Peter Thiel is a tech founder for multiple companies. That made him rich, but it wasn’t just the companies that got him there. He figured out the absolute best way to (legally) protect his money from tax liability.
The brilliance of this is that a Roth IRA is one of the most milquetoast investing account types out there. But it’s how he used it that made it so brilliant. This is the kind of thing that inspired me to create this blog in the first place.
Normally, I’m not particularly interested in using this blog to talk about the boring stuff like “max out your IRA contributions.” You can find that advice in 1000 other places, and I wanted this to be interesting advice you wouldn’t find in Money Magazine.
What Did Peter Thiel Do?
Thiel is the founder of Paypal. He became a multi-millionaire after building selling the company to eBay for $1.5 billion (he took home $55 million).
After a couple of companies which grew his wealth to over 200 million, he made a critical decision and invested half a million in Facebook for a 10% stake in the company. This decision alone eventually made him a billionaire.
Through more investments and fund participation, he has grown his net worth to just under $7 billion (estimated as of July 6, 2021 from Bloomberg Billionaires Index).
Here’s the kicker: most of his wealth will be tax-free.
How in the world? Is this one of those billionaire loopholes everyone keeps going on about? Well…yes and no. You’re going to love this.
He invested all of this from his Roth IRA.
The One Time a Roth IRA Will Make You Rich
I’m zero percent upset that Peter Thiel exploited this “loophole” that isn’t a loophole. He took risks and they’ve paid off again and again.
Quick run-down on Roths:
- In a normal IRA or 401k, you pay taxes only when you withdraw money
- If you contribute to an IRA, you can write it off on your taxes that year
- If you contribute to a Roth, you are still taxed that year
- However, when you withdraw from a Roth at retirement, you will pay zer otaxes on withdrawals
- You also can’t contribute to a Roth once you start earning more than $140,000/year (as of 2021)
So Roths are for when you’re not rich, and IRAs are for everyone. There are a few interesting caveats, like how you can buy a house with your Roth, but in general, you will only take money out of these accounts at retirement or face penalties.
A self-directed IRA is one where you act as custodian so you can invest it in interesting things like startups. In a normal IRA held through a brokerage like Fidelity, you’ll pretty much only be able to invest in publicly listed stocks.
Peter Thiel sold himself his own companies shares to his self-directed Roth (not illegal) for a price of $0.001 per share. The share price has some questionable legality, but I’m not a lawyer. If his company went bankrupt and his Roth went to zero, would anyone be complaining?
Paypal took off and sold to eBay. He and the other cofounders got rich and went on to start YouTube, Tesla, Yelp, and more. Peter reinvested his funds as an angel investor in Facebook, among other investments. That investment grew tax-free all through his various redemptions eventually totaling over $1 billion.
Okay, So How Do I Do This Myself?
Legal disclaimer: I don’t know shite about the law and this definitely isn’t legal advise. If you like dancing on the edge of the justice system then sure, give this a whirl:
- Start a company
- Put cash into your self-directed Roth IRA (you’ll have to pay taxes on this initial deposit)
- Sell yourself shares of your company to your Roth (you’ll want a lawyer for this)
- Sell your company for a billion dollars. This is harder than it seems.
- Reinvest your new cash payout into other companies that also sell for billions of dollars.
It’s that simple. It’s not that easy.
The reason this is so good is because he doesn’t have to pay taxes between payouts. So when he sells Facebook stock, he doesn’t have to pay half of it to the government but can turn around and reinvest it all over again.
Because it’s a Roth and not a normal IRA, he’ll also never have to pay taxes on it—ever. He paid taxes on the $2000 he deposited in the beginning, and in the law’s eyes, that was enough.
Is this unethical? I don’t think so at all, but I also don’t care because I think income taxes themselves are deeply unethical. It’s legal and he’s not taking a dollar away from anyone else—he’s keeping what’s he risked and earned. Cue Ayn Rand ranting.
Got an interesting investment to make with a crazy amount of potential upside? If you make less than $140,000/year, consider investing in it via a self-directed Roth. Downside: you may not be able to withdraw it for a long time (unless you’re using it to buy a house). Upside: no taxes.