Peter Thiel has $5 Billion in a Roth IRA. Here's How He Did It.
Updated: Mar 24, 2022
Roth IRA's - Tax Shelters for Everyone!
Roth IRA's are a landmark achievement in the landscape of American wealth-building. Originally conceived of and passed in 1997, these unique retirement accounts were meant as an incentive for Americans to save more for retirement, and to keep one eye on the future.
What is a Roth IRA?
Essentially, a Roth IRA is an account made up of post-tax contributions up to $6,000 per calendar year. That money then functions just as in a traditional investment account: Want to invest in Apple? Go for it. Want to invest in penny stocks? Seek help immediately. Any way you put your money to work is yours to choose. And the best part? Once you turn 59 and a half years old (why Congress, why the half), you get to withdraw that money tax free. Not one penny is taxed.
Roth IRA's have been increasing in popularity as normal Americans look to legally skirt taxes on their capital gains. The average IRA balance during the first quarter of 2021 reached $130,000, an all time record. So imagine my surprise when I saw the story cross my desk this morning that Peter Thiel, eccentric billionaire venture capitalist, has over $5 BILLION in his Roth IRA.
Who Is Peter Thiel?
In a gross misinterpretation of what this account is supposed to be, Thiel has gone full Bermudan-tax-shelter right here in the United States. The insanely successful venture capitalist who was the first outside investor in Facebook and founder of recently-public company Palantir, has taken what was by all accounts an initial $2,000 investment in 1999, and turned it into a fortune not many will ever see by 2021. And he's done all of this by age 53, which means he is six-and-a-half (there's that half again) years away from being able to claim all of this TAX. FREE. How did he do it? Let's break it down with help from our friends over at ProPublica, who unearthed this incredible story via a data dump from the IRS:
Open a Roth IRA and deposit a nominal amount of money.
Already be successful and wealthy and have access to the private equity and startup markets.
Invest in start-ups using Roth IRA money, holding those shares in tax-sheltered accounts.
See the companies you invested in go public on the stock market, resulting in a dramatic increase in your share value.
Sell those shares for a profit and avoid the 20% IRS haircut.
Invest in public equities.
Who Else Uses A Roth IRA?
The thing is, Thiel is incredibly smart to take advantage of an unfair system (more about that later), and he's not alone. While Thiel's Roth balance stands alone, other incredibly wealthy people are using the tax shelter to their enormous benefit:
Warren Buffett (Berkshire Hathaway chairman) - $20.2 million
Ted Weschler (Berkshire Hathaway deputy) - $264.4 million
Randall Smith (hedge fund manager) - $252.6 million
The issue you face when looking at a list like this and compare it to normal Americans
is the access to private equity markets. Sure, raising a huge amount of money in a Roth IRA is technically possible if you max your contributions and hit it huge with a micro-cap public company. Even then, you won't see the returns that these people see, and you'll never get close to that magic "B" number. And the issue comes down to the American definition of "Accredited Investor."
What Is An Accredited Investor?
The SEC defines an Accredited Investor as "Those investors whose level of financial sophistication warrants a reduced need for protection." The threshold for that is:
An annual income of over $200,000 ($300,000 for joint income) for the last two years, or,
A net worth exceeding $1 million, but excluding their primary residence, or,
If the person is a general partner, executive officer or director of a company that is issuing the securities in question.
This incredibly strict definition inherently limits the ability of the average person to be able to replicate the success of the wealthy people in this piece because they simply don't have access to the same financial vehicles and tools that everyone else does. It's like asking Patrick Mahomes to win a Super Bowl without an offensive line. They're playing the same game as the other team, but in missing an incredibly important component in order to be successful, it's setting him up for failure.
The best, and only, way for the average person to compete is to open up the private markets. Make them accessible to you and me, the average person who doesn't have that $1 million. Tip the scales back in the favor of the little guy, and we might see more success stories just like Peter Thiel.
Do you have a Roth IRA? How do you take advantage of its benefits? Let me know in the comments below, and don't forget to sign up for my email list so you never miss a post!