falls apart. The Roth IRA is supposed to be a savings vehicle for the middle class, where investors pay a tax on income received, then get a tax deduction on appreciation (i.e., one that is subsidized by the US tax payer.) But what is a "fair" way to calculate your income when it includes illiquid stocks? For certain assets, the "fair price" is literally whatever my lawyer says it is. So allowing highly illiquid (and not-well-priced) assets into this system seems like an invitation for abuse.

There is a separate question about whether the total Roth IRA tax benefit should be capped to something like $10m in your lifetime even when restricted to fairly valued liquid assets. After all: the US taxpayer is subsidizing this as a middle-class retirement program. But disallowing the inclusion of weird, illiquid assets might be a good idea as well.


No, my assumptions are wrong then - what does "20" represent here? and does the "^" symbol represent the power function?


Yeah sorry for being cryptic. It's 20 years compounding at 7% per year. Scenario one: take your starting investment, subtract 20% for taxes, then do the compound growth. Scenario two: take your whole starting investment, do the compound growth, then subtract 20% of the result.

It's totally possible that I missed modeling some part of the situation that somehow makes more money from the Roth way of doing things. But the models above produce the same results.


I think that's fair, although, and correct me if I am wrong. Its his current income tax, so it's highly likely that his income tax bracket is lower than the cap gains tax that would normally be applied on investments like this.

That being said, I tend to agree. Its to prevent double tax in which you're trying to promote a better investment. Your long term health and retirement.


I'm correcting you: Unless he makes less than $40,000 in salary, the capital gains tax rates are going to be lower than the tax rate for ordinary income. The chart in this article reveals more: https://www.investopedia.com/articles/personal-finance/10151...


> I 100% agree Thiel has broken no crime and I think you should be embarrassed to say that the people who created the Roth intended this. There is no evidence of that. We should recognize that this Roth IRA is sheltering more money than people expected and make (or refrain from making) regulatory changes in response.

I remember when I was young and maxed out my Roth, also converted a lot into it, and a tax accountant warned me that the government could change the rules so the gains are taxed. I thought, "no way, they couldn't do that!"

Now I see they very well could as a response to arguments such as yours.

I can't say I'm a fan of Thiel's business or writings however many of us rely on Roth remaining as-is. It already has limits. Thiel simply made good investments. We shouldn't punish that unless there was something like insider trading occurring. And that should not impact the existence of the Roth.


> Now I see they very well could as a response to arguments such as yours.

I think the parent is arguing that a Roth should be limited to some reasonable ceiling, e.g. $1M, $5M, etc.


You can only put earned income into a Roth, you can only put up to 6K per year, and you are only eligible to put anything at all for a given year if your total earned income was below a fairly modest threshold. Roth IRA already has plenty of restrictions. The fact that one man happened to be some combo of smart/lucky to make the modest initial investment turn into billions is definitely not an indication of whether the Roth is problematic. I think the parent may be confused about the exact details of a Roth.


You can rollover to get around contribution limits [1], and the government gets your money now rather than later,

> A Roth IRA rollover (or conversion) shifts money from a traditional IRA or 401(k) into a Roth. You can get around Roth IRA income limits by doing a rollover. You'll owe tax on any amount you convert, and it could be substantial.

Limiting the max amount would reduce near-term government tax revenue. So I don't think it would happen.

[1] https://www.investopedia.com/how-to-do-a-rothira-rollover-47....


Interesting, I thought there was an income limit on rollover as well but apparently that was axed in 2010. In any event Thiel couldn't have used this.


You would disincentivize good investments and reduce GDP as a result.


This is happening because it's Peter Thiel, and he's an enemy of progressives, or at least, he is in their mind.

If it came out this was someone they like and hold dear, there'd be no article. That's why this whole article is pathetic.

By Law of Large Numbers alone, we're almost guaranteed there's another person with another Roth IRA with another outcome almost just like Peter's... but we'll never hear about it because that person didn't vocally endorse Donald Trump for president, doesn't do blood transfusions with 18 year old donors for mesenchymal stem cells, and isn't a thorn in the progressive side.


> successfully used an instrument designed for the 'middle class' to shelter billions in earnings

A Roth IRA is beneficial if positions are being changed (taxable events), because those taxes are deferred. For very long term holding, the benefit caps out at 20% in exchange for tying up the assets for decades.

He will eventually benefit, if the company is still valuable when he comes of retirement age, by avoiding the single long term capital gains hit he would otherwise pay. It'll be more of a story, then, if the stock is near an all time high value, but frankly, this is not a scalable investment strategy for the wealthy sheltering their wealth (which would be a more interesting story). This only worked because he has been an exceptionally prescient investor. This wouldn't be a good strategy for every startup founder, because even if the startup was mega-successful, the founders would not be rich until retirement.


He has been constantly changing his positions and using the proceeds to invest in other companies. The benefit isn't one time, it is compounding over time, because he gets to keep investing the 20% of extra money he would have had to pay in capital gains, over and over again, as he shifts his money between investments. It would pay off anyways even if he did have to pay 20% when he eventually withdraws, but the fact that he gets it all tax-free makes it pay off massively.

He also doesn't have to keep all of his wealth in this Roth IRA, just a percentage. And it clearly is a scalable strategy because lots of people are doing it.


This worked because he used a self directed IRA that most likely invested in some LLC with a marginal amount. It's very probable he also invested in the same company via some other investment vehicle, possibly direct ownership. The managing members simply assigned more benefits to the self directed IRA instead of the other account...

What does not seem fair is that most people think you can only invest in stocks and bonds in an IRA. You go to a bank or brokerage to open an IRA account... They offer you mutual funds, etfs, stocks, bonds... not much else... No one ever tells you that you can do this a different way and invest in different ways... Why? It's just too complicated for most people...

https://trustprovident.com/self-directed-investing-in-a-limi...

Yes it does suck for the rest of us but if you have money you have good advisors that can construct this IRA and all of its transactions in a legitimate manner.


What really sucks is I never got the opportunity to invest in PYPL at $0.001 per share. That’s the part that actually confused me. Sure its pre-IPO, but I’ve never seen any that are pricing their shares that low in the beginning, did I miss something?


oh yes the par value of stock...

https://www.nolo.com/legal-encyclopedia/what-is-par-value-st...

I think he went the route of his IRA's investment llc membership units being assigned a super large assignment of income distribution vs his initial investment.

just guessing...


I’m still not really following, what are you saying about assigning income distribution?

But so the way the article made it sound then is his IRA paid for the shares at par value ($1700 = 1700000 shares IIRC). Even though they were of course worth more than par value, so then he owes money to the company for the difference but if that wasn’t paid out of the IRA that would seem an incredible and surely illegal tax dodge so I don’t think that could be the case.


my bad you are correct,

https://sdirahandbook.com/self-directed-ira-investing/fund-s...

it is in section: Need to Know #1: Prohibited Transactions



Nothing is deferred with a Roth IRA. There are no taxes owed on distributions.


"exactly as intended"

I would say it's exactly the opposite of intended. ROTH IRAs were never intended for professional investors to avoid taxes.


I mean...it was intended for everyone to use, and the intended use was to avoid taxes (in this one, very limited context). And professional investors are part of "everyone".

So...I mean....it really is the intended use.


The intention was not to create tax shelters for the ultra-wealthy. Hence the income limits.

Thiel used a loophole to grow his wealth using the Roth as the vehicle.


He didn't use any loophole. He didn't make more than the allowable yearly contribution, which is small. If someone can turn that into billions good for them. The vast majority of wealthy people could not, hence why this is a weird anecdote like OP was saying, not an actual problem with tax code. And there are many such actual problems we should be focusing on.


It was at least not a public intention, but I know more than one multi millionaire that has used this "loophole". Peter thiel isn't some super rare exception


Backdoor Roths are a thing. The income limits don't matter in practice. The trick is getting appreciable money into the necessary accounts in the first place.


Is the loophole investing well?


Perhaps disqualify accredited investors from ROTHs? Or make it convert if the holder makes so much $$ they become an accredited investor.

Or if the individual has paid AMT or less than 20% average tax through age 59.5 then tax all withdraws as ordinary income.


I believe that in some countries the equivalent to a Roth is limited to exchange traded companies and relatively low risk funds and bonds. If the intention is for normal people to save for retirement this makes sense to me.


There's all the evidence it's exactly what Roth IRA is for in its very design. If whoever designed it meant it to have caps - they would make it have caps. They know how to do caps - they did caps on contribution, they did caps on income for being allowed to contribute (which btw is super low). They didn't put caps on the account size because they didn't intend to have them, not because everybody who designed it suddenly had a stroke and forgot caps are possible.


All systems with rules have outliers. If Roth IRAs are hugely beneficial to a large swath of the middle class and at the most extreme outlier it lets a billionaire dodge what is, at the end of the day, a barely significant amount of taxes maybe the correct response is to not care. If policy reaches a local maximum for distributing good and you're upset that someone is wealthy, maybe it's your own envy that's at play.


What is the goal here: to make revenue for the government or to punish successful investors?

Thiel paid taxes on his Roth IRA - when he put the money in. As a result, the government didn't have to wait till he was 59.5 years old to get their cut. Thiel for his part was willing to use that money for risky investments. As in, the cash deposited in that account could have well gone to $0 if not for the fact that Thiel is a gifted investor. In that case, the IRA would have been worth nothing but the government would have still gotten their cut ahead of time.

Management and mitigation of risk - both for individuals AND the government - is literally the reason Roth IRAs exist. This is indeed the law working absolutely as intended.

Anyone could follow the Thiel strategy, except for the fact that ordinary Americans are forbidden from investing in risky investments because they're deemed too stupid by that same government and that Thiel is probably a better investor than just about anyone else.


And Thiel is not alone. Max Levchin also dodged taxes by putting his early investments in an IRA.

If the act is not an official tax dodge, then it’s a breach of fiduciary for a large investor like Max or Theil AND the company to fail to disclose the IRA lock-up. For Max or the company to show the cap table or advertise the investment on a roadshow yet fail to communicate the illiquidity of the holding— that’s materially misleading.


You misunderstand it. The holding is not illiquid. It's fully liquid, it's just that Peter and Max's access to the cash proceeds aren't. If someone buys the shares in the Roth, their position is fully liquid: they can sell the next day and use the cash for anything. And the sellers can take the cash and use it for anything that looks like an investment. Like, invest it into another company, or into real estate (like a mansion or yatch)


That's wrong. Holding something in an IRA doesn't prevent you from selling it, only from taking the proceeds and putting them in your personal checking. The proceeds continue to be property of the IRA/401k, and can be re-invested elsewhere, without incurring a taxable event.

You can day-trade in your self-directed 401k or IRA until you're broke or Thiel-level rich, and the IRS will never get involved.

I mostly agree with the top-level comment, here; ProPublica is losing a lot of credibility for their mildly misleading and black-and-white framing of these tax issues, and I'm someone who genuinely believes that wealth inequality is a problem that can and should be addressed by the state.


Can one hold and trade crypto in such a vehicle?


Theoretically, yes. You'd have to use a self-directed IRA, but it can be done.


I do


In Theil’s and Max’s case, the proceeds account for 99.9% of the account’s value, no? The investments appreciated over 100x. Thus the entire position is locked up / faces withdrawl penalty. Maybe the position could be liquidated but the ROI would be lower. As a VC, the action signals such a friendly relationship with the founder that the VC doesn’t care about the returns. That materially affects incentives—- especially voting incentives.


You're still misunderstanding how the retirement trust works: selling shares does not imply a withdrawal, it just means that instead of owning stock, the retirement account now owns cash. Because selling is not a withdrawal, there is no withdrawal penalty, and no influence on the trustee's ability or willingness to sell.


> This is not an article claiming that laws have been broken. It is pointing out the difference in intent and reality for a part of our financial law.

There's always a difference between intent and reality. A hammer can be used for many things other than hitting nails.


If they intended something else, then why didn't they write the rules to reflect "else"? The truth is that they didn't think that any Roth IRA investor would be as successful as Thiel. He showed that he can be. Good for him.


> If they intended something else, then why didn't they write the rules to reflect "else"?

If the web server didn't intend to allow a buffer overflow on POST requests, why did it improperly allocate memory?

I agree with you that we have a choice: should this be allowed? If not, how do we transition? If yes, do we want to place any limits on it in the future?


When you create a tax shelter, someone always asks "what if someone uses this to create an enormous amount of wealth"? This is not just true for the US tax code, but has been true for probably every tax code in history. When that question is raised, the first thing to contemplate is how likely it is to occur. And if it is not considered likely, then this risk is accepted.

Fuzzing may be a good analogy. Fuzzing can be used to test POST request processing when the logic is too complicated to validate via more formal means. We try a large sample of inputs. If they pass, then the test passes, even though we cannot be confident that the code will handle every input string correctly.


Right, but like - if you later find a buffer overflow that the fuzzing missed - you'll fix it right?


Sure, if you can reproduce the input and if you agree that it is misuse. This is a scenario where we don't know the formula to create $5B, and and there is no consensus that it ("making an extremely successful investment in a tax shelter") is misuse.


Why wouldn't it be allowed? If my investments into my Roth IRA performed so we'll i became a billionaire, I wouldn't want to be treated differently. And I wouldn't want my mom or my neighbor to either. They essentially got lucky, they're not taking anything from me in being so fortunate.

The "problem" in this case is that Thiel was already a billionaire to begin with, and such luck on top of existing wealth is what irrationally bothers people.


We have a progressive tax system, which generally taxes higher incomes at greater rates. Maybe we do want the Roth to be an unlimited shelter, but that has generally not been the approach we have taken.

> The "problem" in this case is that Thiel was already a billionaire to begin with, and such luck on top of existing wealth is what irrationally bothers people.

This isn't how I feel and I don't actually think that is the case ProPublica is making. Tax breaks can also be understood as payments - is it in the interest of the US to pay Thiel to put his money in a Roth? How much should the US pay? How many of your tax dollars would you want to go to funding tax breaks for Thiel?

I am sure people are vindictive as well, but the tax questions seem both meaningful and work asking to me.


I think this is a strange zero-sum way of interpreting things. It assumes tax income is fixed in some way, and that some not being taxed means others always get taxed more. That's false.


> Is it in the interest of the US to pay Thiel to put his money in a Roth? How much should the US pay? How many of your tax dollars would you want to go to funding tax breaks for Thiel?

I submit that yes, it is in the interest of the US to do this, provided that Thiel is creating value for the US (and to some extent the world) with that money. $5B is approximately one day of US government spending (maybe less now). Letting Thiel invest $5B may not be the best investment decision that the USG has ever made (e.g. Internet funding, Telsa support), but it is way higher than the mean decision.


The difference is also that the investments your mom or your neighbor put into their Roth IRA are going to be publicly traded companies and similar. Thiel, an accredited investor and startup founder, tweaked his salary to be low enough for a Roth and sold himself shares of his own company at a very low price to put into his white glove managed Roth IRA.

The average person does not have the ability to do this.


Are you seriously trying to say that lawmakers can't write buggy code with edge cases they didn't consider?


Sure they can.

Here, I think some lawmakers probably thought (a) "if someone can use this tool that well, then more power to him", or (b) I don't like it, but it is so unlikely, and I can probably live with it.

I don't think it was a scenario of someone failing to "consider the case."


The law is an evolving code as we discover new scenarios. This reporting is exploring one of those unexpected scenarios so we can understand the need to change the law.


Not to mention that rich people can pay the smartest legal scholars and financial gurus to find workarounds and engineer ways to make more money.


I think you are missing the point of GP. There is nothing billionaire specific about what Thiel did. You could have done the same with the same Roth contributions. If the law is changed it will not only limit Peter Thiel from doing this but also you and me.


It's clear that the IRA system was created to encourage saving for retirement through tax deferral.

It was not intended for billionaires, because for them it serves no purpose in encouraging them to save for retirement. (Financial security in retirement is not something billionaires worry about.)

The idea that there is no way the law could exclude this sort of benefit while not hurting the middle class is absurd. There are any number of ways to do it: for example, any plan with more than $10 million in capital gains could have gains above that amount lose their tax-exempt status.


>It's clear that the IRA system was created to encourage saving for retirement through tax deferral.

It is not clear to me that IRAs were created for this reason. As far as I can tell, they seem to exist only to provide plausible deniability (and poorly at that) for 401ks giving an advantage to big businesses that can afford to implement them (pre Vanguard/cheap passive investing days) over smaller businesses that could not afford to implement 401ks.

Otherwise, I see no reason why people who work for employers that can afford to offer 401ks should have a leg up in tax advantaged retirement savings over people who do not and have to rely on IRAs (which have drastically lower contribution limits).

>It was not intended for billionaires,

It would have been simple to write in a limit for maximum amount of tax free gains in Roths.


“The law, in its majestic equality, forbids rich and poor alike to sleep under bridges, to beg in the streets, and to steal their bread.”

I think there are about 4 billion billionaire-specific things Thiel is getting out of this arrangement that aren't accessible to me (or, I suspect, to you).


> If the law is changed it will not only limit Peter Thiel from doing this but also you and me.

That obviously not necessarily true. One can imagine a change in law that limits tax sheltering of this type for any individual to say, 10mm. A tiny fraction of the population would be affected.


> That obviously not necessarily true. One can imagine a change in law that limits tax sheltering of this type for any individual to say, 10mm. A tiny fraction of the population would be affected.

Or limit the types of assets that can be held in an IRA to those that are publicly traded and can be bought on the open market. It seems like an important part of this scheme was Thiel basically got to set the price of some shares he sold himself, because they weren't publicly traded at the time.


Then you are limiting what people can do with their money 2 inflating stock prices of giant companies. What if I want to invest in a friend's business or buy a rental property. Are you saying it should be illegal for me to do that with my IRA?


> Then you are limiting what people can do with their money 2 inflating stock prices of giant companies.

So? It's what 99.999% of them do anyway.

> What if I want to invest in a friend's business or buy a rental property. Are you saying it should be illegal for me to do that with my IRA?

Yes.


No. IRA is funded with your money, so you should be able to do with it what you please. Next you'll be telling people they can only buy ETFs because stocks are too risky.


You can do what you please with your money and one of your choices is to put it in an ira or not. If you've decided to put it in a specially tax advantaged shelter defined by the government then you follow the rules they define for that status, if you don't want to then you don't put it in an ira


> No. IRA is funded with your money, so you should be able to do with it what you please.

No. You can't even do what you please with money that's not in an IRA. And I mean, you already have to accept other restrictions to enjoy the tax advantages of an IRA, so what's so bad about adding another small one to solve this problem?


If you can legally invest in an asset in a taxable account, you should be able to invest in the same when its an IRA. Anyone can take advantage of this. Why do you want to restrict the way people invest their retirement funds?


All money is yours legally. The gov can tax it.

Some things are are illegal to do with money and assets, but that doesn't mean that everything belongs to the government


The gains over doing the same at a taxable accounts are not your money, but public funds (the taxes not paid on those).


With taxable accounts, it is legally your assets, gains or not. You pay taxes when you sell. Just like with a traditional, non-Roth IRA: you pay taxes when you withdraw. The IRS makes the rules.


The IRS doesn't make the rules, but enforces them.

Unlike a somewhat popular opinion on this website, the law isn't an algorithm, but a codification of societal norms, like that we all share the expanses of living in civilized society.

Yes, the TRANSFER of assets happens at time of sell or withdrawal, but the share taxes was painted such when we (the people, through legislation. Not the IRS!) decided that such share should be dedicated to society.

This isn't about letter of the law, and never was: it's being an asshole.


That doesn't even make sense. The "share" is not known until the assets are sold or withdrawn, and also subject to change based on whatever tax law happens to be at the time. If I hold a stock long term, instead of day trading and accruing short term gains and associated taxes, am I being an asshole?


Better yet, they can only invest in blue-chip companies


It always amazes me how quick people are to needlessly take away freedoms and fuck others over as a knee-jerk reaction.

Putting restrictions on others should have careful thought and clear rationale.


> It always amazes me how quick people are to needlessly take away freedoms and fuck others over as a knee-jerk reaction.

What freedoms? We're talking about tax advantaged investment accounts intended for a very specific public purpose, which are already restricted in many ways because of that.

If you don't like restrictions, we could also solve this problem by abolishing IRAs then. Does that sound better to you?


You are proposing adding new restrictions on what people can do with their money. That is taking away their freedom. It is worse because you propose it as a solution to problem that doesn't even exist.


Your being very optimistic here and changes will make the existing v poor US pensions system worse.

edge cases make bad law eg using the small number of social security cheats to reduce entitlements to all or the tiny tiny number of cases of elector fraud to disenfranchise the poor and BAME.

Dunblane and the Dangerous dogs act in the UK are related.

This is the sort of thing that fringe "hobbyist" activists do assuming they aren't paid agent provocateur's


> Your being very optimistic here

I'm not being optimistic or pessimistic, just pointing out a logical fallacy.


There is actually something millionaire specific about what Thiel did. He was an accredited investor that was able to buy private shares that the general public cannot buy.

If IRAs were only allowed to purchase publicly-listed stock, this wouldn't have happened.


Which also gives the accredited investors another advantage: with less capital available, the valuations are inherently depressed.


That's the point. It should limit temporarily embarrassed billionaires like you and me from doing this if we regain our riches.


It’s pretty disingenuous to say that Thiel’s investments just happened to be “in the top 0.0001%” like he’s some 90s wunderkind. He bought non-public shares for $0.001 per share - a price that no one except a PayPal founder would have access to - years before PayPal went public and then watched it balloon after IPO and onwards. This is not the same thing as the average American making wise investments and to paint it like that is missing the point entirely. I certainly don’t agree that Thiel is “stealing” or being sinister here, but I also don’t see any other comments in this thread purporting he is. It seems the general consensus is this is just another “hack” of the system (purchasing shares of your own company before IPO with a triple tax benefit account) out of reach to 99% of people - which is true.


But the shares truly were worth basically nothing at founding. If he made the contribution for tax year 1998, then they hadn't even raised any money and therefore there was zero external valuation.

Anyone can found a company with a $1 market cap and have full ownership from their one dollar investment. But it's meaningless unless they turn that into an actually valuable company with a market cap in the billions. Thiel just got exceptionally lucky, in addition to a bunch of hard and smart work.

I think this is a concept a lot of us struggle with when imagining the extreme wealth of the most elite tech entrepreneurs. Bezos, Gate, Zuck, and the rest all started with worthless companies and had substantial ownership as founders. Their wealth came from turning those large stakes in worthless companies into slightly smaller stakes into companies worth hundreds of billions.


We'd need more numbers to figure this out, but the article discloses that within the same month "the company sold a slice of itself to investors for $500,000." That should clearly establish the value of the company at the time. If that slice grew by a factor of 295, that is, the 500k divided by the 1.7k he invested, then he fairly valued the amount of stock he purchased. If not, the information presented suggests to me that he committed tax fraud.

I don't know where to find the documents on Paypal's valuation and early ownership transactions to be able to dig further into this. One would imagine Propublica would have done so if it were feasible, and reported on it.


Note there's significant limits on stock held in a Roth. Last I looked at it, you can't own more than 10% of the company, and you can't be an operating officer:

26 U.S. Code § 4975(2):

(H)an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10 percent or more of the yearly wages of an employer) of a person described in subparagraph (C), (D), (E), or (G)

The propublica article says Thiel put shares of his own company in his IRA. If true, that's not something you can do anyone.


They weren't worth nothing, since they got investors to invest at 500k.


And that's why he paid for them.


Anyone can purchase shares of a company they found. You can file paperwork for a few hundred dollars and immediately own 100% of the shares of your own company.

Making those shares worth billions of dollars is left as an exercise for the reader.


Not with funds in a Roth IRA. Everything must be at "arm's length" (otherwise a lot of people would purchase homes using their Roth)


You can purchase real estate with a self directed IRA, not sure if it can be a Roth IRA, and probably not your primary residence, but I don't know the exact rules.


You can purchase property with a Roth.

It cannot be your primary residence.

You have to be entirely hands-off with it. You are not allowed to manage the property, do repairs, etc.

You are still not allowed to decree that the value of a house that you own is $10 and sell it in to your Roth in order to shelter it from taxes and get around contribution limits.


> This is the law functioning as intended. Thiel's case is a one-in-100-million+ event. He may have the only Roth IRA in existence that's valued at over $5 billion. But he didn't do it by exploiting some sort of "loophole" or paying high-priced accountants to shield his assets in foreign entities offshore. He put his investments in a Roth IRA just like any of you can do. The only difference is his investments were in the top 0.0001% in terms of performance. That's generally how people get to be billionaires.

No. Roth IRA's have contribution limits, and at a minimum I'm sure he exploited some loophole to get his adjusted gross income down below $110,000 so he could make that $2000 contribution in 1999 (https://www.irs.gov/pub/irs-prior/p590--1999.pdf). Look at his work history:

> https://en.wikipedia.org/wiki/Peter_Thiel: He then earned his J.D. from Stanford Law School in 1992.[7] After graduation, he worked as a judicial law clerk for Judge James Larry Edmondson of the U.S. Court of Appeals for the Eleventh Circuit, as a securities lawyer for Sullivan & Cromwell, as a speechwriter for former-U.S. Secretary of Education William Bennett, and as a derivatives trader at Credit Suisse. He founded Thiel Capital Management in 1996. He co-founded PayPal in 1999, serving as chief executive officer until its sale to eBay in 2002 for $1.5 billion.


It's called Backdoor Roth Contribution [1]. It only really works if you don't have any normal IRA accounts.

1 - https://www.investopedia.com/terms/b/backdoor-roth-ira.asp


The backdoor Roth didn't exist until 2010; Thiel's initial contributions were in 1999.

https://en.wikipedia.org/wiki/Tax_Increase_Prevention_and_Re...


Its per year. Founders often are not taking salary or much of one for several years.

You can have millions of liquid assets and not have any income and be eligible for income related thresholds.

You dont need to be taking advantage of net operating losses or charitable deductions for any of this.


I'm surprised to see this downvoted. My understanding is that one can only contribute to a Roth IRA if their income is below a certain limit. For the 2021 tax year that is $139k. Plenty of founders are receiving salaries below that threshold in 2021, even after raising money.

If Thiel made this contribution for tax year 1998, then this would be before they even took any external funding. It's quite conceivable that he received an exceptionally low salary that year and relied on savings.


> I'm surprised to see this downvoted.

There was some snark that was edited out.

> Plenty of founders are receiving salaries below that threshold in 2021, even after raising money.

Yeah, that's the mechanism, but being in a position to decide what what your taxable income will be is a loophole in itself, one that's pretty much only available to the wealthy and people who run businesses. I'm sure Thiel was both at the time.


> but being in a position to decide what what your taxable income will be is a loophole in itself

mmmm not a loophole, the government encourages entrepreneurship and created tax deferred plans because social security is flawed and inadequate and pensions also shouldnt be expected by the general population

Having a self directed IRA with some good trades in it is the expected outcome


He could have saved it up from prior years of work. Starting salaries can in fact be lower than $110K.


The OP said he made the contribution in 1999, after he did things like work as a securities lawyer and founding a hedge fund.


> Again - this isn't a tax dodge. This is someone who used the law exactly as intended without any illegal or shady dealings and happened to be incredibly fortunate.

To quote Daniel Ellsberg: the scandal isn't that they're breaking the law, the scandal is that what they're doing is legal.


This is by the far the most succinct way to debunk the OP's misguided thinking.

There is simply no way to argue that what Thiel et al have done was an intended use of the Roth IRA account. Any attempt to advance some form of that argument is jaw-droppingly disingenuous.

The easy fix here is to either cap the tax free gain (the cap could be as high as $1M and have the desired effect w/o hurting the people meant to benefit) OR revise the eligible asset definition.


I don't think that's true right. Peter Thiel purchased shares in Paypal at $0.001 per share, which is far below fair market value.

The "theft" here is the undervaluation of the shares with which he purchased at


You realize that when forming a company, the number of shares you issue is arbitrary, right? If three founders each put in $1 capital, and each get 1 share, then the price per share is $1. If instead the founders get 1 million shares each, then each share is worth 1 millionth of a dollar. What economic difference does it make?

Or are you claiming that on the day that he paid $0.001 per share, someone else paid more per share? If that didn't happen, there is NO WAY to determine after the fact what the “true” market value was on that date.


> Or are you claiming that on the day that he paid $0.001 per share, someone else paid more per share

I suspect this was the case. Hypothetical example: Class A shares were available for $100 each, and Class B shares for $0.0001 each, but you could only get a B share by buying an A share. With the implicit (or explicit?) promise to merge the share classes together eventually to cause the prices to converge and massively inflate the Roth IRA side of the investment where you stashed the B shares.

So the $0.0001 shares all cost you $100 each to buy, but that $100 comes from outside your $2000 contribution limit.


You don’t need two classes of shares for this you are over complicating things


Yeah, could just do the share issuance in 2 stages: the first at $0.000001 then later at >$1 to raise useful capital.

But multiple share classes often exist anyway for various reasons (different preferences upon liquidation, different voting polices, different retraction policies, different dividend policies, etc)


Yes

I believe Bain Capital used separate share classes to pump their employees 401ks

That level of collaboration and financial engineering should be encouraged


The article says that Paypal filings with the SEC stated that the purchase was below fair value.

The fun thing about your second paragraph is that courts don't care whether it is true.


Who sold him those shares?


That's not how it works. When you incorporate, the corporation has shares split among the founders. The founders themselves determine the "par" value of each share - essentially its intrinsic worth.

You have to pay this amount of money to acquire the shares upon incorporation. (Each state does it a little differently.) So it's generally made a very low value between $0.0001 and $0.01. You'd pay the same amount if you were to incorporate a new business. That's it. He put some of his founding shares in Paypal in the Roth IRA when he founded the company and he got incredibly lucky. Nothing sinister happened.


Except if these were founder shares, he would likely be disqualified. "Disqualified person...an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10 percent or more of the yearly wages of an employer)"

  (2)Disqualified person
  For purposes of this section, the term “disqualified person” means a person who is—
  (A)a fiduciary;
  (B)a person providing services to the plan;
  (C)an employer any of whose employees are covered by the plan;
  (D)an employee organization any of whose members are covered by the plan;
  (E)an owner, direct or indirect, of 50 percent or more of—
  (i)the combined voting power of all classes of stock entitled to vote or the total value of shares of all 
  classes of stock of a corporation,
  (ii)the capital interest or the profits interest of a partnership, or
  (iii)the beneficial interest of a trust or unincorporated enterprise,
  which is an employer or an employee organization described in subparagraph (C) or (D);
  (F)a member of the family (as defined in paragraph (6)) of any individual described in subparagraph (A), 
  (B), (C), or (E);
  (G)a corporation, partnership, or trust or estate of which (or in which) 50 percent or more of—
  (i)the combined voting power of all classes of stock entitled to vote or the total value of shares of all 
  classes of stock of such corporation,
  (ii)the capital interest or profits interest of such partnership, or
  (iii)the beneficial interest of such trust or estate,
  is owned directly or indirectly, or held by persons described in subparagraph (A), (B), (C), (D), or (E);
  (H)an officer, director (or an individual having powers or responsibilities similar to those of officers or 
  directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10 percent or more 
  of the yearly wages of an employer) of a person described in subparagraph (C), (D), (E), or (G); or
  (I)a 10 percent or more (in capital or profits) partner or joint venturer of a person described in 
  subparagraph (C), (D), (E), or (G).
  The Secretary, after consultation and coordination with the Secretary of Labor or his delegate, may by 
  regulation prescribe a percentage lower than 50 percent for subparagraphs (E) and (G) and lower than 10 
  percent for subparagraphs (H) and (I).
https://www.law.cornell.edu/uscode/text/26/4975


I was surprised by that also and asked a friend who has a CPA, but doesn't work in tax law. Their first comment after briefly scanning the legal code is that "disqualified person" is only used within the context of "prohibited transaction". The definition of "prohibited transaction" concerning "disqualified person" doesn't seem to address this case. Instead, it seems to focus on dealing with the Roth IRA assets in a manner to benefits ones accounts outside of the Roth.


I don't know if that's a distinction with a difference. The rules are that they don't want you investing in a business you have material control over, as part of your IRA. Maybe it's because they think it's too risky, or can lead to self-dealing abuses...or $5 Billion tax loopholes.

The guidance they give you may be helpful

Department of Labor (DOL) Advisory Opinions suggest that under the following circumstances, a prohibited transaction would likely occur:

The transaction is part of an agreement by which an IRA owner causes IRA assets to be used in a manner designed to benefit the IRA owner (or any person in which the IRA owner has an interest) such that it would affect the exercise of the IRA owner's best judgment as an IRA fiduciary. The IRA owner receives or will receive compensation from the subject company.

By the terms or nature of the transaction, a conflict of interest exists between the IRA and the IRA owner (or persons in which the IRA owner has an interest).

The IRA owner will be relying upon or otherwise be dependent upon the IRA investment in order for the IRA owner (or persons in which the IRA owner has an interest) to undertake or to continue the investment (e.g., minimum investment to be satisfied jointly by the IRA and IRA owner).

https://www.dwt.com/blogs/startup-law-blog/2020/10/startup-i...

https://www.irs.gov/retirement-plans/plan-participant-employ...


I think that was the poster's point.


It is in the article "Mr. Thiel purchased his founders’ shares in PayPal through his Roth IRA during PayPal’s formation"

I am willing the venture a guess that the initial valuation was far greater than 0.001 per share. And this was all an accounting trick to exploit IRA


I'd guess $.001 is the par value and there was no 409A valuation. The initial basis doesn't really matter if it is essentially zero or $1 or $5 in this case. The implied current price on the founders shares is approximately $2500.

I agree with Propublica's take

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 also think that there should be a cap on tax free distributions sheltered by Roths, and they should not be transferable upon death.


I disagree with ProPublica's take. If it was as simple as "pay just fractions of a penny per share... watch as all the gains..." then we would all do it. Not just with Roth IRAs, but with our entire portfolios. The reason we don't all do this is because startups are very very risky. Some people will succeed and walk away with windfalls. Other people will lose their shirts. If there was arbitrage, there would be a an "app for that" and there would be more billionaires walking around.


What they seem to be suggesting is that a fair valuation (well reasoned given all information) of the shares would have put the investment at millions of dollars, but due to a peculiarity of historical accounting, they could be put at worth $2K because that was the creation price and the last print.

For instance, it might be that a funding round was about to happen. This is never a sure thing, so you could claim that the shares are not worth the full price (and in any case the only trade was at 2K), while privately thinking "hmm, my shares are now worth x millions".

You then sell the shares to the Roth, thinking yourself that you're putting x millions in the vehicle while reporting 2K.

Doesn't sound illegal to me, but it also doesn't sound like things are supposed to work this way.


Or just exclude private shares from Roth IRAs.

Most people are non-accredited investors and therefore ineligible to buy them.

Startups won’t miss out on the $2000/yr from the few that are eligible.


This is what Canada does with its Roth equivalent, the TFSA.


Though Canada restricts your private shares to Canadian corps. Not as many startup home runs that stay Canadian before becoming public.


Forcing all IRA investment through publicly listed companies sounds like exactly the law a hedge fund would write. Why allow people to invest in assets you can own without going through a Wall Street investment bank?

Regulatory capture is forcing the entire economy through your cartel in the name of nominal protection.


Publicly listed companies are equally available opportunities for anyone participating in the contribution rate-limited game of Roth IRA maximization.

Private share contributions give huge asymmetric upside to private investors/founders. Yes they take risk in that their shares still have to end up being worth something one day, but clearly the upside tax advantages are ridiculously unbalanced against the middle class because not everyone has access to early stage investments.

So, even the playing field by:

- Letting anyone invest in early stage companies (this has many other implications)

Or

- Only allow cash contributions to IRAs


You can buy publicly traded companies without going through brokers/stock exchanges.

What can be assured is that the exchange can be booked at a market value, which can never be guaranteed in a private sale in an opaque market, risking shenanigans to shift value beyond the contribution limit.

(You can say a corp’s initial shares have zero value, but we can all agree here that a Corp formed to execute on a startup team’s plan/idea absolutely does have value).


The key is knowing exactly which startup to put your $2000 in.


> The key here is that if you have to reliably identify exactly which startup to put your $2000 in.

No. Theil was already making a risky startup bet, so the "reliably identify" point is moot. All this maneuver did was let him avoid all the taxes he'd owe if it paid off.


No, the key is being able to sell yourself something for far less than its actual value so that you can squeeze millions of dollars worth of assets into the few thousand dollar contribution limit for an IRA.


All shares issued at founding have a near-zero cost because, while you technically need to buy the shares, the company (by definition) is worth $0 on the day you start it.

There is no tax gimmick involved in that part. If you require entrepreneurs to buy shares of their own company for large sums of money on the day they start the company, it would dissuade many entrepreneurs. On the day I incorporated my company in Delaware, my debt exceeded my assets and the startup was going to be my only profession.


Sure - there's no problem with valuing those shares at $0.001 in general, because there's not much that valuation matters for in the short term (eventually you will pay different taxes depending on the end result of your company).

However, Roth IRAs specifically are a tax shelter and have contribution limits, so valuations matter a whole lot for them (difference in $0.01 per share vs $0.001 per share would be a difference of $500M vs $5B today). That's why I think illiquid (or non-market cleared) securities should not be allowed in Roth IRAs.


> That's why I think illiquid (or non-market cleared) securities should not be allowed in Roth IRAs.

That + a cap on tax shelter would solve the issue, if it needs solving.

Perhaps also prohibit equity from any source where you aren't arms length.


> the company (by definition) is worth $0 on the day you start it.

Is it?

If Elon Musk forms a corporation tomorrow, its market value is more than $0 before he does a single thing with it.

And that’s all the IRS should care about for Roth contribution limits: market value.

If I buy 1000 shares of PayPal from my mom for $2000 (mkt value: a lot more!) and put that into my IRA and tell the IRS that $2000 is the price we agreed (in the marketplace of the dinner table).


If, at the moment of formation, the company has a binding agreement with Elon Musk (the founder) requiring their services for a fixed time allocation and at a fixed rate of remuneratin, then yes that contract has value and therefore the company has value. The value will depend on the remuneration to Mr. Musk vs the perceived value of his services. Even so, it would be as one of a small % of outliers with high-value founders amongst the millions of companies incorporated every year. Was Peter Thiel as valued when he started paypal as he is now? No.

More importantly, acknowleding that very few companies may have value at inception due to the value (and commitment) of their founders' time doesn't make it any easier to systematically value that time. To legally enforce this, you would have to have valuation and audit service providers who do this - creating a bureaucratic hurde that every founder - famous or not has to go through - just to start a company.

It is my opinion that the cost of doing this - in reducing or slowing down the number of companies started and the lost taxes as a result - would significanty outweigh any gain in taxes from taxing the notional value of Elon Musks's presence as part of his own company.

All laws that apply to humans, particular compliance related laws, have significant second order effects. The second order effect of taxing the popularity of folks when they start a company is that thousands of less rich, less popular, less privileged, and less confident first time founders will face an additional hurdle when starting a business and they may never start one, never get rich through one. Ultimately, inequality would likely increase and rich established founders like Elon Musk and Peter Thiel would likely be more entrenched and benefit more from this, not less.


> If Elon Musk forms a corporation tomorrow, its market value is more than $0 before he does a single thing with it.

If there’s anyone stupid enough to value such a company at more than $0, Elon should sell that company and just start another one. Infinite money machine. He should call it Bitcoin or NFT or something similar...


People will throw money at a company that has done nothing solely based on the people behind it.

I mean, people throw their money at companies that actively burn money with unlikely prospects of overcoming their death spiral. One that hasn’t even started should at least be worth much much more than those.


When the company is formed the valuation is genuinely very small because it has no assets, customers, etc. Buying some of your shares in a Roth IRA at this point is relatively common, enough so that I've heard multiple people suggest that founders do it.


Yeah, I doubt Thiel came up with this himself. Was probably recommended by accountants whom should all be familiar with Roth IRAs.

But the possibilities of windfall tax-free profits made sure everyone kept quiet about it.


Are you saying that Peter Thiel should have known that he would turn PayPal into a multibillion dollar business, and because of this, the shares were not really worthless?

EDIT: That was sarcastic, but re-reading, that basically is what the article is saying:

> Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value.

20-20 hindsight


it’s honestly no wonder that the masses assumes inaccessibly expensive accountants are necessary to simply think clearly


Its still surprising to me that you got this backwards. There is no reason to ever choose a higher par value than that then when forming a company.


As a founder you can grant yourself options or shares at essentially infinitesimally small values in the very early days of the company and pay virtually no tax.


Other countries only allow shares of publicly traded companies to be added to tax shelter savings accounts. This seems like a reasonably fair way to prevent people with significant resources from taking advantage of the system in ways the general public cannot. Someone getting returns in excess of hundreds of thousands of percent should be able to afford paying a few percent in tax to help pay for the infrastructure society has provided to make success in industry possible.


Forgive my ignorance but I was under the impression this was startup founders standard operating procedure.

1. Form a C Corp

2. Grant founders shares at $0.000x/share

3. Early exercise all of said shares at basically nothing

4. Make 83(b) election to IRS

5. Take advantage of long term cap gains and qsbs

I’m sure plenty of folks in this forum have done similar things, the only difference is mr. thiel put it into his Roth account, essentially betting on himself and it paid off big time.


The difference is 83b defers tax until you sell, while IRAs don't allow you to buy assets from yourself


The UK doesn't there are a number of schemes that allow this.

Everyone in the private company I work for has EMI options that trigger on change of control.


That's not how I read the article at all. Honestly how I read it shows how he was able to abuse the system in ways that weren't intended. It also lays out clear and simple solutions:

- Only let publicly traded stocks/investments be part of an IRA

- Stock grants should be included in the maximal income to determine if someone should be able to contribute to an IRA

Honestly with just these two factors he couldn't have done what he did (implicitly nor anyone else with mega IRAs). The intent of the IRA was for a retirement vehicle for the average person, not as an investment vehicle where you could dodge taxes. You're right that he didn't commit any crimes. But that also doesn't make the thing right. When we find people using edge cases and breaking the intent of the system we say "well played" then patch the framework.

This is a tax dodge, just a legal one.


Just impose a tax when capital gains exceed some annual threshold averaged over a time period (say 5 years). Also, make everything after the first, say, $1m taxable on withdrawal at cap gains rates. It’s super easy to fix this.


I mean I'd be perfectly okay with adding a third criteria to my list being something like "max holdings of $10m (tied to inflation) and returns higher than that are taxed as capital gains." That's enough to ensure a luxurious retirement. But I do think the other parts are helpful and would help reduce other avenues for abuse. The IRA was intended for lower and middle class people to build retirement investments. Also 1m seems low for the maximum. At least IMO.


> The IRA was marketed as a way for lower and middle class people to build retirement investments.

The pessimist in me FTFY


Right. It's actually pretty easy to craft tax laws that help the middle class and below without enabling someone to have a $5B tax-free slush fund. People that argue the current situation is reasonable are just being silly.


- “Ah, Mr Thiel, I see you’re holding some shares there of a precious little company. Would you want to sell me some to put in this here tax shelter maybe?”

- “Why, yes, Mr Thiel, I’d love to sell you some of my shares here for your fine tax shelter there, let’s say, hmm, 1.7 million shares.”

- “Aye, let’s do it then, Mr Thiel. Mind you though: you can only sell yourself up to $2000 worth, Mr Thiel, per year. Now say, Mr Thiel, how much are those shares there worth, you reckon, Mr Thiel?”

- “Well, Mr Thiel, I’ll write you receipt over $0.001 per share. What do you say, Mr Thiel?”

- “Very well, Mr Thiel, that sounds about right. $1700, of course, Mr Thiel, just under the $2000 limit, what a happy coincidence, Mr Thiel. You’re so savvy in valuing shares!”

- “Of course, Mr Thiel, thank you, always eager to help, Mr Thiel.”

- “The pleasure is all mine, Mr Thiel. We are so fortunate, are we not?”


These are the exact conversations I have with myself even doling out shares to my self directed 401k and private foundation

Here nothing abnormal or discounted occurred with the share price

The par value at formation time would have been that


The article also names Berkshire Hathaway's Ted Weschler as someone who has a large Roth IRA. Weschler's response [1], which is linked from the article, is worth reading. He points out that decades ago he opened an IRA, just like anyone else, and happened to make some good investment decisions and got very lucky along the way:

> The magnitude of my Roth IRA is certainly larger than anything I ever would have imagined when I first opened my IRA in 1984 as a 22 year old Junior Financial Analyst making $22,000 a year working for W.R. Grace & Co...

> Upon leaving Grace, I transferred my IRA to a self-directed IRA account at Charles Schwab & Co., giving me discretion over the individual investment made in the account. Over the ensuing 29 years (through the end date you quote of year-end 2018) I invested the account in only publicly-traded securities i.e., all investments in this account were investments that were available to the general public...

> The investing success of this account has been a function of careful stock selection, exceptional luck and a multi-decade time period. To have a sum of this magnitude built up in my Roth IRA is certainly beyond anything that I ever expected but it was implemented in a way that was available to all taxpayers with an appropriately long investment runway, i.e., the result is exceptional but it is not the product of exclusionary tax strategies.

[1] https://www.documentcloud.org/documents/20971124-ted-weschle...


I think you missed a key part. The way Thiel (and others) got so much in the Roth IRA -- when contributions are limited, at that time to 2K/year -- is by under-valuing the non-publicly-traded stock they had insider access to.

Although yes, the main thrust of the reporting is that the tax laws are set up to hugely benefit the rich and allow them to avoid paying taxes, not that the rich are breaking the laws. With these IRAs in particular though, there does seem to be something very dodgy and possibly illegal about the way the rich are getting around the contribution limits by under-valuing non-publicly-traded stocks.

> 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.

> PayPal later disclosed details about the early history of the company in an SEC filing before its initial public offering. The filing reveals that Thiel’s founders’ shares were among those the company sold to employees at “below fair value.”

> Victor Fleischer, a tax law professor at the University of California, Irvine who has written about the valuation of founders’ shares, read the PayPal filings at ProPublica’s request. Buying startup shares at a discounted $0.001 price with a Roth, he asserts, would be indefensible.

> “That’s a huge scandal,” Fleischer said, adding, “How greedy can you get?”

> Warren Baker, a Seattle tax attorney who specializes in IRAs, said he would advise clients who are top executives working at a startup not to purchase founders’ shares with a Roth to avoid accusations by the IRS that they got a special deal and undervalued the shares. Baker was speaking generally, not about Thiel.

> “I would be concerned about the fact that you can’t support the valuation number as being reasonable,” he said.


This was my first reaction as well, but on second thought, this seems like a flagrant abuse of the Roth IRA. I'm not saying Thiel should be punished, but something is clearly wrong here. Let's say I invest in a freelancing company that only employs myself, and buy 100% of the equity for $500, which I use to buy a work laptop. I only take 1/3 of my income as salary and then leave the rest of the money in the freelancing company, which invests it in stocks. Combine this with a Double Irish arrangement, and I could basically avoid paying taxes completely.


You'd be trading as an investment company then


"This is the law functioning as intended"

The law creating Roth IRAs was intended for middle-class people, not billionaires. Likewise, the law allowing conversions from Traditional to Roth IRAs was intended for the middle-class. A billionaire taking advantage of the Roth conversion to amass a Roth IRA worth billions is not even remotely what the relevant laws were intended for; that it is legal is an oversight on the part of Congress, who did not realize what they were drafting when they wrote the law.

Moreover, it is not as if billionaires need to exploit the IRA rules like this. Typically billionaires will avoid taxes by borrowing against the value of their assets, then deducting the interest they pay on those loans from the income they use to pay the interest (done right, this results in no income taxes). That is an example of the law working as intended.


> And that's not even to mention that the assets in a Roth IRA are essentially worthless to him - he's not old enough to make withdrawals or take distributions tax-free and you can't borrow against a Roth IRA. The funds are essentially unavailable to him for years to come unless he wants to pay taxes and penalties.

If he took all of that money out now he'd be looking at losing half of it to taxes and penalties, leaving him with about $2.5B which is several of orders of magnitude more than he put into it. That's far from "essentially worthless".


> Again - this isn't a tax dodge. This is someone who used the law exactly as intended without any illegal or shady dealings and happened to be incredibly fortunate.

I agree with the general sentiment of your post, but I think you’re overstating your case a bit. To me it seems pretty obvious that Thiel did stretch the law when he bought shares in his own company at a far lower price than investors payed just months later.

This is a quite common and general loophole in tax legislation. E.g. in Sweden (where I live) capital gains are taxed lower than income. This of course creates an incentive to try and convert income to capital gains, and the tax authorities are constantly on the lookout for such schemes. If you sell shares/options cheaply to yourself or employees just a month before investors pay top dollar then you can expect… trouble.


I agree that Thiel did stretch the law, but all of this only matters because PayPal was exceptionally successful. Almost all founders who buy their early shares prefunding and place them in a Roth IRA will end up with worthless equity for retirement.

Further, there are disadvantages to having this portion of his wealth in a Roth IRA. For one, you cannot borrow against equity in a Roth. So while he can sell and buy something else tax free, none of these assets are available to him until retirement age. Whereas his PayPal shares outside of retirement accounts can serve as collateral for loans, which would allow him to access a portion of these assets tax free , while allowing the equity to continually appreciate.


Australian retirement investment account (called superannuation or super) worked similarly where you could accumulate as much money as you want in a low tax environment. In this phase all income and capital gains received from assets within superannuation are taxed at a maximum of 15%. Then once you turn 65 and convert to a pension there is no tax on the pension (drawdown from the accumulated money).

The govt. changed rules couple of years back this so that the max you can now convert to pension phase is AUD $1.6m indexed every few years. The rest of the money stays back in accumulation phase where tax has to be paid.

This closed the loophole where really wealthy people were having $1m tax free pension earnings.


PayPal later disclosed details about the early history of the company in an SEC filing before its initial public offering. The filing reveals that Thiel’s founders’ shares were among those the company sold to employees at “below fair value.”

If the shares were really purchased below fair value, there's not much in the way of a defense of the activity.


> And that's not even to mention that the assets in a Roth IRA are essentially worthless to him - he's not old enough to make withdrawals or take distributions tax-free and you can't borrow against a Roth IRA

I don't think that's remotely true. For a normal person with tens of thousands or even a few hundred thousand in an IRA that money is basically useless.

But for someone with billions in an IRA? He can almost certainly start a public company and use a maze of shell companies to let him do whatever he wants with the money.


There is some truth to what you are saying however I think one could easily be just as "astounded and disamyed" at your comment's lack of social conscience. There is a legtimate legal question over the valuation of some of the shares held in Thiel's Roth IRA. If they were sold to Thiel at less than FMV then there is a potential legal issue. Even if we put that aside, if everything Thiel has done is "legal" then how can a "hit piece"1 recounting inculpable actions succeed in swaying public opinion toward a negative view of the subject. No one should care. The truth however is that legality and morality are two different things. If we live our lives doing only what is "legal" and ignore doing what is "right", then what sort of behaviour does that allow for, what sort of "character" does that build. The question readers are implicitly presented with is not only whether what he has done is "legal", it is whether what he has done is "right". Thiel can do whatever he wants with his money, including "legally" avoiding taxes, but by the same token, ProPublica can opine on that in any way they see fit. If there are factual inaccuracies in the article, then that is a different matter; they should be corrected. However, your comment does not appear to contest the facts presented, it only contests the author's apparent opinion on them.

1 https://en.wiktionary.org/wiki/hit_piece According to this definition, the ProPublica is not a "hit piece" because it neither presents false information nor tries to appear objective. The bias is very clear.


>>"And that's not even to mention that the assets in a Roth IRA are essentially worthless to him"

Not at all, he can withdraw and pay a 10% penalty. He probably will never needed to since, I bet, he has other assets and it makes no sense to pay the penalty. Few people in the world get that option. A characteristic of a Roth IRA is that withdraws are tax free. 5 billion plus decades of tax free growth, wow!

The idea of taxes is for everyone to contribute to the common infrastructure we all need to live in society. It's very unfair for someone to acquire such wealth with out contributing to the system that made it happen.

True it was 100% legal but that's a loophole that needs to be reviewed since it's not a one time case. Other high worth individuals have done the same thing so it's not an out of the ordinary case. As it stands now roth ira's have no upper limit.


If you read elsewhere, they've got him on a couple cases. He technically wasn't allowed to put any shares of confinidy (Eventually paypal) in his roth ira since he was a founder. Also, he's not paying US taxs on his personal international income and using his dual newzealand citizenship to park it there.


The true theft is the thousands of private documents on private citizens stolen from the IRS and provided to ProPublica


Per their about page[0]:

> We dig deep into important issues, shining a light on abuses of power and betrayals of public trust — and we stick with those issues as long as it takes to hold power to account.

As you said, the "abuse of power" here is someone (likely) at the IRS leaked these documents. Someone with the power over others taxes chose to share that info. Then ProPublica is then using this information to push a tax story that they want.

[0] https://www.propublica.org/about


I assume the IRS had them stolen but perhaps you are correct and it was an IRS employee who feels like this is a noble thing to do.


Yeah this vigilantism from careerists in the federal bureaucracy must be punished.

We're never going to hear about the ins and outs of their darlings like AOC and Sanders (whose wife defrauded and destroyed a college she was put in charge of).

Instead this is a hit on people they dislike or disagree with.

Edit: y'all can downvote me all you want. I used to work in DC and I know the difference between a law, signed off on by elected officials who represent you, official rules, that go through a rule making process, and guidance, which is being routinely abused.

I also know that activists and bureaucrats are actively conspiring to push policy without winning a single election.

Everybody loves when people they agree with bend the rules, but what we've seen over the last several decades is a warping and poisoning of our policy infrastructure.


From what I can tell, people don’t want to learn, they have a warped view of taxes at all which drives their furor

I disagree about the Roth IRA being unavailable to him though. He listed it as an asset on his New Zealand citizenship application and it didnt hurt. If push comes to shove he can take any amount out of it and pay the “penalty” which is income tax + 10%, so worst case in this country is around 60% on the portion taken out if the tax residency - that specific year - was in a high tax state instead one of the many zero income tax states where it would just be 47% or so. Some European countries have it worse at relatively low amounts.


Of course it’s all legal. That’s not the point.

The point is that this is one more example of how the wealthy and powerful have more opportunity than others, even given the same laws.

This is no different in that aspect than the problem of rich people being able to hire the best lawyers to defend themselves, while the poor receive overworked public defenders. Everything equal, the wealthy have more opportunity.

If we want a society that is equal opportunity, our laws and regulations need to account for the natural emergent properties of wealth. Our progressive tax system is a narrow, feeble attempt at doing that, but it’s certainly not enough.


This seems to be an example of the opposite of this. From a quick search, Thiel is from a first gen immigrant family of no extraordinary wealth. Yet, your comment is implying that prior wealth is responsible for his current wealth, which gave him an unfair advantage over the rest of us. I think that is absurd, this guy's talents+luck are clearly responsible for his success.


talents+luck+greed


Do you think he scours the internet for idiots who defend him so he can give them lots of money, or is this more of a kink situation where you get off on defending the rich in general?


Are you claiming there's nothing illegal about Thiel buying his stake in PayPal for a nominal $1,700? There are two tax-law experts quoted in the article saying otherwise.


You're right that this is legal, and that it does not seem to involve any trickery. It's not clear that it's even a loophole per se.

But that is not the same as intended, which is a stricter bar. Arguably a provision capping the tax-exempt returns to a mere 10000% (just spitballing, surely there are better ways to write such a provision) would have been more in keeping with the intent of the law.


A stricter bar because?

What issue do you have with people having post tax dollars? I don’t really understand this sentiment, it seems to be at odds with even the government’s goals.


You misinterpret. I mean a stricter bar for interpretation.

My own opinion on taxes is irrelevant—the parent poster cannot say “it’s legal, so it’s the intent of the law”.

This is true whether it’s a good or a bad law.


I see, just a stricter bar of scrutiny

I think this outcome passes the stricter bar of moral, just, intended, and something others should learn from


Seems pretty clear that he sold himself shares below fair value to make the contributions legal


PayPal shares were purchased by the CEO at fractions of a penny - an obviously fraudulent valuation - effectively turning Thiel’s $2k fund into a multimillion dollar fund overnight in actual fact and circumventing the intent of the law.


Actually, I bet good money the law was broken by Peter Thiel. It is very likely he used backdated options or sold shares at below fair market prices into the Roth. This is criminal behavior.


> "Again - this isn't a tax dodge. This is someone who used the law exactly as intended without any illegal or shady dealings and happened to be incredibly fortunate."

Absolutely. But key is the interpretation of "used the law exactly as intended". In the context of ongoing reports of no taxes paid, off shore tax shelters, etc. "intended" takes on new meaning (read: nefarious, or at least should be questioned).

The disgust isn't that he didn't do any wrong, the disgust is that what he did isn't wrong.


Uh huh - I think we will need a full accounting on what exactly happened here in an IRS audit to confirm that - I'm pretty dubious.


The US government is pretty aggressive about getting their tax dollars (no matter who it is).

See John McAfee, Al Capone.


I'm pretty sure Al Capone was not about aggressive tax collecting but was instead about putting him away on the one thing they could actually prove and make it stick.

Edit:

https://www.forbes.com/sites/kellyphillipserb/2018/10/17/al-...


His 1099-MISC was lacking millions in income.


That was before 40 years of billionaires largely controlling the agenda of government, with the past 15 years in particular seeing audit rates for this class drop below audit rates for waitresses.


They're gone on record saying they only go after the small fry though. The big ones hold them up in litigation.


Really? IF the US is that aggressive about their tax dollars, what was the full fallout of the Panama Papers again?

I'm not going to say anything about McAfee at at this time, but your other example was not really a target for inditement based solely on his tax crimes.


"The whole article is a hit piece designed to get whip people into a furor."

I've seen a lot of this lately too and it feels coordinated.


> keep all of his wealth in this Roth IRA, just a percentage. And it clea

how did he get access to paypal shares that's <0.1$/share?


> The whole article is a hit piece designed to get whip people into a furor. And lately I've been noticing propublica publishing a lot of those.

I hadn't heard of pro publica until around 2-3 years ago and during that time they've produced some of the most shameful inaccurate reporting I've ever read. I don't know why anyone trusts them at all. They a prime "cancel culture" mover that drives people to hate and shame others for no reason at all.


It's absolutely crazy to me to see such a technical community not understand or care for finance, investing, and crypto. The sentiment in discussions about crypto border on fearmongering and complete misunderstanding, while I see little to no discussion about investing in general.


Don't need to gargle billionaire balls mate.


But it's good to keep the facts straight. No need to delude ourselves just to make sure they are always the bad guys in our head.


Spot on. From the first paragraph I could immediately tell Propublica is trying to paint Thiel as some sort of evil tax dodging criminal. Quite an agenda the author seems to have.

You outraged by this? Then you should be advocating for dramatically simplifying tax code and laws. I know most don't want to hear this on HN but Trump tried to do just that with his tax plan. Obviously did not go all the way unfortunately.

> Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value.

Ummmm that's called being an angel investor.


The "Investments" made by private equity firms are not the same as investments made by you and I. Why? Because unlike for a public company, holding a managing stake in a private company in certain circumstances and controlling how they compensate you for your services, permits you to legally pay yourself (or perform financing indistinguishable from paying yourself) in shares that you assign an arbitrary value to.

Let's say I've taken over management of a private retail firm with a big multibillion-dollar balance sheet that's barely breaking even. Yesterday when my finance firm borrowed $800M to acquire it, I felt like the company was worth $900M, today as I guide it through the bankruptcy process I feel like it's worth $100k, which has no consequences whatsoever except for the $5000 in shares (5% stake) I'm issuing to myself today as a management fee. Tomorrow I'll feel like it's worth $1400M once some of its debts have been renegotiated and I take it public again. My shares just appreciated 1,400,000%.

https://www.theatlantic.com/politics/archive/2012/09/whats-r...

This is a tiny, oversimplified picture of how all this works; Everyone that takes advantage of these structures has their own spin on it. In VC it may take the form of simultaneous dollar-capitalized debt and ownership stakes. It would take an aggressive forensic audit to even know what's been employed here. There are more than enough levers to pull for this sort of compensation scheme to use arbitrary valuations to make a mockery of the program, though. With enough financial lawyers and enough money, they control the vertical and the horizontal here.

That money is tax-free. In this hypothetical, I've ascended to a partnership at this firm at age 59. I get full control of that money at age 65.


seriously? people aren't stupid, of course he didn't break the law - but the law shouldn't be like that on the first place


> The whole article is a hit piece designed to get whip people into a furor. And lately I've been noticing propublica publishing a lot of those.

Yes. The story is shaped and told to feed the "Capitalism and Wealthy People are Bad" narrative.


> That's generally how people get to be billionaires.

I think generally they inherit?


I believe that this has been true at some points in the past, but is not true for the majority of the current slate of billionaires, most of whose wealth comes from activities during their lifetime.

It's a robber baron period, not a dynastic wealth period.


> but is not true for the majority of the current slate of billionaires, most of whose wealth comes from activities during their lifetime

Huh you're right. I guess that's a source of hope!


you "withdraw" by getting a bank line of credit with the IRA as collateral


I don't think you are allowed to borrow against a Roth IRA. You are able to borrow from an IRA in a very small set of situations. I think they are mainly buying your first house, going to college, becoming disabled, or adopting a child.

I am not a lawyer so take it with a grain of salt and I am very probably wrong.


Of course you are allowed to borrow against an IRA. You can pull they money out, at any time, day or night, for any purchase. You just have to pay tax on it.

There are some situations where the tax is waived


It's explicitly prohibited for Roth IRAs.


That's not allowed.

I expect if you have enough there, you could use the same sorts of schemes as other illiquid wealth.


He lied about the value of the PayPal shares he put in. That’s a problem.


No. If anything he exaggerated the value of those PayPal shares at the time of contribution. Assuming he made the contribution for tax year 1998, then PayPal hadn't yet raised any money and had no external valuation. The company was worthless at the time and the price-per-a-share was a formality of the initial incorporation. This is similar to most other early stage startups that are similarly worthless at founding.


You're splitting hairs. Treating gains from startup founder stock like gains from an investor who put in substantial amounts of money is just silly, and that part of the tax code should be fixed. It's just as abusive as the carried-interest provision.

If the person who started the company had zero access to capital, then claiming the company had no value at the beginning would be credible. Peter had substantial access to capital even in 1998-99. There was no question he was going to raise a boatload of money quickly after starting the company. Contributing shares of such a company to an IRA by claiming they're worth $1700 is just an abuse of the system.


This reminds me of Trump supporters who said, "Because he beat the IRS and paid zero taxes means he's smarter than the system."

Your argument is along the same lines: Theil followed the law, ergo nothing "sinister" happened.

Which is the same as: "It isn't sinister because there is no law."

Yet, where did laws come from? Oh right, from people who have ethics. Because our ethics do not come from laws; our morals do, but not our ethics. Morality is an invented extension of ethics, which is codified into law when people think something shitty is happening (well, that's how it SHOULD happen... but that's the School-House-Rock version)

IMHO, and many others (sadly, to your "dismay") Theil is being a greedy pig exploiting vagaries of the law for his MASSIVE gain, and there needs to be laws to prevent this kind of behavior because it is only available to the super wealthy, and it makes the elite class even more untouchable (plus a thousand other second-order effects).


This isn't some complicated double-dutch tax sheltering scheme though. It's functionally the same as using your Roth IRA to buy a lottery ticket and winning. The vast majority of startups fail.

It's just a super simple investment that succeeded because his startup won.


Again: I have a problem with someone investing in their startup using a government tax-protected shelter, and then making a killing off of it: that is double dipping, and scum-baggy.

Simple law: you cannot invest in your own company in your own Roth IRA because it is blatantly unfair to other investors who don't have similar insider trading abilities.

Done.


> Simple law: you cannot invest in your own company in your own Roth IRA because it is blatantly unfair to other investors who don't have similar insider trading abilities.

Why can't other investors create their own startups and invest their money similarly?

Startup founders take a lot of risk. There is a big chance his investment could have been zero. It is strange that ProPublica does not understand this basic concept.

Where is their report on millions of Roth accounts that went to zero?


> It is strange ProPublica not understand this basic concept.

One could ask how you demonstrably cannot understand the conflation of two unrelated concepts?

Concept A: taking a risk to create a startup that you hope becomes a profitable company by executing to its core competency

Concept B: investing in your own company through a tax vagary with an investment device that has nothing to do with startup (or a particular startup)

Seems clear as day to me.

https://www.youtube.com/watch?v=BPX-wuplDvc


This isn't a Leetcode puzzle. It's a question of how you want society to be organized. Do you really think it's reasonable to have loopholes that allow certain semi-random people to totally escape the income tax system? What possible good could that do for society?


The paltry amount he invested was hardly a risk. Had it not panned out, he would have been out basically zilch.


He was a founder. His investment was not just financial. When he invested, he was not ultra rich. So a loss would have been significant.

Remember, we can't see the future.

By your logic: You are free to invest like him in early stage startups. You will be out zilch, so why not do what he did?


> By your logic: You are free to invest like him in early stage startups. You will be out zilch, so why not do what he did?

1. Accredited investor rules 2. Please find me a startup which will allow me to buy shares at $0.001/share while simultaneous selling to other investors at a price of 500k[0]. 3. If you say to start my own and invest in my own company that I am working for in my Roth, I'll remind you that it's explicit not allowed, and the fact that it's not allowed is the thing that most people are taking issue with.

[0] Yes, that's not the full valuation issue, but it's enough to see that the value at the time wasn't really legitimate.


"With financial support from friends and family, he raised $1 million" - from his wiki.

Yeah, I don't think this person was hurting for the paltry sum they invested. It also sounds like they would've been just fine if it had failed (aka just move on to the next venture until you hit jackpot).

The rich get richer I guess, and random folks on the internet applaud the pilfering of the commons (dodging taxes).


I mean, you're already not allowed to use a Roth to invest in a company that you're an officer of, major shareholder in, etc (with many other restrictions), so I'm not sure how adding a new law would have changed this (since the existing ones appear to have just been ignored)


Just as “they” are being presumptuous about how he got that much money in there, so are you. He may very well have made an extraordinarily good investment with his Roth IRA, but he may have transferred tens of millions of dollars worth of stock into it at below market rates.


The article explicitly states: "Mr. Thiel purchased his founders’ shares in PayPal through his Roth IRA during PayPal’s formation."

That's literally the market rate.


> purchased his founders’ shares in PayPal through his Roth IRA during PayPal’s formation."

> That's literally the market rate.

That's not a market rate, that's a price-fixed rate. A market rate involves actual buyer and seller transactions and an actual market (a couple of people shuffling stock amongst themselves does not a market make)

If he had put Bitcoin in there at $0.01 back when it was trading at $0.01 - that would be a market rate transaction (since there was a market for Bitcoin at the time). That would have been much less problematic than what actually happened (and there would be no "substantial control" problems either with the Bitcoin investment).


It gets philosophical, but founders equity has a lot of characteristics that I’m sure the government was not thinking of when they made the Roth IRA rules. For example, Thiel’s time was a massive reason for him getting the equity he did, so he was able to use $x of Roth IRA money and $100*x of his labor to transfer value into his Roth. What most people have to do is trade their labor for money, then transfer a capped amount of money into the Roth, and use that small amount to invest.

On top of that, as the other commenter said, founders equity doesn’t see the light of the market to have a fair value. And it wouldn’t shock me if Thiel waited until it was obvious PayPal would succeed (i.e. if presented to the market, his shares would be massively valuable) to transfer the stock in.


Applications are open for YC Winter 2022

Guidelines | FAQ | Lists | API | Security | Legal | Apply to YC | Contact

Search: