Lord of the Roths

[Rianne]

How do you take a Roth worth than $2000 and turn it into $5B?

“Over the last 20 years, Thiel has quietly turned his Roth IRA — a humdrum retirement vehicle intended to spur Americans to save for their golden years — into a gargantuan tax-exempt piggy bank, confidential Internal Revenue Service data shows. Using stock deals unavailable to most people, Thiel has taken a retirement account worth less than $2,000 in 1999 and spun it into a $5 billion windfall.”

Perfectly legal. Now why didn’t I think of that?

https://www.propublica.org/article/...to-a-5-billion-dollar-tax-free-piggy-bank/amp

 

[NW-Bound]

Perfectly legal?

Years ago, I heard about this Roth account of gargantuan size, but did not know how it was started.

As the article pointed out, the deal might not be legal. If it smells fishy, it is likely to be rotten fish.

Forget about the tax-free aspect of the Roth account, I would not mind turning $2000 into $5 billion, even if I had to pay tax on it.

Suppose Bill Gates or Warren Buffett wanted to give some money tax-free to their offspring. Can't they donate some shares of their stocks and value them at $0.001/share? Or maybe give some land and claim that it is worthless and valued at $1/acre? Sell them a mansion, and claim it's worth $100K?

No. They would get audited, and get in trouble.

What I don't understand is how Thiel got away with the shenanigan. Amazing. Sounded like Thiel's lawyers are better than the ones employed by the IRS.

 

[free2020]

Perfectly legal?

Years ago, I heard about this Roth account of gargantuan size, but did not know how it was started.

As the article pointed out, the deal might not be legal. If it smells fishy, it is likely to be rotten fish.

Forget about the tax-free aspect of the Roth account, I would not mind turning $2000 into $5 billion, even if I had to pay tax on it.

Suppose Bill Gates or Warren Buffett wanted to give some money tax-free to their offspring. Can't they donate some shares of their stocks and value them at $0.001/share? Or maybe give some land and claim that it is worthless and valued at $1/acre? Sell them a mansion, and claim it's worth $100K?

No. They would get audited, and get in trouble.

What I don't understand is how Thiel got away with the shenanigan. Amazing. Sounded like Thiel's lawyers are better than the ones employed by the IRS.

Not the first time we've heard of such outsized Roth. Romney was reported to have a gargantuan Roth as well, I believe from his time running Bain Capital or something like that.

While on this subject, the very best time to make our own Roths gargantuan (by our own measure) is to convert after a major pullback of the markets. This is kinda sorta what Thiel/Romney have done. Picking the moment is all we can do. They seem to be able to pick other things as well.

Who knows, we may be upon one as we speak. Worked wonderfully well in 2010 for us.

 

[Out-to-Lunch]

Perfectly legal?

Years ago, I heard about this Roth account of gargantuan size, but did not know how it was started.

As the article pointed out, the deal might not be legal. If it smells fishy, it is likely to be rotten fish.

Forget about the tax-free aspect of the Roth account, I would not mind turning $2000 into $5 billion, even if I had to pay tax on it.

Suppose Bill Gates or Warren Buffett wanted to give some money tax-free to their offspring. Can't they donate some shares of their stocks and value them at $0.001/share? Or maybe give some land and claim that it is worthless and valued at $1/acre? Sell them a mansion, and claim it's worth $100K?

No. They would get audited, and get in trouble.

What I don't understand is how Thiel got away with the shenanigan. Amazing. Sounded like Thiel's lawyers are better than the ones employed by the IRS.

Exactly! I recently wanted to make an investment into the company my DW runs. I thought "Hey, let's put it in my Roth!" So I looked into whether this could be done (knowing about Thiel). But I learned that I am a "disqualified person" due to my relationship with my wife, and cannot use Roth funds to make this investment. How did Thiel manage this? Probably he skirted the rules.

Here is a good analysis: https://fairviewlawgroup.com/news/opinion-is-peter-thiels-5-billion-roth-ira-legally-valid-there-are-many-reasons-for-doubt/

 

[NW-Bound]

Not the first time we've heard of such outsized Roth. Romney was reported to have a gargantuan Roth as well, I believe from his time running Bain Capital or something like that.

While on this subject, the very best time to make our own Roths gargantuan (by our own measure) is to convert after a major pullback of the markets. This is kinda sorta what Thiel/Romney have done. Picking the moment is all we can do. They seem to be able to pick other things as well.

Who knows, we may be upon one as we speak. Worked wonderfully well in 2010 for us.

I did not think of doing Roth in the Great Recession. Was too busy worrying about how much I had left to buy food and pay utility bills.

Did not think about Roth conversion in March 2020 either. Was too busy watching reports of people dropping dead from Covid around the world.

Not too busy now. Hence have been converting here and there. Better late than never.

 

[ncbill]

Perfectly legal?

Years ago, I heard about this Roth account of gargantuan size, but did not know how it was started.

As the article pointed out, the deal might not be legal. If it smells fishy, it is likely to be rotten fish.

Forget about the tax-free aspect of the Roth account, I would not mind turning $2000 into $5 billion, even if I had to pay tax on it.

Suppose Bill Gates or Warren Buffett wanted to give some money tax-free to their offspring. Can't they donate some shares of their stocks and value them at $0.001/share? Or maybe give some land and claim that it is worthless and valued at $1/acre? Sell them a mansion, and claim it's worth $100K?

No. They would get audited, and get in trouble.

What I don't understand is how Thiel got away with the shenanigan. Amazing. Sounded like Thiel's lawyers are better than the ones employed by the IRS.

Thiel stuffed his Roth full of stock when PayPal was beginning.

If you start a company nothing prevents you from cramming stock of that company into a Roth as well.

Of course, that's assuming your new company will survive...most don't.

 

[pb4uski]

It could very well be perfectly legal, but without knowing the details it is hard to tell. The conventional way to do this is for people who have access to IPO issuances... like Romney did when he was with Bain Capital.

The next question is should it be legal? Probably not as a matter of good tax policy.

I would support reforms that would place maximums on the amount in a Roth that can be tax free.... max of what? $3 million? $5 million? I dunno. At the end of each year you would have to withdraw any funds over the maximum or do an in-kind transfer of shares over the maximum.

 

[oldtimer]

They all paid tax on the dollar amounts that they contributed into the Roth IRA. No different than anyone else. It's just they used the money inside the Roth to purchase an investment that sky rocked in price. No different than a taxable brokerage account, except the Roth IRA has a special tax-free wrapper on its earnings. They recognized this major benefit of a Roth IRA unlike most Americans that don't even have a Roth IRA.

 

[Bigdawg]

Paypal was worth $0.001 per share when he put his 2k ROTH contribtion in back in 1999. You could buy shares of ?? at $0.001 today and put in 7K and make 3-4X as much as Thiel in 20 years (if the stock goes up like Paypal did). Good luck.

 

[NW-Bound]

The problem here is that they were buying shares of their own startups at way, way below fair value, even for a startup.

If you buy shares of Tesla at $4 in 2010, and it becomes $720 now, nobody will say that it is unfair that you got a 180x gain.

But it's not what Thiel did! He sold himself shares at $0.001/share.

With just $1700 Roth deposit, he got 1.7 million shares. The valuation of his startup was difficult to define, but was it worth only $10K, or $20K, at the time he sold himself these shares?

If the valuation of the startup was only $10K-20K, who would loan it $100K? Who would buy a portion of the startup for $4.5 million?

At the time Thiel bought his founders’ shares, his own hedge fund had already loaned the new startup $100,000, California and SEC records show.

And soon after the company sold him the shares, millions of dollars poured in from investors, securities filings show. In just a month’s time, the company sold a slice of itself to investors for $500,000. That June and August, another $4.5 million poured in from the venture fund arm of telecom giant Nokia and other investors, those records show.

 

[RetiredAndLovingIt]

They all paid tax on the dollar amounts that they contributed into the Roth IRA. No different than anyone else. It's just they used the money inside the Roth to purchase an investment that sky rocked in price. No different than a taxable brokerage account, except the Roth IRA has a special tax-free wrapper on its earnings. They recognized this major benefit of a Roth IRA unlike most Americans that don't even have a Roth IRA.

Agreed.
I remember when I first heard of the Roth back then, I couldn't believe it and checked and double checked to be sure i understood it correctly. Could it really be true that by simply making an after tax contribution, my Roth balance would grow tax free forever. That was a no brainer for me in my early 30's especially on my meager income and low tax rate. My ex refused to do it because he was not getting a tax deduction and no matter how much I tried to point out this was the better deal he was not interested.
I made sure to make my maximum contribution every year even if that was all I could afford to save. Also at the same time, they encouraged folks to convert their existing IRA's to Roths and IIRC you could stretch the conversion taxes due over 3 years. I took advantage of that as well and I'm willing to bet Thiel did as well.

https://www.investopedia.com/history-roth-iras-5220565

 

[FlaGator]

They all paid tax on the dollar amounts that they contributed into the Roth IRA. No different than anyone else. It's just they used the money inside the Roth to purchase an investment that sky rocked in price. No different than a taxable brokerage account, except the Roth IRA has a special tax-free wrapper on its earnings. They recognized this major benefit of a Roth IRA unlike most Americans that don't even have a Roth IRA.

The difference between legal and “fair” as some asses it. If it’s “wrong”, blame Congress, and maybe the IRS, if Congress left the statute open to administrative interpretation.

 

[JBTX]

Not the first time we've heard of such outsized Roth. Romney was reported to have a gargantuan Roth as well, I believe from his time running Bain Capital or something like that.

While on this subject, the very best time to make our own Roths gargantuan (by our own measure) is to convert after a major pullback of the markets. This is kinda sorta what Thiel/Romney have done. Picking the moment is all we can do. They seem to be able to pick other things as well.

Who knows, we may be upon one as we speak. Worked wonderfully well in 2010 for us.

In the case of Romney, I’m pretty sure it was a traditional IRA. The question came up, how does a IRA come to be so large (I think it was a similar deal, otherwise unavailable shares purchased at below market value). But then the next question came up, why use a traditional IRA if you are going to be in the highest tax bracket down the road. Would likely be better to recognize gains as capital gains rates.

 

[Montecfo]

Perfectly legal?

Years ago, I heard about this Roth account of gargantuan size, but did not know how it was started.

As the article pointed out, the deal might not be legal. If it smells fishy, it is likely to be rotten fish.

Forget about the tax-free aspect of the Roth account, I would not mind turning $2000 into $5 billion, even if I had to pay tax on it.

Suppose Bill Gates or Warren Buffett wanted to give some money tax-free to their offspring. Can't they donate some shares of their stocks and value them at $0.001/share? Or maybe give some land and claim that it is worthless and valued at $1/acre? Sell them a mansion, and claim it's worth $100K?

No. They would get audited, and get in trouble.

What I don't understand is how Thiel got away with the shenanigan. Amazing. Sounded like Thiel's lawyers are better than the ones employed by the IRS.

Was not a shenanigan. He had his Roth invest in risky, venture funded shares ( at the offering price) that paid off.

I have seen several folks do this but they all lost their shirts and got no tax deduction for it.

 

[NW-Bound]

Was not a shenanigan. He had his Roth invest in risky, venture funded shares (at the offering price) that paid off.

I have seen several folks do this but they all lost their shirts and got no tax deduction for it.

"At the offering price"....

No, his own price is a tiny fraction of the price he sold to other investors.

That's the whole gist of the story that people keep missing.

 

[Ncc1701]

It was perfectly legal, he stuffed his Roth with Paypal shares when it was a penny stock and converted more as it went up.

He created an entity that now employs 31,000 people who support their families with their income. No to mention how important moving money quickly is in developing nations.

The IRS is making a killing off of Paypal's revenue, its employees incomes and many of its customers who engage in taxable transactions. Why should Thiel be vilified for his success?

 

[NW-Bound]

If Thiel had sold himself shares at pennies/share, it would not be talked about.

No, it was 1/10 of a penny.

And I am sure he sold shares to other investors at much higher prices than pennies.

 

[Winemaker]

It could of been 1/100th of a penny; but it wasn't.

 

[NW-Bound]

Bloomberg has this article, but without a subscription I can only read the intro.

Maybe you need good lawyers?

Want to Avoid Taxes the Peter Thiel Way? Don’t Even Try

Few investors can shield huge stock gains in an IRA without running up fees and slamming into scary IRS rules.

 

[RunningBum]

It could of been 1/100th of a penny; but it wasn't.

So he only got the girl somewhat pregnant?

 

[Montecfo]

"At the offering price"....



No, his own price is a tiny fraction of the price he sold to other investors.



That's the whole gist of the story that people keep missing.

Venture funded companies offer shares at various prices over time, supported by fairness opinions. An insider can't just make up their own value to enrich themself. Why would their partners and board agree to this? They have fiduciary responsibility.

If there are allegations Thiel did anything illegal, I have not seen them.

 

[cathy63]

Venture funded companies offer shares at various prices over time, supported by fairness opinions. An insider can't just make up their own value to enrich themself. Why would their partners and board agree to this? They have fiduciary responsibility.

If there are allegations Thiel did anything illegal, I have not seen them.

From reading this thread, it sounds like the allegation is that he used Roth IRA funds to exercise his founder's PayPal stock options at $0.001/share at a time when the actual value was higher than that. If the total stock purchase was worth more than $2K at the time he exercised his founder's options, then he over contributed to his Roth in that year. It's not the share price that's the problem, it's that he used Roth IRA money to do it.

If he had executed that transaction outside the Roth IRA, then he would have owed taxes immediately on the difference between the option strike price and the fair market value. You can't evade those taxes by putting cash in an IRA and then buying stock at below FMV. The IRS has rules against under-valuing IRA holdings. There are also rules against self-dealing, buying stock in a company where you own more than 10%, etc.

Now whether the IRS could go after him at this late date, I do not know. There's no statue of limitations on willful tax fraud, but he could argue that the true value of the stock was what he paid and the other investors were the ones who were actually paying over FMV, and everybody just got lucky when the company took off.

There are reasons why most IRA custodians will not touch this type of transaction.

 

[Montecfo]

From reading this thread, it sounds like the allegation is that he used Roth IRA funds to exercise his founder's PayPal stock options at $0.001/share at a time when the actual value was higher than that. If the total stock purchase was worth more than $2K at the time he exercised his founder's options, then he over contributed to his Roth in that year. It's not the share price that's the problem, it's that he used Roth IRA money to do it.

If he had executed that transaction outside the Roth IRA, then he would have owed taxes immediately on the difference between the option strike price and the fair market value. You can't evade those taxes by putting cash in an IRA and then buying stock at below FMV. The IRS has rules against under-valuing IRA holdings. There are also rules against self-dealing, buying stock in a company where you own more than 10%, etc.

Now whether the IRS could go after him at this late date, I do not know. There's no statue of limitations on willful tax fraud, but he could argue that the true value of the stock was what he paid and the other investors were the ones who were actually paying over FMV, and everybody just got lucky when the company took off.

There are reasons why most IRA custodians will not touch this type of transaction.

There is no allegation that his Roth exercised stock options. I am not aware of a way to transfer those to an IRA. I have been asked by investors to do that and there was not a way found.

And of course most of the value in the Roth came from investments other than Paypal-overwhemingly.so.

My guess is IRS has looked at this since he is a billionaire and saw nothing illegal, but that hardly prevents speculative hit pieces in the press.

 

[cathy63]

There is no allegation that his Roth exercised stock options. I am not aware of a way to transfer those to an IRA. I have been asked by investors to do that and there was not a way found.

And of course most of the value in the Roth came from investments other than Paypal-overwhemingly.so.

My guess is IRS has looked at this since he is a billionaire and saw nothing illegal, but that hardly prevents speculative hit pieces in the press.

Yes, that's exactly the allegation. From the ProPublica article that started this thread:

...
Pensco was a small firm that allowed its customers to put nearly any investment they wanted into a tax-advantaged retirement account. Thiel was about to become Pensco’s whale.
...
Thiel used his new Roth IRA to purchase shares of his startup.
...
a letter included in the entrepreneur’s application for residency in New Zealand: “Mr. Thiel purchased his founders’ shares in PayPal through his Roth IRA during PayPal’s formation.”
...
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.”
...

The article also makes the same point you make -- there's not a way for ordinary investors to do this. You need an IRA custodian like Pensco that's willing to hold stock in companies that aren't publicly traded. The non-public company also has to be willing to provide a share value to the IRA custodian every year so they can file their 5498s. If you're the founder of the company, it's probably a lot easier to make that happen than it is for other employees.

 

[ncbill]

Umm, again, those are shares of stock he owned as founder...not stock options.

If I start a company which issues stock I can put whatever valuation I choose on those shares.

And there are plenty of custodians who (for relatively high fees) will allow you to own esoteric assets in your traditional or Roth IRA.