Topline
Paypal cofounder and Silicon Valley mega-investor Peter Thiel has $5 billion socked away in a tax free Roth IRA, according to a new report from ProPublica, part of its ongoing investigation, using leaked Internal Revenue Service tax information, of the ways the ultra-rich are able to avoid paying taxes and maximize their wealth.
Key Facts
A Roth IRA is a special type of investment account designed for retirement—it allows individuals to contribute already taxed dollars to an account, where investments grow untaxed and can be withdrawn tax-free once the account owner reaches retirement age.
Forbes reported in 2012 that in 2001 Thiel acquired PayPal shares for his Roth IRA at 30 cents a share and had apparently enjoyed a tax-free gain of $31.5 million when eBay bought out PayPal for $19 a share in 2002; Forbes also reported then that he appeared to have put early Facebook stock in his Roth.
According to ProPublica, Thiel was able to build a $2,000 Roth into a $5 billion tax-free kitty because he used the money in the account from the sale of eBay shares to buy shares of other startups at low prices.
After Congress created Roth IRAs in 1997, the Clinton Administration, fearful they could become a shelter for the rich, blocked higher income folks (at that point, singles earning more than $110,000) from contributing and capped contributions at $2,000 a year; but since Thiel was just starting out, he was apparently eligible to contribute $2,000, ProPublica reports.
Annual contributions to Roth IRAs are now capped at $6,000 (or $7,000 for those who are 50 or older), but those who earn too much to contribute directly are able to stuff money in a Roth through what is known as a “backdoor” Roth.
Crucial Quote
“IRAs were designed to provide retirement security to middle-class families, not allow mega-millionaires and billionaires to avoid paying taxes,” Senate Finance Committee Chair Ron Wyden (D-Ore.) said in a statement reported by Bloomberg on Thursday. He vowed to revisit his 2016 proposal that would cap contributions to Roth IRAs that have reached $5 million in value, according to Bloomberg.
Key Background
Using retirement accounts as a way to accumulate massive sums of money is nothing new for the ultra-wealthy. At the end of 2011, more than 300 taxpayers had IRAs worth more than $25 million each—or a total of $81 billion. Forbes reported back in 2012 that Max Levchin, who cofounded PayPal along with Thiel, sold 3.1 million shares of Yelp through his Roth IRA and netted $10.1 million. He didn’t pay income tax on those gains because taxes for Roth IRAs are paid up front and gains are tax free if the account owner waits until they are 59 ½ to pull them out. And as long as those gains remain inside the Roth IRA account, the owner can use them to make other investments, too.
Further Reading
IRAs Gone Wild: How To Invest In Private Equity, Real Estate, Gold (Forbes)
Congress Blesses Roth IRAs For Everyone, Even The Well Paid (Forbes)
Peter Thiel Has Accumulated $5 Billion In A Tax Free Roth IRA Designed To Help The Middle Class Save For Retirement, According To New Report - Forbes
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