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.
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.
>> 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.
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?
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?
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.
> 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.
> 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.
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.
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 %.
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.
"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.
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.
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?
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.
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.
>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.
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.
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 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.
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.
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...
> 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...
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?
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.
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.
> 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.
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.
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.
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".
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.
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.
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.
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.
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.
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.
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?
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?
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?
> 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
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.
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.
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.
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 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.
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.
> 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
> 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.
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.
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)
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).
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).
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.
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)
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 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.
> 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.
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.
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.
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.
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.
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!”
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.
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.
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.
> 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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. 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.
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.
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%.
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.
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.
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.
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.
> 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?
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?
> 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.
> 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.
Without commenting on whether this was legal at the time Thiel made this transaction, it appears it would not be permissible under current tax law. (Update: the relevant text in the statute appears to have been in effect as early as 1995: https://uscode.house.gov/view.xhtml?hl=false&edition=1994&re...)
Specifically, the law explicitly disqualifies anyone who is:
>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)
I was surprised by that also. Here's what I found and shared in an earlier comment in this submission.
I 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.
> "However, if someone establishes a self-directed IRA with the aim to invest IRA dollars into a small private held business that they control or own – such that the business entity, and/or their role in the business, can cause it to be a disqualified person – there is a risk that allocating IRA dollars to own that business can cause the IRA itself to become disqualified (and treated as fully distributed as a taxable event). After all, if the IRA puts money into the business, and the business then uses that money to pay a salary to the IRA owner (as an officer of the business), the IRA owner has effectively used the assets of the IRA to enrich themselves."
That addresses the self-dealing part of a transaction like this that would be a common-sense red flag. This is all clear as mud; I'm definitely confused enough that I'll be asking my CPA for a recommendation.
So either PayPal was earlier enough that you can make an argument that a "fair price" was $0.001 per share, OR you can make an argument that Thiel owned less than 10% of the company at the time. Seeing as there were only 3 original founders at the time of Confinity incorporation, I highly doubt that Thiel had a <10% ownership.
This is even more clear given that he (apparently) owned ~3.5% of PayPal in 2002, which is after the x.com acquision/merger, and raising ~$200M in VC funds.
Either Thiel has a valid argument for claiming a fair price of $0.001/share, or he owned more than 10% of the company.
Correct, these are the accurate things to consider
And also must be weighed against the consequences
He very well could have paid the 100% penalty of $2000 that year and still kept the asset in the Roth IRA because the desired consequence was still so much greater and worth it. It was 1999 at the peak of that tech bubble
There is also the possibility that the ownership % state changed so fast within the same year that you could look at the average % and wind up satisfying the condition with no penalty
There is also the possibility that the IRS was asleep and lost their chance to levy a penalty by now
Allowing someone to make a prohibited transaction and then simply pay a 100% penalty after-the-fact, especially when the initial transaction was extremely-low-priced to begin with, is clearly open for abuse. What is to stop me from selling myself a couple houses into my IRA for $5 a piece, saying "whoops, I guess that was a prohibited transaction. I'll pay the 100% penalty of $5."
That is why IRC Section 408(e)(2) stipulates that the IRA itself is fully “disqualified” – which means it loses its tax-deferred status, and is treated as though it was fully liquidated in a taxable distribution as of January 1st of the tax year in which the prohibited transaction occurred.
Disqualification notably only occurs with prohibited transactions between the owner/beneficiary. Not entities where the owner is a director, that can only incur a penalty. If the transaction isn’t unwound its a 100% penalty.
Try this source or find a similar source that you respect:
The law itself doesn't make that very clear, thats how its been interpreted and acted upon
Again, we are still starting from two different assumptions: I dont consider earning money to be abusive, I dont consider taking risks with your own private equity in a tax deferred account to be abusive. Its great that these accounts are allowed to take risks.
IANAL, but I believe you are misinterpreting the clause - the clause disqualifies an officer or 10% shareholder of (subparagraph G:) a corporation that is >= 50% owned by (subparagraph A:) a fiduciary (owner of the IRA).
No only owning shares in their IRA of the company they're directly an officer in. It's limited in scope to essentially people with significant control in a corporation.
What I don't understand about this whole maneuver is that Roth transactions must be made at arms length; ie, "Transactions must be made at arm’s length and not involve the IRA owner or a member of his or her family."
An example of this is that if you use a Roth to invest in property, you are not allowed to use it personally, not allowed to manage it or do maintenance yourself, etc.
Prohibited transactions risk tainting (and thus exposing) the entire account.
How is Thiel investing in his own company not considered a prohibited investment?
>"How is Thiel investing in his own company not considered a prohibited investment?"
It should be, but the IRS doesn't catch every cheat, and as with most other white collar crime, the responsibility can be laundered through a number of accountants and other professional staff, resulting in fines rather than jail time.
So a lot of rich people make a lot of questionable calls regarding how their assets are categorized and if they get caught out they generally just pay what they're supposed to have paid, or sometimes slightly less (some countries have legislation prohibition tax authorities from accepting settlement offer at under-assessed amounts, but there are ways around that too). If they're particularly risk-averse and ballsy, they'll ask for an advance ruling certificate or another pre-emptive ruling on their filings to confirm they're correct beforehand. You can bake those too, if needed.
1. Thiel was not rich when he did this. He was 32 with $2K tucked away in a Roth, maybe more in a standard IRA.
2. What he did was in no way illegal. He did not cheat the system. The IRS would have come down on him with a hammer already, and they haven't managed to figure out how to do it for the last decade.
>The IRS would have come down on him with a hammer already
Part of my work is in financial investigations. The finances of large, multi-entity organizations are expensive to create, difficult to parse, and require extensive periods of time of trained, expensive staff to understand.
Assuming that 'things would have been caught' flies in the face of the fact that they almost never are. Accounting rules change frequently, software systems for logging information is changed, and records are lost. Emails have to be read in tandem with entries to understand the intentions.
Even in cases where we have confessions that someone has embezzled money, we often need to spend multiple weeks tracking down records to isolate when/where/how it occurred.
Even during audits, requests for records can be baked. 'Random' samples of given entries can just exclude the questionable ones.
I've appeared in front of federal tax courts in my practice, the game isn't fair - don't base your reasoning on the idea that it must be.
1. Thiel was not Mega rich, but he had money, he had worked as a lawer for a few years and managed his own venture capital firm. Either way, this is irrelevant as he met the income requirements to contribute to an IRA.
2. It very well may have been illegal, as mentioned in the top level post. The purchase price was the legal value, but using an IRA as a vehicle to invest in your own company appears be prohibited by IRA regulations. At the time, it was a purchase <$2000, and may not have been reviewed. If paypal was someone else's company, there would be no legal issue.
IRAs can be shareholders in anything. They can be 100% shareholders as well. They can even form their own companies from the beginning.
Being a minor shareholder in a corporation isn't a prohibited transaction or run afoul of self dealing regulations.
Even in circumstances that they would, you having less than X% of voting shares mitigates that, the X depending on what type of tax deferred or exempt entity is in question. SOME tax deferred/exempt entities have stricter self dealing regulations and even they wouldnt have had an issue here as Peter Thiel was one of several co-founders.
But if you work for a company owned mostly by your Roth IRA, that's easily abused.
Suppose you're a consultant and your one-person consulting company is owned by your Roth IRA. You could deliberately draw a very small taxable salary, so that most of your work goes towards increasing the company's untaxed value in your IRA.
You're basically making your earnings tax free.
Obviously, your Roth IRA's company employing you at below market rate isn't a fair, arms length transaction.
>But if you work for a company <i>owned mostly by your Roth IRA</i>, that's easily abused.
As I understand it, you can't own a company that you(or a relative) own a controlling interest in with your IRA. I can see the sense in this because if own 20% the person(people) who own the other 80% have an incentive to make sure I'm not playing any kind of games with the finances.
In the case of Thiel, it seems like he took $2000 and made a moonshot investment in Paypal. At that point his investment could have just as easily went to $0 as it was to hit $5 billion. He took the risk, why shouldn't he have gotten the reward?
I think the problem is these IRAs were not designed to shield the super rich from taxes. It's meant to help the average person. Implemented properly it should have an upper limit, probably under a million dollars. Letting it grow to five billion tax free is a loophole that shouldn't exist and does not benefit society at large.
> He took the risk, why shouldn't he have gotten the reward?
And he should get the reward, minus capital gains tax.
This country provided an environment for that investment to turn into five billion. He couldn't have done the same thing in Somalia, or Vietnam, or Greece. Why shouldn't it reap its share?
Nearly everyone else pays their fair share of taxes.
He invested a tax advantaged $2000. If he had invested that $2000 in the S&P 500 in 1995 he would have a tax advantaged $25,000. He would have been out that tax advantaged $25,000 if paypal didn't take off. Instead he decided to make a much longer shot bet and for him it paid off.
I can understand adding legislation that would tax distributions on Roth IRA's for billionaires. Thiel would be fine if he had to pay taxes on that windfall.
I just think that it is a mischaracterization that he isn't paying his fair share of taxes. To me, it doesn't seem like he did anything wrong. He took advantage of a system that is accessible to everyone.
The issue is as far as people can tell he illegally invested 2000$ from an IRA. You’re not allowed to invest in a company with an IRA if:
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)https://uscode.house.gov/view.xhtml?hl=false&edition=1994&re...
Being the CEO clearly qualifies. That said, the statute of limitations means you can often get away with things if they go unreported for long enough. It may be he’s currently in the clear.
> In 2011, Thiel caught the attention of the IRS. The agency launched an audit, tax records show. The records don’t spell out what the IRS was looking at or if it involved Thiel’s Roth. Whatever the case, the audit was closed years later and Thiel didn’t owe any more taxes, tax records show.
He was CEO of PayPal until 2002, which means in 2011 this would presumably be past the statute of limitations for many things. It’s unclear if this falls under Tax Fraud or not.
> That said, the statute of limitations means you can often get away with things if they go unreported for long enough.
What I find most interesting in regards to this is that by the time there was any reportable gain (2002 sale), and thus any reason it would even be looked at, the 3 year statute of limitations would be up on the initial prohibited transaction. Which is... interesting.
> IRAs can be shareholders in anything. They can be 100% shareholders as well. They can even form their own companies from the beginning.
> Being a minor shareholder in a corporation isn't a prohibited transaction or run afoul of self dealing regulations.
Yes, obviously, and is exactly how the real estate example I provided works. The IRA opened a company. Obviously it is a company in order to financially benefit the owner of the IRA. That's literally the whole point of investing, and is not what I am debating here.
It is different when you are then taking an active role in the day-to-day management and/or operation of that business, which is obviously what Thiel did at PayPal.
Oh by property that to you meant real estate, I didnt catch that
Peter Theil did not have 100% voting shares of Paypal, and if he did that went away very soon after with the other co founders and investors diluting him fast enough for it to satisfy IRS regulations.
That would work now as well, but it is also possible that it worked better 22 years ago as the IRS may have lacked clarity back then.
> Peter Theil did not have 100% voting shares of Paypal,
First, that's not the requirement.
> and if he did that went away very soon after with the other co founders and investors diluting him fast enough for it to satisfy IRS regulations.
Your argument here is "even if he made illegal investments into a tax-advantaged account that has set him up to not pay taxes on 50000000000 dollars, we should ignore it because if he made the investment later it wouldn't have been illegal".
By that logic let's just throw out insider trading laws. "Well if he made the investment after the information was public, it would have been fine"
> the IRS may have lacked clarity back then.
They didn't. It was still explicitly not allowed for a officer/director of a company, someone with a similar role, > 10% share-holder, etc to make investments like this with a Roth IRA.
Owning 3.5% after a acquisition by/merger with x.com, and raising $200M in funding is not anywhere near the same thing as owning 3.5% at the time of the Confinity founding (which is apparently why $0.001/share is valid?).
It doesn't matter if the ownership percentage changed quickly throughout the year of 1999
These kinds of sanctions are based on the result by time of reporting or audit, not by their mere action
and as we’ve already gone over, he very well may have chosen to pay a self reported penalty if his accountant’s tax software just spit out that additional number of $2000
I can think of two reasons:
(1) It was not his own company when the IRA made the investment. That is, the IRA invests alongside other investors at the founding. Anyone who wants to buy shares at 0.01 is able to do so. He is not dictating some special price that only he gets.
(2) If some investors create an SPV to invest in PayPal (e.g. to limit liability), then his IRA becomes an investor in that SPV. He loses management control over that portion of the investment, but when the SPV sells its PayPal shares, it distributes the cash to all investors, including to the IRA.
Easy. He doesn't own the company, shareholders do, and he happens to be a shareholder. If you work for Microsoft, can you buy Microsoft shares in your IRA? Yes. This is why the IRS can't do squat about this. It's completely legal. If he owned a controlling interest (>50%) things would have been different.
If you bought the property as part of an incorporated entity, it would be entirely legal for you to do work or be contracted by that entity.
It specifically sweeps in classes of people with responsibilities that are held by typical active co-founders: "(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)"
Very difficult to a) be a cofounder with meaningful equity b) not do any work so this provision doesn't trigger c) keep your equity and d) have it be worth anything.
Oh that is interesting. This must get very complicated for officers or directors of companies in the S&P 500. Could you not buy index funds that hold shares of the company you work for?
They probably just have to buy the shares in taxable accounts.
Edit: misread this. I would be surprised if index/mutual funds are subject to the same rules because holders of an index fund don't own shares in any of the underlying securities.
I have to assume you're just feigning naivete here.
First, officers or directors of S&P500 companies are almost definitely above the income level to open a new Roth IRA.
Second, you're really grasping at straws here trying to trace a relatively minuscule investment through mutual fund in order to defend Thiel here.
Someone is saying "Bank robbers are bad because they steal other people's money" and you're sitting over here saying "Well technically when I pick up a penny on the ground, it's not mine. So it's basically the same thing. We have to find a solution that solves both problems at the same time".
I am trying to wrap my head around these rules regarding IRA transactions. I’m certainly not trying to defend Thiel here. Would you mind pointing me to what in my comment lead you to that conclusion?
Also I would be shocked if there aren’t directors at publicly traded companies making under 208,000 and are filing jointly in a single income household.
You're also not allowed to put ISOs or anything "earned" into a Roth IRA (or buy it from yourself).
The problem here is that this was clearly a prohibited transaction, but the IRS state of limitations is effectively 3 years for stuff like this (unless you have really pissed someone off). It's likely that by the time the stock was worth enough (in terms of 409A guesstimate) to look in to, or there was any kind of reportable transaction showing a gain, the time frame on investigating the initial transaction was long past.
> IRS records show that in 1999 Thiel purchased 1.7 million shares of his startup, which would soon become PayPal, for just $1,700 — a tenth of a penny per share
> Even though Thiel's startup received millions in funding within months, Pensco still told the IRS these founders' shares were worth less than $1,700 at the end of 1999.
Under certain circumstances, there is no statute of limitations. If Pensco did knowingly misrepresent the value of the shares, and if the funding round did imply a wildly different valuation, IRS could still pursue the case.
But I cannot fathom the cries of "IRS Pursuing Investigation against a single Tax Transaction from 20 years ago against vocal Trump supporter" would go over well.
> The problem here is that this was clearly a prohibited transaction
I have been unable to find any source for this claim. Even ProPublica, the people with the original documents and the most incentivized to break the news, do not claim this.
Right, so this is an example of journalism that reduces people’s trust. Or at least it did mine with regards to ProPublica, which I had previously held in higher regard.
>> What I don't understand about this whole maneuver is that Roth transactions must be made at arms length; ie, "Transactions must be made at arm’s length and not involve the IRA owner or a member of his or her family."
Wouldnt this be as simple has investing in another company (managed by external managers) that then invests in your company? I'm sure the wealthy have all sorts of ways to get around this.
I am aware of the fact its popular to dislike the ultra-rich, but is this not worrying to the general public?
ProPublica has obtained a trove of IRS tax return data on thousands of the country’s wealthiest people, covering more than 15 years.
Someone leaked not only Gates, Bezos, Musk, etc data, but thousands of private citizen's intimate financial disclosures (edit: seemingly for the purpose of weaponizing the data against them).
What crime were these thousands of people convicted of to deserve this?
It's about recognizing how the entire system is stacked against working people and that these ultra-rich pay 0% in taxes, while I pay 30%.
The backbone of this nation is funded by the middle class and the poor being taxed, while the rich externalize their expenses to the government and pay little to nothing in taxation.
If some IRS docs need to get leaked, then so be it. The reporting on this has been pretty responsible.
Government spending is almost entirely leveraged by debt and these documents prove that these "ultra-rich" pay a large absolute dollar amount of taxes (albeit lower than 30%). That is factually non-zero.
I am all for a healthy debate on the topic, but I disagree the reporting is responsible. Responsible reporting, in my opinion, would involve nameless "there is a $5 billion Roth IRA out there... the system isn't working", rather than naming private citizens who believe their tax returns from 2005-2020 are private information.
Edit: And I think it may be of public curiosity to know about what goes on in the billionaire class. I get that, to a degree. My original point was that ProPublica is admitting that they are in control of thousands! of American's tax returns for the last decade and a half. There is no guarantee that the IT administrator or summer intern is going to keep that data safe.
> Government spending is almost entirely leveraged by debt
What does that have to do with anything? I literally have no idea what you're trying to imply.
> these documents prove that these "ultra-rich" pay a large absolute dollar amount of taxes (albeit lower than 30%).
Yes, and they also benefit from the work of society and government many times more than I do! From courts to law enforcement to bailouts to everything else. More generally: these people are not rich in a vaccum, they are only this rich because the rest of society exists, therefore they owe a debt back to society.
Absolute values count for nothing. It's preposterous that I work my ass off and get taxed 30 or 40% and they live off capital gains and get taxed zilch.
> What does that have to do with anything? I literally have no idea what you're trying to imply.
It means that government budget can be eventually consistent, unlike our personal budgets. Wealth is a leading indicator of income, and we all know that the vast majority of the ultra-wealthy will eventually pay taxes once they liquidate their wealth. When that happens, they will pay more in taxes than you or I, especially once you factor in inflation (which is one of the reasons why the long-term cap gains tax rate is so low to begin with, everywhere around the world).
Realistically, the government is already spending the money it expects to receive in eventual income tax collections from the ultra-wealthy. The best-faith attack on wealth is mostly around concentration of power, rather than tax revenue or even "fairness" relative to the middle class (the US has by far the most progressive taxation in the developed world[1][2][3]).
Because we tax income, rather than wealth? This is true for most of the OECD. None of this has changed, and it's true for any ultra-wealthy person who wishes to actually consume against their wealth.
By definition, the ultra-wealthy defer their consumption for the sake of investment. If they never ever choose to liquidate their wealth, then it's little more than a life high score.
One can certainly consume right now by taking on a collateralized loan against their wealth, but even if one were to do that, the loan would need to eventually be repaid. For this to happen, some gain would have to be realized somewhere. That money isn't free. No matter what, that wealth is eventually taxed.
And just a side note: generally assume that I'm being serious. I try to be as earnest as possible on this forum. Going in with this assumption for anyone on here is best for its general health.
"these "ultra-rich" pay a large absolute dollar amount of taxes"
Money is power.
Because of the wealth they get to keep, these ultra rich are in many ways ruling the rest of us and turning more and more of us in to their servants, telling us how to run our lives, raise our kids, and what to believe.
I disagree. Many complain about Bezos making billions and not paying a fair share of taxes; yet they support and empower him to further do so with every purchase they make from Amazon. Sure, voters have power voting in occasional elections, but every other day they vote with their dollars—whether they see that or not.
"Many complain about Bezos making billions and not paying a fair share of taxes; yet they support and empower him to further do so with every purchase they make from Amazon."
From what I understand, the vast majority of Amazon's profit comes not from the e-commerce website but from AWS.
And the overwhelming majority of Bezos' net worth comes from the value of Amazon's stock, does it not?
So aren't the people who are most responsible for his wealth the purchasers of Amazon's stock, not the users of the e-commerce part of the business?
It’s true they’ve rewarded shareholders and shareholders have rewarded them, but the profit metrics by division are almost trivial in this context. Amazon didn’t turn a profit for nearly 15 years- and not because they couldn’t have. The e-commerce has historically been run at near-zero margin, even willfully running categories at a loss to drive out competitors. As the consumer buying diapers from Amazon you might think you’re just saving a dollar vs diapers.com, it’s low margin so who cares, maybe you’re even sticking it to them if they’re really losing money on the transaction? But then diapers.com doesn’t exist anymore, and shareholders are rewarding Amazon. A single snapshot can only begin to tell the story.
So should we have been buying from Amazon's competitors instead, even if they have a worse selection, worse customer service, few if any reviews, slower delivery, and are much more inconvenient to buy from?
Variety, choice, and a healthy competitive ecosystem are definitely desirable and to be missed with Amazon's dominance, but there are many reasons Amazon is ahead of other e-commerce sites and brick-and-mortar stores.
It'll be interesting to see if/when Amazon finally starts to seriously increase its prices once the rest of its competition are dead and there's no where else for consumers to go.
Will there be a reckoning? Will Amazon be split up?
Notice what the 'fair share' is, is never stated, and at the same time want to encourage behavior via the tax code, but then get mad when people use the incentives.
I see this article and thread as a general exploration/discussion of these concepts. I’d have suggested we could probably peg ‘fair share’ anywhere between zero and average American tax rate for the sake of this argument, but let’s just go ahead and say 24%. Do you believe an individual should be able to earn billions, and should able to pay less in taxes than individuals making under 100k? If you agree I’ll bet you can find several billionaire (and many more on their payroll) that’d agree.
Look, I admit Ive made my share of contributions to the Bezos machine. Now I could vote for Bernie all the while, but ultimately my point in response above is/was that we vote with more than bumper stickers, social posts, and… well, votes. I might be hypocritical, but I’m not mad or delusional.
Also I don’t hate Bezos or Thiel for playing this game, and I’m not saying you should hate either, but heck I think it’s okay to say at some point, it’d be okay to look at the policy and say okay you made a billion tax free, nice one, but that’s enough we tap out.
And yeah I’d love to divorce business/financial decisions from politics/voting, but you know, Citizens United…
I don't recall ever reading such bland, uninteresting statement.
If you want to claim democracy doesn't work, post some explanation of your position. You might feel like your opinion is shared amd known by everyone, but that's just a social bubble.
I'm more towards your side than you probably think, btw.
The voters are told what to believe by the likes of Peter Thiel and Cambridge Analytica, or by the likes of Hearst, Bezos, and Rupert Murdoch owning newspapers.
The rich very often have the ears of politicians, with which (if they don't directly bribe) they can easily have lunch any day of the week to lobby for their special interest, or propose quid-pro-quo plans.
How often does the average voter have lunch with their elected representatives? For almost all of them the answer is never.
The rich also donate to foundations (if they don't own some outright) that lobby the government for their interests, they fund ads to the tune of millions of dollars, they sometimes use millions of their own money to fund their own campaigns for office (Trump being exhibit #1, and Bloomberg #2), etc.
There are plenty of Kleptocrats that aren't concerned with the world being free and fair; they're just happy to sit atop the pile, regardless of what the pile is.
> Government spending is almost entirely leveraged by debt and these documents prove that these "ultra-rich" pay a large absolute dollar amount of taxes (albeit lower than 30%). That is factually non-zero
These are such non points. Who cares about the absolute amount? We measure it in points for a reason, and the effective number of points the ultra rich pay is <1, while I pay ~25. You can't denormalize that away.
I'm pretty open to the ethical version of this article omitting Thiel's name.
I also think it would be interesting to talk about what it is in this reporting that materially harms Thiel. That he is a billionaire and that he owns PayPal stock was previously public knowledge. This only seems to introduce information about how much tax his Roth is sheltering him from - which the anonymous version of the article would also cover.
In principle it seems unfair. Case-by-case I have a hard time being against this sort of reporting because of how much influence that money might have. How is it that an individual has so much money? My feeling is that it was enabled in part by tax-funded infrastructure and insufficient government regulation. Too much individualism is trouble (see the USA response to COVID-19). Likewise too much central control.
If we’re collectively being exploited and some publicity is what is effective at change, so be it. I still see the super-rich as individuals, intrinsically no better or worse than anyone else, worthy of empathy, and answerable for their actions, which generally feel unethical.
Where might we cap wealth?
What is a better way to go through life than playing the acquisition game and feeling like we’re not adults until we have the fancy, humorless luxury things?
How do we otherwise meet the needs of those who thirst for more and more power and resources?
> these ultra-rich pay 0% in taxes, while I pay 30%.
Then I have a modest proposal. If the median household net worth[0] in the US is about $120k, and the median household federal tax burden[1] is about $10k per year, then let's say that anyone with a net worth more than $1 billion should pay an annual wealth tax of 10%.
The G7 have already agreed to a global minimum corporation tax rate, so let's make this wealth tax global too, and forbid billionaire residents of non-compliant countries from visiting or passing through countries that implement this tax.
A 10% wealth tax is quite a lot but otherwise I agree hat we absolutely need to move from income to wealth tax.
I’d support a progressive tax, something like 0 for the first 200,000 or something, then slowly rising to a few percent.
The really tricky thing though is that some assets generate income but others don’t, and we probably don’t want to put even more pressure on people to make rent on their assets than they already have.
So it’s a really hard problem but worth thinking about because taxing capital is really the only way to have a fair tax system in a capitalist society.
It wasn’t only that. Setting up the infrastructure to actually measure and track wealth (nice pre-IPO stocks there, how much are those worth? Nothing? How interesting) is a massive undertaking and a bureaucratic mess.
It’s a tax with a massive administrative overhead to it.
The good thing about a law targeting billionaires (and taxing their wealth at 10%) is that the administration costs can be at least $100m per investigation and still break even.
(Admittedly at the bottom end someone might manage to sneak in under the threshold, making the investigation a waste, but there's no harm in the bureaucrats starting with the richest person and working their way down the list, gaining skills and efficiency as they go).
Even if all the money that the government collects ends up going to pay the investigators, at least that would be creating thousands of decent jobs. Also, assuming a balanced game, if the investigators are being paid $100m to find evidence then the billionaire would have to pay a similar amount to hide evidence, which means they might as well not bother hiding it.
I'm imagining that the wealth tax would only apply to people with more than $1bn in net assets, so the overhead for almost every tax payer is to simply tick a box each year saying "I am not a billionaire".
More precisely, the law would require anyone with gross assets above some threshold, say $500m, to report the value of those assets to the IRS every year, based on some simple valuation rules, like "How much did you pay for the asset?" and "What is the market value of those shares / cryptocurrencies?". Only assets worth more than $1m would need to be declared.
Then, as I say, the IRS can go down the list of people with the most assets and do a more thorough audit, to make sure their valuations are correct, while also making sure that there aren't any billionaires who have forgotten to file, since it should be hard to hide that much wealth.
This article is about Roth IRAs and I don't know if Roth IRAs are "stacked against working people". That is because anyone who is working can open up and fund a Roth. I think Peter Thiel's returns are just highly unusual.
Actually, it's probably the opposite, a Roth is probably a very useful tool for working people as far as savings. For someone starting a Roth at 23 with $6000 and contributing $6000 every year, 10% market average compounded growth, it might be worth around $3M 40 years later. It's not hard to see how Buffett was able to grow his into the tens of millions. I think the Roth IRA is pretty reasonable for wage workers and definitely gives them an edge.
Its kind of surprising to me how obvious it has become to compare % as more or less instead of absolute numbers. I dont know anything else but taxes that people use this notion.
30% of a small number is a lot less than 10% of a massive number. Most definitely PT has paid a multiple of taxes than middle class: millions upon millions of it.
The most common justification is the subscription to the punitive usage of taxes: if someone has money, he should be punished more and more for it.
Maybe you could use another framework and say, how much of taxes and public services do you consume and how much do you contribute. And I assure you people like PT are very much net providers, whereas middle class will very often be a net consumer.
You mean like when Musk sold $1.5B in Tesla shares and paid $0.5B in taxes (33% rate) but then Propublica complained $0.5B was a small amount of taxes compared to his overall wealth (ignoring the rate for the transaction).
This is disingenuous. ProPublica pointed out that, regardless of the individual transaction, he amassed so much wealth that the .5B in taxes were a drop in the bucket.
PP isn't accusing Musk of cheating the system. They're pointing out that the system is broken.
No Propublica was being disingenuous. They note his total wealth, then took a snapshot in time of a single year, where he paid $0.5B in tax, ignoring his actual income of $1.5B
It’s like looking at a retiree and saying “you only paid $15,000 in taxes, but you have $1M in assets!!” ignoring that those assets were either already taxed or will be taxed in the future.
What country are you talking about? Because in the US the top 1% pay about 40% of taxes [1]. The remaining 2-5% pay 20%. Almost all taxes are paid by people in the top quarter.
I believe that if the leak is proven to be in the public interest, no one should go to jail (but that it should be the rare exception).
I also don't believe Snowden deserves to be in jail (or rather that he should be pardoned). Sometimes you can't fix things without breaking the law - everyone does it on a daily basis with few consequences (jaywalking, etc). Sometimes it has to be done on a larger scale in order to shed light on injustices - otherwise the power of the few will prevail over the power of the many.
If someone brings to light an injustice which prompts the legislature to fix the laws to better match the public consensus of fairness, that seems a perfect example of what the presidential pardoning power is intended for.
I understand that the word "If" is doing a lot a work in that sentence, and I have some sympathy for law-abiding billionaires who don't deserve to have their privacy invaded, but they should receive some form of compensation rather than legal punishment of the leaker.
I think that justice should be blind. Just because you’re rich doesn’t mean you aren’t entitled to the same protections. We’ve gotten to a point in culture where some people “deserve it” so it’s ok if bad things happen to them. That feels like a dangerous exception to make.
Some countries have public tax returns (Sweden? Norway? One of those Nordic countries.)
I think probably they should be public data.
That aside, for very rich people, having them be public is in the interest of the public as it reveals the shady stuff they do to dodge taxes (legally.)
Debating wether tax returns should or should not be public is a great debate to have, I agree. The country should be having that debate. And if we decide tax returns should be made public, it should happen in the future so everyone is on the same page.
The fact is that US tax returns are private information, regardless of what other countries are doing or what you and I think should be done.
> Debating wether tax returns should or should not be public is a great debate to have, I agree. The country should be having that debate. And if we decide tax returns should be made public, it should happen in the future so everyone is on the same page.
The same way the Snowden leaks were instrumental into regulation about surveillance, leaks like this are instrumental in crafting better tax policy, so I would say they are a public good. It's also not-quite possible to do it via completely legal means (as vested interest opposition is too big and has too much capital - the only way to battle against them seems to be to do it via not-so-legal means).
So in this case the fight is punching up against people in positions of power, not down onto people that have no power, so I don't see a direct issue with it. If you have power, you should also have the proportionate responsibility.
"Responsibility" is a very strange word in your comment to me.
Snowden leaked government program details. How in the world is that the same about thousands of private citizens (aka not public figures) personal financial details?
How are these individuals not being "responsible"?
The only unresponsible person is the person(s) who leaked the details, and ProPublica for monetizing it.
We have a disagreement in what makes a public figure then. I believe that over a certain level of wealth, the wealth alone makes someone a public figure or a figure of significance (since wealth = power, and public status also = power, and celebrity status = power).
If someone is powerful enough to have power over other people (which the wealthy certainly are), then they should account for that power with appropriate responsibility.
If you don't want to be a public figure, don't accumulate exorbitant amounts of wealth.
When I say public figure (which Mr. Thiel is, despite his harassment by Gawker and other quirks, but I get your point) I am referring to the thousands of non-public figures who have had their personal tax details stolen and shared with ProPublica, who seemingly did nothing to deserve this.
It is in the public's interest to transparently understand the activities and finances of anyone with outsized political power. Since money is freely convertible to and from political power, people with outsized amounts of money have outsized political power, and are therefore public figures. Are ProPublica publishing details of people who are not rich?
You want family and friends to know exactly how much you make?
That's extremely problematic for a lot of people.
Congress already has access to tax returns for the purpose of writing tax legislation. It's not perfect but I really don't want my finances public, and I'm not doing anything shady.
Imagine hooking up the public tax returns to an image recognition system and database built from social media. It should be possible to create a dating app for women that lets you see the wealth of people on tinder, in the street, at a party. Men might also use that, but they already have their ideal "rating by physical appearance" app in tinder. Some gender differences are persistent throughout all human history.
seems like corporate tax transparency would be a good first step.
> Congress already has access to tax returns for the purpose of writing tax legislation.
while that is the law that Congress can request/subpoena returns under §6103(f) of Title 26 [1], if it can just be ignored then Congress doesnt really have access.
I have lived in 4 countries, and 3 continents and everyone I have lived with agreed that it's not useful for the whole family to know how much you make.
> but thousands of private citizen's intimate financial disclosures (edit: seemingly for the purpose of weaponizing the data against them).
Can you point to one instance of some of this data being divulged about random citizen's finances, or used for blackmailing someone? It seems silly to complain about legitimate journalism because the data might, but has not, been used for nefarious purposes.
Whistle blowing journalism implies you are reporting on acts breaking the law.
Reporting things that are juicy but not illegal, is effectively gossip / tabloid material.
You don't get to break the law in order to effectively gossip.
Case in point. You don't get to break into the King of England's cell phone to report he's infertile, even if you think means English citizens have a right to know that the country will never have a Prince-heir.
That is not legitimate journalism, and its certainly not whistle-blowing. Its repugnant and tabloid journalism.
Personal privacy is never second to the mob. Period.
EDIT: unsafe, fraud, abuse, corruption, malfeasance of government/company funds, are almost always also breaking fed/state/opco policy or regulations, and as such they are illicit and fall within the spectrum of whistle-blowing.
> A whistleblower (also written as whistle-blower or whistle blower)[1] is a person, usually an employee, who exposes information or activity within a private, public, or government organization that is deemed illegal, illicit, unsafe, or a waste, fraud, or abuse of taxpayer funds.
Morality ≠ lawfullness. Many things are perfectly legal but profoundly immoral or unethical. The public has a right to know that they're being cheated like this, that working class people have to pay their taxes but the very rich don't. It's very slimy that you try to equate this to curiosity about royalty.
There is no requirement for whistle blowing to be strictly about illegal activity. Mismanagement, corruption, unethical behavior… are all considered under the term. It’s in the public’s benefit for this information to be public. All billionaires should be under far more scrutiny then they are. There’s no benefit to the rest of us for them to operate with impunity in the shadows.
Personal privacy and the belief that you are innocent until proven guilty (no matter how "obviously guilty" you are), are two things we've really forgotten in the USA and perhaps the modern world in general.
The innocent until proven guilty only applies in criminal court, not in civil court by the way.
Personal privacy is good, but there are some societal things that should supersede the right to personal privacy in my opinion - I don't think any single right should be absolute.
Whenever two people have conflicting absolute rights, who's right is more absolute?
That's why rights are always relative. The Bill of Rights is a good starting place, but any law should pass the common sense/reasonableness standard - we already make many [reasonable, common-sense] exceptions to the right to free speech (i.e. shouting Fire! in a theatre for a cliche example, or incitement to violence)
It's reasonable for good journalistic organizations to have access to secret government records. They just need to be responsible with them. The same discussion happens any time there's a leak of intelligence/surveillance/military documents. What if the info puts soldiers at risk? Well, the ethics of that are up to the journalistic organization to tackle. They're the best equipped to do that, with their training and standards.
Now if someone just sold the records to TMZ or something, that's a different conversation.
The weird thing is that none of it is terribly surprising or unexpected. So information was stolen just to kind of confirm what everyone already knew?
If this was all new information I might disagree with you, but we already knew capital gains is horrendously undertaxed. And knowing the specific dollar amount doesn't change the conversation much, it just makes it that much more incendiary.
There is a difference between mutual knowledge (everyone knows X) and common knowledge (everyone knows X, and knows that everyone knows X, and knows that everyone knows that everyone knows X, etc. ad infinitum).
This brings the knowledge everyone sort of knew and makes it common knowledge. That can have a powerful impact.
Counter point - Information was stolen and is being held that doesn't change the common narrative or introduce new information ("our tax system needs help").
Have you considered the amount of identity theft that can occur when you have 15-20 years of tax information on thousands of individuals? And that information has obviously been duplicated many times if it made its way from the IRS, through an informant, and into the hands of at least one person at ProPublica?
I don't intend to defend "the system" and the fact ultra-rich can become even more ultra-rich, or the morality/fairness of that. I do find it very alarming that its apparently "OK" that Pro-Publica has intimate financial details of thousands of Americans - enough to completely ruin their lives if in the wrong hands - and its "OK because they have a lot of money".
Thats not OK to have on any American, wealthy or not, in my opinion.
> The weird thing is that none of it is terribly surprising or unexpected.
Have I been living under a rock? I think we may have suspected that the ultrawealthy was not paying their fair share, but paying nothing? Using elaborate loopholes to actually get out of any tax burden at all? I found that to be shocking.
I grep'ed the article for the word 'criminal' and came up empty. This is essentially a hit piece. Say what you will about Bezos, Thiel, et al., but they are just high profile targets that propublica is going after for the clicks. I question the ethics of these journalists.
> 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?”
Who cares if it’s criminal? Do you only read crime reports? I was unaware that a Roth IRA could be exploited like this until this piece enlightened me.
Morality ≠ lawfullness. Many things are perfectly legal but profoundly immoral or unethical. The public has every right to know that they're being cheated like this, that working class people have to pay their taxes but the very rich don't.
Mostly that you don't want random people to know how much you make, and unless you are a public figure there's no reason why it should be useful to the public.
In the USA they have been private for a long time (forever perhaps, I don't know the full 200 year history on them). In modern times (2000 or later) they have certainly been very private, though.
Whats the argument for being selectively harassed by leaking your sensitive financial details?
1. Don't worry, IRS has tons of data on you, but it's all secure, nobody gets access to it.
2. Oh, some journos hate you? Then it's totally OK to publish you data, that's a well known exception from privacy.
3. What? Punishing people that revealed private data? Are you crazy? It's the government, they don't get punished ever. But be sure all your private data is protected. Unless, of course, some journo dislikes you, then it's your own fault.
Maybe we should fund and staff the IRS properly so that they can properly police and audit the wealthy unsteady of relying on “leaks”?
It’s perfectly ok for the wealthy to lobby Congress so that the IRS is neutered, but when a person leaks their info, it’s a crime, huh? Seems like a double standard.
One of the thing that sucks about all these billionaires running end run around the tax system (outside of the obvious pay your fair share) is that they then have a bigger and bigger war chess to splash around. Anyone else who is competing the investment arena has to either play by the same rules or can't compete. It inherently makes more people have to buy into these end-run tax scenarios or risk being left behind. In this case it looks Peter Thiel just went all in on the ROTH IRA beyond what anyone else did.
Its not to dissimilar from the Countrywide CEO saying he was in a forced situation to get into subprime even though he had not interest and though it was a bad investment. If he didn't the board would vote him out. Recognize it is different but its kind of not unless the rules of the game change (which they may be in real time if this propublica billionaire take down works).
I think the central fallacy is that you're assuming more money makes it easier to achieve higher returns. For the vast majority of finance, you get diminishing returns to scale. There are many investment strategies that have limited capacity, and as you get bigger you either have to dilute or take increasingly risky positions.
The phenomenon's pretty ubiquitous among hedge funds. Tons of funds produce stellar returns at $100 million AUM, then use that track record to grow to a $1 billion+ and all of a sudden put up mediocre results.
I think you have two things confused. % vs total returns.
Larger funds have a tougher time finding high returns. However if you are getting dollars on a lower cost basis (i.e. untaxed vs 0.8 taxed dollars) you have more money that can be exposed. Therefore allowing for more upside and alternatively any losses can be spread across a larger base.
In no world does not having more money allow for more money to be gained. In venture it also means you have more money you can burn at a loss.
You simply have more investible dollars to use. Therefore any losses can be spread across a larger base, or, alternatively, you have potentially more gains available to you as a result of more exposure.
more investments over a greater pool of assets, chasing returns, also increase your surface area of error. Examples abound.
There's a reason its easy for funds to get big with a small LP commitment round, and there's also a reason most funds close after hitting certain numbers, increasing the AUM means increased complexity, and thus, potential implosion.
The real world bears many examples of growing AUM portfolio that blew up past a certain size.
There's no counterexample that I know of , of a fund with a consistent growth pattern that started small, hit size, and then increasing further their size with the same trajectory from having more investment dollars to use.
Agreed - though the numbers in the Thiel Roth aren't at that level of scale. Therefore having more money to invest in the market allows for an advantage.
From your statement I can't tell if you think that having more after tax money is a benefit or a drawback for Thiel's investments.
Also at higher AUM VC you have the Softbanks (and now every major VC firm that needs to compete at that level or be left in the dust)
Taxes drive a lot of investment strategies. A large number of strategies to increase returns are things like tax loss harvesting, because every sale forces a taxable event that is going to reduce your total capital base. Not being taxed obviates all of that and opens up a number of opportunities.
I don't disagree - I would say that he definitely leaned in on the letter of the law and leaned away from the spirit of the law. $5B in untaxed gains is frankly both impressive in that he generated those returns and also feels a bit unfair to the rest of us who have to pay cap gains on all our smaller wins.
> One of the thing that sucks about all these billionaires running end run around the tax system
It's not an 'end run around the tax system'. It's either legal or it's not. If illegal they run the risk of getting caught. If legal it's legal. Period. Nothing also to prevent a regular person from doing something somewhat similar other than they don't know how to or don't know it even exists to use or exploit. Now you can say 'oh well the rich can hire people who know' but there (in this day and age) nothing to prevent a regular person from taking the time to research and come up with their own schemes using online research and help from others readily available. Of course if you don't have money to be taxed what's the point of that? If you do that takes effort and most people just want to assume what is being done is wrong because someone has or has access to information and importantly knowledge they don't have.
People who are wealthy have many things that regular people don't have.
I would say that tax evasion isn't as black and white as you make it out to be (tax attorneys will take aggressive and passive stances on their interpretation of the law). As well there is the letter of the law and the spirit of the law.
Agree I could also have set up a roth IRA like that. What I don't have access to is the deal flow and the ability to structure the deal on my terms (supposedly i.e. shares for pennies). That's something only power/money and access can get you.
What seems most unfair here is how difficult dealing with private equity is as a normal person; the entire purpose of the Roth IRA is that you do not pay any taxes afterwards, and that is how it functions for everyone, whether you are rich or not. On the other hand, the same cannot be said about the ability to purchase, find, and work with private equity. I understand many publications may dislike certain people (as one can note from who they choose to mention the most), but I don't see a reason why he would decline using tax-advantaged accounts just because he has attained significantly larger wealth and roi than most others using them.
I agree about access to private equity, but did you read the whole thing?
He purchased shares of his own startup at 0.001 cents, way below market rate.
To me, that's clearly not the intent of Roth IRA. This means any startup founder can simply put their ownership shares into their Roth IRA and never be taxed on their company growth.
It also doesn't seem they singled out Thiel, he has the biggest Roth IRA they know off, seems logical to discuss him the most.
> He purchased shares of his own startup at 0.001 cents, way below market rate.
The proper term is "fair market value" and before a company is publicly traded, the FMV is set by the Board and whatever investors have evaluated it and determined it to be.
In this case, it looks like it was before any investors had put in their money so the Board was simply the founders. At that stage, the Board normally sets the strike price (what you get the shares for) the same as the fair market value (what they're "worth") and you pay taxes on the difference. Fractions of a cent are common at that stage.
The risk is that the fair market value will never go higher and is likely to be zero (aka failed).
Their claim that the shares were below market value doesn't stack up. They did this when they founded the company, the company has no value at formation so it's fair priced. Just because they raised money a few months later doesn't mean it was worth anything at formation.
If you have knowledge that people want to inject money into your startup (and thus raising the value), then stuffing shares into a Roth IRA before a raise (that you know will happen) would surely be skirting the idea of fair-market value.
That very same year, there were two or three funding rounds, according to the article, for $0.5m and $4.5m. Yet at the end of the year, the shares in the Roth were reported to be worth less than the initial $1700.
How is there a market rate if his startup was not publicly trading?
The nominal value of the shares in my startup are £0.01. Sure, that's not what we've sold shares for, but the price we have sold them for was purely what the buyer was willing to pay for them.
So, I was reading into this a bit recently after getting an equity offer (also in the UK). The "fair market value" is open to interpretation, but if the inland revenue come calling, you need to be able to explain it. For a startup with no assets that has not previously sold shares, £0.01. Is just fine. But if you've got assets, or you've previously sold shares as more than that, then quite clearly the market value is more than a penny.
I mean, what better definition of "fair market value" is there than "what the buyer was willing to pay for them"?
The Roth IRA is not suppose to be a tax shelter for people to get super rich off their own creations. You are not getting a reduced priced Bitcoins or Gamestop stock. You are gambling with your own funds based on information that everyone else has and paying the same price as anyone else. If you get Bitcoins and/or Gamestock at a reduced price, then you are abusing the Roth IRA and the IRS should stop and fine you.
Would Thiel have been willing to sell his shares to someone else at $0.001 at the time he put them into the IRA? Because that's ultimately what market value is about.
It's also one of the valuation proposals for people playing valuation games with illiquid assets. You can declare them at whatever value you want (and pay tax on that value), but you are forced to sell if someone offered you that value for the asset (if you claim your house is worth $1M, we'll let you pay property tax on $1M, but if someone offers you $1.1M for your house, you're forced to sell). That would cut down on people inflating/deflating asset valuations to game tax codes.
> Would Thiel have been willing to sell his shares to someone else at $0.001 at the time he put them into the IRA? Because that's ultimately what market value is about.
Well... no. (Can't believe I'm defending Peter F-ing Thiel)
I might own some AAPL shares that I think are worth $1000/share--so I'm not willing to sell my AAPL shares for less than $1000 each. The market (today) thinks they are worth $133/share. Who is right?
Thiel might have really truly believed that his 2M shares would be worth a few billion dollars one day. But if you can't find anyone who is willing to buy them for that price, then it doesn't matter. The "fair market value" (what the IRS cares about) of those shares is not a few billion dollars. It doesn't become a FMV until you can find an arms-length buyer who is willing to buy the shares for that price.
You could pay someone to create an independent valuation of the shares--but for a brand new company that has no employees and no assets, not even IP, why would you expect the valuation to come back at much more than $2k?
> PayPal later disclosed details about the early history of the company in an SEC filing before its initial public offering. The filing reveals that Thiel’s founders’ shares were among those the company sold to employees at “below fair value.”
The article implies 0.001$ was below fair value based on PayPal's own declaration at the IPO. That's why.
In any case, I think this is unimportant, the important question is can a founder always transfer their owning shares into a tax advantaged Roth IRA? Does this make sense to permit?
If I start a company today and just buy my shares into my Roth IRA before I even write a single line of code or hire anyone, so that if my startup grows all my owning shares of it are tax exempt.
And if it does, to what extent? Should there be no cap?
In reality it's all just a political question, who should pay taxes, how much, and in what circumstances.
Articles like this I think help people understand and think through some of the edge cases around that, to better allow them to form an opinion on it.
What happened was Thiel buying 1.7M shares of stock in his own startup at a value of $0.001 per share in 1999 in his Roth IRA (and then cashing out for $30M+ in 2002). It's debatable whether it was legal (because he was an officer/director of the company and that law is on the books), but the better question would be - should it have been illegal, and the answer to that, in my opinion, is a resounding yes.
I believe non-public investments should be banned from Roth IRAs (and that we should close all of the backdoor loopholes to them as well). They were meant for a certain group of people at the outset and were then twisted around in knots to provide more tax-breaks for the well-off (which should be rolled back). I think mega backdoor Roth should not be a thing, rollover Roth IRA should not be a thing - bring Roth back to it's original vision.
The IRS apparently agreed with you. The article sloppily doens't doesn't give a year, but:
> The IRS, meanwhile, was floundering in its efforts to police retirement accounts. At one point the agency recommended Congress prohibit IRA accounts from buying investments that aren’t traded on a public market, such as founders’ shares. That went nowhere, too. Instead, Congress began slashing the IRS’ budget, kneecapping the agency for more than a decade.
>It's debatable whether it was legal (because he was an officer/director of the company and that law is on the books)
I am interested in finding out the answer to this, as others have posted in this thread the text of the law which makes it seem like he should not have been able to, and what reasoning could possibly have made it legal.
You won't find the answer, because you're innocent until proven guilty. The laws are not formally defined, it would need to go in front of courts, and then people could argue whatever interpretation and evidence they want to convince one way or another.
I think what's more clear is that it's clever and probably an unintended loophole, be it technically legal or not isn't so important. What matters in the end is a bunch of money didn't go to maintaining society's infrastructure, paying for military, and all that, instead money from other sources and other people's pockets was used. Do you care? Do we care? I think that's the more relevant dimension to think about and discuss.
Why don't you think that was the intent of the Roth IRA, or more specifically within the intent.
The intent of Roth products were to give money to a broke government up front. The government created Roth products for that specific reason and there is no further intent. They made the contract with the people and some of the people actually read it. All tax exempt and tax deferred products can invest in and hold whatever they like with prohibitions generally being on level of control or debt financing. Simply having a prohibition on some kind of property ownership doesn't make sense and I would probably challenge it on constitutional grounds.
I did, but I'm not sure I have enough information to conclude if what was done should be illegal/allowed or not, since this is based on various sections of leaked documents, but it's quite possible some bad things were involved. (One may remark that turning small investments into the many billions quickly clearly is a sign that foul play was involved, but recall that his original 10% stake in FB would be worth almost $100B today in less than 20 years. I do think he sold most of the stake long ago, though.)
TFA. Although I think they’re wrong on this account. It doesn’t matter that the stock was worth more mere months later when the cashed their investment checks.
But what is an issue is the self-dealing of buying shares in a company he holds a major role in the management of.
Also, if you aren't trading public stocks, it seems much easier to get around size limitations. When you spend $5500 buying the SPY, the government is incredibly certain that is the amount of money your investment was valued at. If you buy $5500 of stock in a startup? Who is to say? The opportunity to buy that stock might have been worth 10x that amount the moment that transaction occured, and there's no real way for the government to actually determine that.
I don't think it's a dislike of certain people or blaming them for doing these (legal) investment moves. It's about changing the rules to provide more financial equality in our society. I think it's now too easy for the rich to get richer and too hard for the poor to come up. I'm not suggesting banning rich people, and we can debate over matter of degree of equality that's good.
Generally agree; I mention it since from my point of view, I would have spent most of the article criticizing the rules and policies politically and finding ways to improve them, rather than constantly going on about the personal lives of some that have exploited them (although it does seem like it cannot be helped sometimes).
> 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.
You need a MAGI of less than $139,000 to do that. That includes dividends and capital gains, so it's unlikely post-Paypal Thiel ever made that little. Pre-Paypal Thiel might have.
> Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value.
This might happen for post-Paypal Thiel. Definitely not pre. This is way easier said than done unless you have good access to deal flow (he does) and founders willing to pay for the privilege of having you as an investor vs. some random VC.
> Pay just fractions of a penny per share
You're not paying fractions of a penny per share for something that has a "good chance of one day exploding in value." This investment doesn't exist.
I'd love to see his specific investments. I have a feeling a handful from a specific time window made up the bulk his his returns.
> This might happen for post-Paypal Thiel. Definitely not pre. This is way easier said than done unless you have good access to deal flow (he does) and founders willing to pay for the privilege of having you as an investor vs. some random VC.
He purchased shares of PayPal at 0.001 when he first founded it using his Roth IRA, it's all explained in the article.
> You're not paying fractions of a penny per share for something that has a "good chance of one day exploding in value." This investment doesn't exist
That's where the article alludes to something maybe slightly fraudulent, for him to have his PayPal startup at the beginning sell shares to himself at 0.001$, as a special declared "employee discount rate".
He then managed to make 28 million in his Roth IRA from the IPO of PayPal which he paid no taxes on, because his private PayPal shares were all in the Roth IRA. Then he took that 28 million and reinvested it in Facebook, his Hedge Fund, his other startup Palantir and others, and those investment further did not get taxed, because the whole pool of money was all in the Roth IRA from this point on.
As reported in the article, Thiel's income was below the income limit in the year of contribution, and he only needed one year's contribution to execute the strategy.
Also, income doesn't matter nowadays. Because Congress removed the income limit on Roth conversions (also reported in the article), anyone is free to make a nondeductible traditional IRA contribution and convert it to Roth, which achieves a similar effect.
I also wonder if they can borrow against it. It would seem a pretty low risk loan for a banker to make, and it would allow people to access the money arbitrarily, negating the one downside or limitation. So yet another way that the rich can basically avoid paying any taxes. Does anyone know of any limitations or rules restricting what you can invest the contents of an IRA in? Can you set up a business, sell your IRA shares of the business, then borrow against that value? Basically a foolproof way to avoid paying any taxes ever. The best part is the interest rate just has to be lower than the tax rate, not even the rate of return, right? Incredible. I think Romney was roasted for doing the same thing with his IRA. Seems like any wealthy person could and should be doing this.
Roths are bad collateral in general, because they are a special asset that survives bankruptcy (up to a certain level). Now, Thiel would actually care about his Roth getting chopped to only a few million, so in this case we'd have to look at what laws prevent that, which I don't know.
Edit: Using a Roth as collateral is apparently prohibited under IRS rules 4975(c)(1)(B)
I hope a law is passed that hits this kind of behavior with stiff penalties. Thiel isn't the first to do something like this. It is incredibly common. The letter of the law is that annual contributions are capped, and the spirit of that law is that this is done to keep these accounts from becoming tax-free, judgement-proof shelters for insane amounts of wealth.
Perhaps caps on Roth the value of Roth IRAs and a limit of the type of assets held in them to certain bonds and publicly traded stocks. Somewhere between $1MM and $10MM with an annual CPI adjustment is probably a fair cap amount.
I'm not sure if it's bad that he invested in startups with that money. It's quite risky and if discourage it for that reason. If we implemented your proposal of capping the amount of shielded returns the problem would be gone. Most of this problem word be gone even with a very high cap in the tens millions.
On the other hand, are we optimizing for an edge case that gets media attention but is ultimately insignificant? Edge cases often make bad laws.
This isn't an edge case though. This is a common case. And it's frankly, a common abuse case. This stuff is famous for the being used by the Mitt Romneys and Pete Thiels of the world, but I know people who've bragged about doing the same thing on a much smaller scale. It just happens to work better the more money/influence one has.
All you need is a tax attorney and enough money to found a business to exploit this cheat. Start a business worth $5000, and move it into a Roth. Then shovel other investments into this new business and viola, you have a several million bucks parked in a tax-free, judgement-proof vehicle that can be passed onto your kids and grow until the end of the USA.
The longer we wait to fix this, the more it's going to distort our economy.
An asset cap is a simple solution and it hurts nobody who using this as an actual retirement vehicle. But there are other solutions as well that, again, don't hurt people who intend to take distributions in retirement but prevent abuse like this (minimum required distributions, like 401ks have); dissolution of the Roth upon transfer due to death of the owner, etc.
They're not squirreling away $5B in a Roth IRA, they're squirreling away $2000 and putting it in an asset whose value grows from $2000 -> $5B. In theory someone who put Dogecoin in their Roth IRA in 2014 could do the same.
It would make sense to limit Roth IRAs to publicly-traded assets. If you're investing in securities that you need to be an "accredited investor" for (> $1M liquid net worth), that's not really a tool for the middle class.
The harm here isn't that he invested in startups, but that it's become such an insanely high profit that's now entirely shielded from taxes. What would preventing startup investments accomplish that a simple cap on shielded gains (let's say 10 or 20 million) wouldn't?
All the money coming into the Roth IRA is post tax money, whether it was cash or IRA conversion. Once in the Roth IRA, you can sell for a profit and rebuy different stocks without paying tax on that profit. Outside the Roth IRA selling for a profit would be a taxable event. Trading stale stocks for fresh new winners without paying the tax inbetween is an incredible advantage to growing your wealth.
That's the intended benefit of Roth IRAs though, even for middle-class investors. That you can buy & sell within them without paying capital gains tax.
It's not usually a huge problem in the public markets because they're extremely liquid, with generally symmetric information across all participants, and that liquidity makes it hard to generate extremely excessive investment returns except by luck. But private companies are illiquid, oftentimes with huge asymmetries of information, and that lets you generate 10,000%+ investment gains by happening to have an opportunity to invest in a rocket ship that other people can't get into.
There is no "spirit of that law", law is as written. If there is a spirit that the letter excludes, then it is the fault of the lawmakers - why shouldn't they face penalties instead?
There are many legal traditions in the world, and most of them (both by number, volume of territory, amount of people governed, etc) take the opposite approach.
Only a very narrow English line of black letter law that ascribes to the black letter above all else... and even in that system a completely twinned system of courts allowed for ethical adjustments to law through the courts of equity.
Most continental systems of law and currently standard constitutional constructions provide very clear, very codified release valves for situations in which the written law is bullshit. Which is often.
I don't think it's necessary to debate ETH as a public good but... Vitalik is by far the most impactful recipient of the fellowship grant so "just one of the recipients" is doing a lot of work here.
Seems fairly equivalent to funding a new building at a university that is already mostly populated by rich kids, who by and large are doing things less useful to society than building a decentralized computing platform used around the world.
Although I'm a pretty huge skeptic of the performance of the thiel fellowship (knowing some fellows personally and also knowing some of the showrunners), I don't think calling it a rich kid's club is fair, with the exception of Austin Russel.
I was calling universities a rich kid's club (esp. the ones that get the most gifts from the megarich). Trying to make the point that, while the Thiel Fellowship may not be objectively "good", it seems at least as good or better than the OC's suggestion that it is preferable for the megarich to fund things like universities.
What else has the Thiel Fellowship created other than Vitalik and ETH? I'm not sure we can judge the success of it on it's single most impactful result.
That's like saying the foundation supported a scientist working on building more coal-fired power plants. ETH, along with crypto in general, is harmful to society. Weird flex.
If you are going to make a point against Ethereum, I recommend this: It encourages scams, gambling addiction, people losing money accidentally, and the usual criminal activity associated with crypto.
Most people are barely aware of crypto, let alone the negative effects of it. Once people become more informed, hopefully more and more people will see what a plague on society it is.
The people who have that specific stance on crypto are usually those who know just enough to have to form an opinion but not enough to realize how little they know.
From wikipedia: Billionaire Peter Thiel, a co-founder of PayPal and current Facebook board member, paid $10 million to help finance lawsuits against Gawker Media, including the Bollea lawsuit. He called his financial support of Bollea's case "one of my greater philanthropic things that I've done."
IMO the only thing he did "wrong" was to make excellent returns within the bounds of a tax vehicle and with investment classes that most of us are typically excluded (accreditation, VC exclusivity)
If we should be mad about anything it's that it's so difficult for the general public to get a good slice of diversification including the asset classes that turn 1000s into millions.
Yes we can go work at a startup, but that is all the eggs in one basket. Better to spread that risk around 10+ investments like VCs do
I think the fraud to be found here is whether or not the purchases these IRA's made were made at fair value. Given the astronomical rates of return realized by some, not all, of these mammoth IRAs, you can probability establish such facts. Similar to Madoff's eternally steady fund returns being impossible.
A good litmus test would be, what is the rate of return of a person's investments made outside an IRA vs inside the IRA.
“When I was poor and complained about inequality they said I was bitter; now that I'm rich and I complain about inequality they say I'm a hypocrite. I'm beginning to think they just don't want to talk about inequality.”
I agree. All the annoying animations and hyperbole in the article notwithstanding, it does not seem as malicious as the article tries to portray it. It is rather disappointing that there are barriers to some of these investments but I think without these barriers you would open the gates for all sorts of malicious actors taking advantage of unsophisticated investors.
I wonder if there are good VC firms that would let people participate in funds around the $1000 threshold? Like if I could give Garry Tan $1000 to just participate, no questions or interaction required just fill out the forms sign the check, see you in 10yrs... I know part of the issue is that many VCs have a high touch process for the people signing $100k checks, but maybe if they made it more streamlined they could generate more diverse investor base and just say to them "You wont hear from us, no you cant help, see you in 10yrs" kind of mentality.
They actually are opening up to unaccredited investors, you just need to have a CFP or CPA or something like that (not sure of the actual requirements, I just know that they recently changed them)
The change is that having one of those certs now makes you an accredited investor.
You don't have to be accredited to invest in something like a VC fund anymore using something like Wefunder. However it's extremely risky and generally painful to even find out if the thing you invested in 3 years ago even still exists.
Capital gains tax is stupid. So is income tax. Why? They both tax changes to wealth. They are damping terms in the system. They actually slow down change. I thought Social Change is what you wanted?
Instead, there should be a WEALTH tax, with a rate slightly exceeding historical returns to capital (say 15%), and with a standard deduction of at least $5M. The purpose of income reporting would then be to influence the tax agency's estimate of your cumulative wealth.
Capital gains tax perverts incentives: It tells people to hold on to investments, even if they now think those investments are crap, even if they would rather now allocate their capital in some other way. This is one of the reasons why ETFs are a thing, and one reason why zombie companies continue to shamble on. Roths are the only accounts WITHOUT this feature.
And income tax hurts people who actually work for their money. Really rich people -- do people think some boss gives them a SALARY? That's not how it works: They live off investment income. Capital gains and dividends. Both of which are taxed less than regular income.
This wealth tax would directly stabilize the system towards a state in which everyone had $5M. There are other forces at play as well, so we wouldn't end up at that equilibrium, but we'd move closer to it.
Basically, if you want to change the rules of Monopoly so the game ends with EVERYONE owning some hotels, this is how you do it.
But you cannot, cannot set the deduction too low. People depend on investments for their retirement. You can't destroy that.
...
Now I back off from my confident-sounding rhetoric. Is this actually true? What effects would this have on investment and corporate governance? Would it create a giant market for cryptocurrency? For perk-based compensation? I'm curious what second-order effects I have overlooked.
I do this with my 401ks and IRAs and Roth products too and unlike my non-profit entities in the 501 tax section the big trouble with the 400 tax section is that you cant do in-kind contributions
So you cant contribute assets you have to contribute cash and then buy the assets, whereas with nonprofits you can also contribute assets directly
This is just a small administrative hurdle, when you have contractual authority over an organization you can write options agreements and other grants that your 400 section tax deferred entity can afford. Self directed 400 section entities are typically formed as trusts, so it is easy to interact with them as distinct investors even if you are signing both sides of every contract.
I think its funny in the article where the person quoted said they were “in favor of change” to the tax code. Add in kind contribution to tax deferred products like 401ks and IRAs!
Why did ProPublica omit exactly when the funding round for additional millions was in tweet 10 and 11?
> 10/ So.
>Right pointing backhand index IRS records show that in 1999 Thiel purchased 1.7 million shares of his startup, which would soon become PayPal, for just $1,700 — a tenth of a penny per share.
> 11/ Even though Thiel's startup received millions in funding within months, Pensco still told the IRS these founders' shares were worth less than $1,700 at the end of 1999.
>See where this is going?
The only reason I can think of is ProPublica intended to suggest Thiel committed fraud by misstating the company’s valuation in 1999, but ProPublica wants to maintain plausible deniability because the funding round did not happen in 1999.
It is great that ProPublica is pointing out how tax deductions/exemptions/credits allow for loopholes to exist, but I do not see a reason for them go after specific people for using them.
The lawmakers are quite literally the same people who advise rich people on taxes.
The funniest thing I ever saw was an African civil servant who had gone private now telling foreign companies how to fuck the government he used to work for.
A language that can be near completely specified by a stack of 2D grammars of increasing abstraction.
Binary notation is a general purpose syntax in 1 dimension. There exists a 2D general purpose syntax, where you not only have columns but all rows, and from there you can build abstractions from binary to numeral systems to letters to words to structs to systems.
Sounds intriguing - do you have any links for further reading. I’m into “weird” paradigms like array based languages, lisps, prolog etc, but I’ve not heard of 2D
The fact that someone used a vehicle that limits your yearly contribution to $5500 a year to amass $5 billion is worth investigating. The investment return needed for that is close to 60% annually, an inconceivably high rate of return for any long period of time.
I mean, considering no-one has achieved that rate of return (in the public markets) with compounding ever, that's probably a fair observation. The closest was the Medallion Fund, but that's a non-compounded return at $10B AUM.
But also somewhat irrelevant as the main point of the article focuses on that first investment ($2K -> $33M in 2-3 years via private Paypal shares).
I have no skin in the game but "in the public markets" is a very key part of this discussion. If he did purchase his stock allocations from founding PayPal (regardless of of if this was legal) this would have not been in the public market. This is an extremely high risk time and money investment that could have been worth $0 the next day. This is why a lot of people end up trying to start a startup. To get huge financial gains for themselves.
Yes, this is what is being criticized. Other investors have no ability to do this, and there is little to know what to verify that the stock that was purchased was actually fairly evaluated. If it wasn’t then he was able to invest far more money tax free than should be allowed.
I'm not quite sure I follow. Most people who work for a startup (<10 people) and receive stocks get a similar deal. I've had to buy exercise options at previous companies. I also know people who have had options for $0.10/share for stocks that were then trading at $1.00/share after IPO.
If I worked at a startup pre-Series A, I got 1000 shares at $0.001/share, and then 1 year later they got a Series A and my shares became valued at $0.01/share, and then in a few more years we IPO'd and my shares became worth $100/share the IRS shouldn't have the ability to say "woopsie, yea, you actually paid too little taxes because that company that succeeded was actually worth way more than we expected back when it looked like it was going to fail"
That's just my opinion. I'm not sure if I'm misunderstanding something here. A startup is a high risk prospect. If you buy shares of a startup you're essentially putting money into a shredder in hopes that people pay you a bunch of money to play with the confetti. When a pre-Series A startup offers me "$50k/year in stock options" I instantly value that at $0/year in income mentally because there's no guarantee for any return. Its like options trading penny stocks.
Sure, start ups are insanely risky, but that doesn't mean stock in them can't be incredibly undervalued, and often is. Any tax incentivized investment plan, that allows investment in private companies, whose worth is going to very difficult for the government to judge, given there is a lack of public bids on them, is ripe with opportunities for fraud.
> "Person uses retirement account to save money for retirement."
... with a few extra "twists" that utterly subvert the intention of the Roth IRA, making it possible to accumulate an astronomical dynastic fortune without having to pay taxes on it like normal people.
The intent of ProPublica's entire series of articles is to imply that wealthy Americans are immorally building their wealth. They are taking advantage of the fact that the public doesn't have basic financial literacy to turn the public against wealthy Americans and some of our most important systems in America (Entrepreneurship, Joint-stock companies, etc).
Thiel bought a lotto ticket in his Roth IRA, after which he invested the earnings into other high-risk ventures which also worked out.
It is fascinating how the ProPublica articles are redistributed in mainstream media (BBC, CNN, etc) even though they are obviously wrong, biased and even based on stolen private data.
The big argument was whether it was a true lotto ticket (say buying Bitcoin at 1 cent, where everyone accepts it's valued at 1 cent), or whether it was actually self dealing (real best-estimate value of shares was maybe $0.10 a share, and he bought in IRA for $0.001 a share). That means the true value of his IRA "contribution" becomes $170,000 instead of $1,700, which is clearly tax evasion.
Still a lotto ticket, but that first transaction becomes a lot less innocent.
I have basic financial literacy, and found that article insightful and alarming. Maybe your political views coloured your dismissal of the article series and “the public”.
I don’t think tax shelters for retirement accounts were designed to let financiers such as Thiel and Romney buy undervalued promising lottery tickets from themselves or their buddies, or should be used as such.
I'm curious how he was able to get a Roth IRA in the first place. Apparently Roth IRA began in 1997 and there's a contribution limit if you make above a certain amount.Given that Thiel started "Thiel Capital Management" in 1996, I'm willing to bet he was above the earning limit.
Anybody can have a Roth IRA. Even if you're over the income limit for a Roth, you can still convert a traditional to a Roth IRA after you pay taxes on the amount. These conversions are pretty common and well known.
If you're reasonably wealthy and you start a firm, there's no problem just taking a smaller salary. It's a little bit surprising that the rules don't address this though. Why not just say Roth IRA is for people with net worth under some figure? Or as mentioned in the article, put a cap on the amount of tax exempt money?
Thats where I got the inspiration from for thinking about a lot of accounting differently. Financial engineering that people seem to neglect or be to scared of considering.
With him sometimes Bain Capital made separate share classes, and I think they would give massive dividends periodically to the separate share class that only the 401k investors at Bain Capital would receive. I think its a really great strategy!
Buffett should be doing that in Berkshire Hathaway for their employees instead of being sad about how much tax his secretary pays
Or, the government should change the tax code to not make this possible and make the advantages of doing this moot. People need to be taxed, and we shouldn't have a system which requires a bunch of extra paperwork just for people to avoid it.
These simplistic ideas are exactly why it never will happen
Roth versions of tax deferred accounts only exists because the government is an irresponsible spender and needed revenues. It made the contract with the people because its like a degenerate crack addict child scrounging for cash, in its case only to keep convincing international investors that it can slowly pay debt. Wow the contract worked and you just caught on 22 years later.
What is your issue with people making good trades in a tax deferred and tax exempt accounts? That it needs more revenues again? The government will be fine, international investors are content with its revenue sources. These kinds of accounts are already subject to massive penalties and even UBTI regulations
My issue is that as a society, we want a percentage of the wealth that is created to be democratically controlled. We can debate which percentage and how that should be acquired, but the end social contract is that part of all wealth produced has some democratic component to it. For the last 5 is that decades, we've had groups of people gradually trying to evade more and more of that responsibility, and we aren't going to produce a functioning society that way.
> That January, The Wall Street Journal reported that Mitt Romney, the former private equity executive running for the GOP nomination, had listed on a financial disclosure form that he had amassed an IRA worth between $20 million and $102 million. The story ran on the front page and launched waves of coverage in other publications. Romney had a traditional IRA, not a Roth. But how, people wondered, could the account have grown so large, given that the government imposed strict limits on how much money could be put into one of the tax-deferred accounts?
> Citing former company insiders and documents, the Journal reported that during Romney’s time as CEO at investment giant Bain Capital, executives there had effectively bypassed the contribution limits by putting extremely low-valued shares from private equity deals into their IRAs, then watching them balloon.
Am I missing something? He didn’t seem to do anything illegal.
This is the second article from ProPublica which:
- accuses people of doing something that is perfectly legal
- singles out one or two such people and exposes their private matters
Is that ok just because they are rich? There is another comment thread going on right now where people are absolutely furious that they are tracked for targeted ads. How would they feel if their tax info was displayed online for all to see?
There is an argument whether investing in securities that are non-public and have no official price (especially ones you have a controlling stake in) should be illegal (even if it isn't right now).
I think that's what the article is about. If he contributed $5000, bought bitcoin at 1 cent and had the same amount of money now, it would be a non-issue.
How has all this information form the IRS leaked? ProPublica seems to have accessed many of the richest American's tax data. Is this something one person could do? How many people have that kind of access?
An IRS insider leaked it, obviously. Super illegal and against the IRS culture, but now it's out there.
What's puzzling is how apparently selective the leaked material all is. ProPublica has all these very specific memos and tax return info about Thiel's Roth IRA, and yet, they are only aware of Thiel's long IRS mega-audit (and that he won 100%), and don't know that it was in fact all about auditing his use of the Roth IRA trick? (Or that Fortune reported about the Paypal mafia's use of the Roth IRA back in like 2009?) Very odd.
Not commenting on the morality of the leak but given the IRS has been gutted [0] over the years by those in power, perhaps this insider was sick of seeing the public narrative on taxes be completely different from what was happening privately.
Why do they have info about his Roth IRA anyway? That wouldn't be part of a tax record. Maybe it's from the audit?
(Similar issues came up when people wanted to see Trump's tax returns to find out "if he was really wealthy". They wouldn't show that. Of course they might show a lot of other things.)
Part of the article mentioned the IRA was disclosed in his application for New Zealand residency. So does NZ publish residency applications? Or was that also leaked?
Based on their claims of how they validated it by comparing the data with 60 some persons whos tax filings were public (e.g. politicans) it would be reasonable to assume that ProPublica received detailed tax records on a considerable fraction of all Americans. Certainly whomever collected the data had access to that.
I am sweating here the fact that I am making more than is allowed in order to contribute. Fidelity lets me, so I do, but someone like Thiel, of course, can find ways.
How in the f*k do you invest into startups with something that is not publicly traded anyway? Was PayPal over the counter? Why was it so cheap?
> How in the fk do you invest into startups with something that is not publicly traded anyway? Was PayPal over the counter? Why was it so cheap?*
He was one of the founders of Paypal. At that stage, the strike price of the shares would have been fractions of a cent. More importantly, the "fair market value" of the shares of a non-public company is what the board says it to be which pre-funding is whatever they choose. Post-funding, there's usually a floor set because outsiders (aka investors) have done some analysis.
Normal people pay X% tax on the difference between strike and FMV. (X varies based on a bunch of things.)
That's all Stock Options 101.
Normal people can take advantage of the situation by executing as soon as they have the strike price. That makes the difference $0 so any % of that is still zero. The risk is that the actual value of the shares could go to zero too.
The "loophole" with Thiel is doing it all with an IRA.. which legally anyone can do BUT it's complicated and requires a specific process.
I've followed RocketDollar the past few years because they help with that and document all of it properly.
You can invest in many asset classes in a Roth. You can buy a house. What I'm interested in is if Theil offered to invest $100 from his Roth at a $1,000 valuation with a handshake that he would then invest $1,000,000 at a $100,000,000 valuation. Or numbers that make more sense.
Of course, if you're not an accredited investor, you cannot invest in startups. The idea is you could not recover from a loss. So I have no idea why a Roth should be allowed to invest as an accredited investor.
The accredited investor rules irk me. Not because investing in startups is a good way to accumulate wealth, but because of the double standard. The government happily separates literally tens of billions of dollars from poor people every year through the lottery, why can't we let those people crowdfund interesting new ideas if they want to?
Blame scam artists. Before these rules were in place, scammers were taking people's life savings through shoddy investments. This happened often enough that people asked the government to step in to protect these people. And the "Accredited Investor" was born.
Maybe things would be better today if they revoked the rules. Or maybe they would be worse. But either way it exists for a reason.
And to be honest, $1MM is not a huge hurdle to overcome. Anyone looking to invest in risky ventures would be wise to accumulate a meaningful amount of wealth in order to shield them from the loss of capital they will very likely incur. Plus, there are ways around this in certain situations.
A better approach would be to address the reporting requirements that are preventing startups from going public earlier. Startups used to IPO a few years after founding, but now they are going for 10+years.
There is a secondary benefit in that it influenced people like me to save, invest, and work very very hard to get that status. I invested in one YC startup after achieving it and that felt like a major personal win.
However, the financial goal posts were set 20+ years ago should have been periodically updated for inflation.
Due to the long history of investment scams. The lottery takes large sums in aggregate, but doesn’t use high pressure sales tactics or let people easily place their life savings in it. Aka, it would take significant effort to buy 500,000$ worth of lottery tickets.
The lottery gives players a moment to fantasize about what it’d be like to be rich. I see no difference to buying a beer for a few moments of entertainment.
Obviously people can overdo gambling, but the same goes for beer.
You create an LLC that you invest in, that LLC then buys the house. Pretty much anything but (a) collectables or (b) S-Corps can be owned by a Roth the same way.
You cannot live in it, your family cannot live in it (for some level of closeness), nor can any of you even replace a broken window. But it's totally doable. You need a self directed Roth and paperwork done. You are allowed to do the paperwork yourself.
I think you can have houses that are bought for investment (e.g. rented out to others) but not a house you live in. You need IRA custodians that allow alternative investments.
If you're making direct Roth contributions over the limit, those are disallowed and may come back to bite you. It may be possible to recharacterize your already-done disallowed contributions as Traditional IRA conversions; I would talk with Fidelity or a tax advisor.
I push a button that says "Contribute", and it's fraud. Donald Trump buys land in New Jersey for $2 million to develop a golf course, the golf course is deep sixed by the town, he writes "$100 million loss because that is what it is worth in my opinion", and it's fine.
God forbid I make a few thousand dollars tax-free, let alone by accident.
I realized after the fact that I have been contributing above my income level - I was sort of aware I might have been out of the range but I never paid attention. The screens are nagging you about being at $0 contributions.
You should be very careful. There is another way to do this, it's called a backdoor Roth. Despite the sketchy name, it's perfectly legal and used in practice by millions of people. A simple way is to contribute $6,000 of post-tax money into a traditional Roth, then submit what is called a Roth conversion to convert the $6,000 into a Roth IRA account. Do this through the proper channels so all the documentation is there.
Anyone actually done this with normal stock options (NSO if it matters) and have advice? My understanding is that it might be achievable with Pensco as the IRA custodian but I'd be interested in hearing how it worked in practice
I’ve done it, you have to have executive authority over the issuing company to do it, as other directors and their legal counsel are too uninspired to do anything outside of the norm.
Your IRA is a legal entity and you can grant an option to it. It needs the cash to exercise it. Options can have shares at any price in them, such as discounted to nothing but it comes down to which consequences you care about. Making a potentially screwy 409a valuation isn't a big deal, but also avoided if done before other investors come in. Either way it can be a tolerable level of consequence.
Thiel then used the wealth amassed in his Roth to invest in other startups
How? I thought the whole point is you can't touch this money? Did he take on loans, promising to pay them back once he was 60?
In 2004, he provided Facebook's first large outside cash infusion, investing $500K. His Facebook shares would grow tax-free in his Roth.
I'm not sure I understand. Did he invest in FB and independently purchase shares (less than 2k pa) in his Roth? So the 500K was not the private purchase of shares?
Is this practice -- putting founder shares in a Roth IRA when they are worthless -- sort of standard practice? Is everybody doing it and Thiel just did it most successfully?
I don't think anyone is surprised to see rich people skipping taxes that the middle class is meant to pay. When you have a corruptible, centralised government, a political apparatus, mass media that let you convert money in manipulating large numbers of voters - the ones wielding more power will have more influence and will be able to shape society in a way that is convenient for them.
Thiel even admitted it:
> In an interview on the website Big Think, Thiel said the U.S. tax system has
> “fairness problems” in which “you have super rich people paying a lower rate than
> people in the middle or upper middle class.”
The only difference between the audience of this article and Thiel is in the way this problem should be addressed.
The article is obviously meant to push for the "tax the rich till there are no rich no more" narrative, Thiel instead thinks we need less government:
> The answer wasn’t taxing the rich more, he said, but “taxing the middle class and
> the upper middle class a lot less” and cutting their dependence on expensive
> programs such as Medicare and Social Security.
Founders shares are typically underpriced at a nominal value - which is why they’re tied by vesting agreements to continued employment at the startup. In effect, he was investing significantly more than 2k into his tax sheltered investment in PayPal - he was investing years of work at below market salary.
“Tax rules bar you from investing your IRA or Roth IRA in a business you control—such a “prohibited transaction” can render the IRA immediately taxable and possibly subject to penalties.”
Thiel and levchin, and probably many many others have certainly skirted the spirit of the Roth IRA.
Indeed. I'm surprised this is not a main part of the HN conversation. It concerns me that the IRS leaking personal financial information is not the main story.
They really should replace 401k (and 415(c)(1)(a)), 403b, 457, IRA, etc with just TSP-for-everyone. Don't make it contingent upon employer, and don't allow additional employer-sponsored tax-advantaged space.
The fact that someone working at a large tech company can put away around $70,000/yr into tax advantaged accounts is kind of insane. Not even including the crazy edge cases that come with private equity like this Thiel instance.
What people are missing here is the fact that Peter Theil is investing in new companies that go on to create thousands of jobs and billions of dollars in taxes every year. He risks his capital to create these new companies, and a lot of his investments go to zero. The next effect of this is that he's generating a lot more tax revenue for the IRS that he's saving from his Roth IRA.
Is it legal for a startup employee to purchase shares with their Roth? I understand that an officer in the company probably cannot, but if you're just an employee- does anyone know if that's permitted? I skimmed about half the comments section here, not sure if anyone answered this already.
If it is legal- pretty great deal for an employee either given RSUs or options to buy them this way, no?
“ buy a stake in a startup that has a good chance of one day exploding in value.”
the propublica people must be rich, if they can reliably identify these kind of startups - everything is easy in hindsight. They also missed the bit where thiel paid tax on the $2000, that he invested. The whole idea of retirement accounts is that you either pay the tax at the beginning, or you pay at the end.
I wonder why the Roth didn't include any sort of cap or maximum exemption? It seems like that would have been an easy safety to build in, like a stop-loss for the government to avoid intentional and unintentional abuse leading to tax shortfalls. The federal gift tax has a limit of $11.7 million, seems like a gift to your older self might be considered similarly.
> But Thiel doesn’t need a man-made island to avoid paying taxes. He has something just as effective: a Roth individual retirement account.
But Thiel doesn’t need a man-made island to avoid paying taxes. He has something just as effective: a very well-paid tax expert who knows the intricacies and complexity of the tax code that the politicians have created, and you don't.
It's not a zero sum game. This is such a misleading article. Contributions to a Roth IRA are made after the taxes were already paid. Sure, the money grows tax free, which is what such an IRA does. So what? When the money is distributed, taxes are paid. The only issue is that the writer is engaging in class warfare.
> It is most definitely an abuse of IRA's to shield from capital gains taxes this way. It was never meant to be used for this.
That is what an IRA is, a shield from capital gains. They are not meant just for people who lose money or whose investment growth is very low. It's meant for people who put money into them. It's wrong to blame the successful entrepreneurs, because they were successful.
You know that when he wants to use any of that money or when he has to take distributions that taxes will be paid, and those taxes will be higher compared to them having been paid along the way.
They wont be paid if he doesn't sell before 60. This will be completely untaxed. Thats the IRA abuse: its meant to be used tax deferred as a retirement scheme for a certain amount (6k a year) not for billions.
But because of its mechanics you would like to put your wildest shots into IRA's (say, option trading) because it has the highest expected value in case it goes up.
In the spirit of the program, there would be a cap to how much money will be shielded from capital gains tax.
> They wont be paid if he doesn't sell before 60. This will be completely untaxed.
I do understand this. I just disagree on this being an abuse of the vehicle. Active option trading from within the vehicle is separate and does seem like an abuse.
Seems like the fix here is to limit the types of investments that can be made in a RothIRA. Just allow publicly traded instruments.
The unfairness here is that Thiel was able to buy his founder shares using Roth dollars and that’s subject to abuse, since founder share costs can be set arbitrarily.
> 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.
What? Am I missing something or is that a horrible explanation of how this works? I still don’t understand how he used a Roth to shield 5 billion from taxes. I’m much more alarmed that he gets deals on startups that nobody else does. That hardly seems fair.
What happened is the resources put into this account were invested in highly successful things. If all investment accounts were this successful, society would be 10X or 100X or 1000X more wealthy.
I cannot put any money at all into a Roth IRA, despite making a decent but non-astounding IT salary (below the caps), because I'm an American living abroad who had the temerity to marry a foreigner and am stuck in "married, filing separately". I cannot use similar retirement plans in the country I live in, because no brokerage here wants to deal with non-rich people who are US citizens or have US income tax obligations (why I do not file jointly - at least one of us needs to be able to keep paying into a retirement account here!)
Words cannot express my contempt for Thiel, who is apparently still a citizen of the country I live in. I'm pulling for the Finanzamt, however they can swing it.
Does anyone know whether this kind of tax planning is available to today's startup investors? Are there any administrators which support this kind of illiquid investment?
Yes, Roth IRAs are quite simple as you can literally just have a stack of cash in your apartment labelled “Roth IRA” if you wanted to. All the reindeer games with IRAs are just so the accounting is hard to mess up, with separate usually electronic accounts.
1.7m shares of Paypal at .001 is worth 5B at the current share price of 295.
Obviously debatable whether you can mark shares of your own company / PE firm sponsor equity / etc at near zero in a tax sheltered vehicle. But if Thiel held shares in a personal account and borrowed against them he wouldn't have owed tax either, as unrealized capital gains are not taxed.
Buffett, Musk, Bloomberg, etc. all have the vast majority of their wealth in businesses they founded, and have subsequently paid de minimuis taxes relative to their net worth.
All have arguably made significant contributions to society and world at large, magnitudes higher than their net worth and taxes paid.
Let me guess, if you're being compensated billions in stock-based compensation, you can structure special funds and reroute that compensation to the Roth IRA?
Another example of fine financial engineering. Money from financial instruments (interest income, capital gains, etc) should be restricted in its use. That money should only be usable in purchasing real goods (not options) real products and real labor. By allowing investment gains to be used for further investment, we allow increasing demand for financial instruments to drive up their prices and attract even more money. Instead of building roads, schools and paying our teachers, we are using our money to 'buy more money', an abstraction that does not really benefit us.
Another sensationalist headline about people doing things that are not illegal. This article feels especially egregious since it is based on stolen IRS data.
The negativity here is misled. Thiel made investments in companies which he thought might one day be of enormous value to society. Their current valuations, and the size of his IRA, prove him right. We can thank early investors like Thiel for bringing this potential to fruition. And not only that, but Thiel has not consumed any of this well-earned wealth, instead leaving it untouched, hasn’t converted it into scarce goods and services, presumably because he didn’t see virtue in the gross materialism that consuming it would entail. These investments are heroic acts by Thiel.
In the sense that he developed his business acumen and foresight to an exquisite degree and was then able to take well-informed risks with his own resources that in the end produced a great outcome for society (and himself). Many people fail to develop their talents, or squander them, or are too over-cautious to use them, and they and society are the worse for it.
Good for him. I don't think this is a problem for a lot of reasons. First he didn't break any laws, second, US taxes are a waste anyway. They'll either be used to fight pointless wars, sent to special interests (See Pelosi's family), or used to fuel racial injustice with militarization of police. The only way out to is to stop feeding the beast.
Any IRA owner with more than 50 years of average family income ($3.5m) should be required to liquidate it. These are not tax shelters for the rich!
But seriously this is no different than if he owned the stock shares outright and he just chose never to sell those shares for 50 years he would pay no tax! It's how the rich have break to the system to favor Capital over labor!
Make a really good bet on a stock in your Roth that pops something like >10,000x.
In his case it was Paypal shares.
Then you have a massive tax-free investment shelter and you can be an angel investor for startups through it and seek out another >100x investment with it.
It helps a lot to have better information and be more plugged into the investment culture than your average person on the street reading the NYT and trying to sort out where to invest their 401k. It also helps to be a sociopath so that all you care about is returns.
There's a bit of an oversight here where the tax-free returns in a Roth shelter are completely unlimited, they probably should have been capped where massive windfalls became taxed some way, but rich people and those who carry water for them, would have flipped out.
The rich have defunded their police, the IRS has no resources to go after complex schemes like these. But they consider it out of bounds when poor people demand the street harrasment police be defunded.
Wow they sure try to sledgehammer the fact that thiel has a lot of money here with the first 3 paragraphs and visuals making sure that you understand that 5 billion is in fact a lot of money.
Sure, I absolutely think they should pursue it. I'm just saying, say the guy is rich once. You didn't even need to say it once, 95% of everyone reading knows very well that he is rich as hell. I don't need a visual to explain to me that 5 Billion is more than 30k
The propublica tax leak is monstrously fucked up and I'm constantly shocked at how little anyone seems to question the validity of using personal IRS records for reporting.
"I'm constantly shocked at how little anyone seems to question the validity of using self-reported evidence that shows our one-sided the US tax system is for reporting"
TLDR: Roth IRA is an account where when you put money into it, it can grow untaxed. It's not a loophole or anything, it's the sole reason this type of an account exists. It's like a regular bank account, but exempted from capital gains tax - in order to stimulate retirement savings.
Thiel - among others, I presume - used some of the money in this account to make some very successful investment. He didn't use any "loopholes" or tricks, except for the trick of knowing what to invest in and taking the risk. Now he has a lot of money in this account, due to his investments being successful.
This is off subject, but given that someone illegally leaked these tax returns on the richest, is anyone else not surprised we have heard zero about Trump's taxes? (I assume they are riddled with stuff like this)
Not his fault the tax rules are broken for the ultra-rich. They always have been throughout history...so I don't expect any changes.
If we tried, it would require regulation on how politicians can be compensated for the rest of their lives after taking office. Need to close the revolving door where politicians help out rich people/corporations while in office, then are compensated indirectly after leaving office.
Sure it is, not his alone, but the ultra rich bribe the government to make sure the rules are broken. They are all at fault. Any attempt to fix these things is stopped by the ultra rich. They have even put their own people on the supreme court! (see comments by the Koch brothers stating this explicitly)
>Not his fault the tax rules are broken for the ultra-rich.
This isn't some accidental software defect. The rich write these laws to their benefit. He's part of the class whose fault it absolutely is and considering his political position as a conservative, he advocates and helps keep up the corrupt system he benefits from directly, even if he didn't lobby for this specific tax regulation.
He’s a quasi libertarian that doesn’t trust the government with his tax money. What was expected? Further, if you know that’s what he think and it’s within the law, what are we doing here with this expose? It would be one thing if he was critical of other people for working within the law to avoid taxes and you caught him being a hypocrite but this is not that. If we are going to be critical here, it should be of whatever loop holes allow this.
He has no problem taking the government's money though. If he didn't trust the government, I would expect that he'd refuse to work with them on the grounds of not being able to trust them.
I believe that the parent is implying that Thiel doesn't trust the government to use his money prudently, not that the government is liable to cheat him out of a contract.
That's not really a double standard any more than taking a paycheck from google while using duckduckgo on your PC at home is a double standard.
Yes, this is what it was made for. I got mine up to $150,000 based on the annual increment and a few smart buy/sell.
I wish I had bought $50,000 Apple at $2, it would have turned into $25 million. A few like Thiel do better.
Want to hurt Thiel? Hurt us all is your only way.
Block options etc, so only trading shares can go in. No 'popcorn' shares that expand by 100 to one or more after they vest etc.
No, it isn't what it was made for. You're limited to a $2000 contribution. Claiming that the value of a share of PayPal was 1/10 of a cent was nonsense. He found a loophole, sure, but it's morally fraudulent even if legally allowed. To close the loophole, putting private shares into a Roth IRA should be banned because they have no true market price that indicates their worth.
> To close the loophole, putting private shares into a Roth IRA should be banned because they have no true market price that indicates their worth.
Why should they be banned? Everything has a price. IIRC, in a self-directed IRA you can put anything... paintings, gold, collectibles, houses. Why not random shares?
I see a huge problem here. Roth IRAs were made with certain guarantees. That some people would make outsized returns in a country of almost 400 million should be expected. Why do we find it necessary to then go and 'get our fair share'? Didn't we already set the rules? Why must we now change them since some guy got lucky?
Ideally, we should just say 'good job Mr Thiel', you held up your end of the bargain and we'll hold up ours. The deal was already struck. This is why no one trusts the American government.
Also, I'd point out that the roth IRA mentioned here is only nominally worth $5b. If he were to sell all the shares there would likely be a huge drop in price. Either way, what goes unmentioned is that the $5b wouldn't be taxed anyway if it was all in unrealized capital gains.
The transaction was dishonest from day one. Those shares were worth more than 1/10th of a cent each. Had he offered to sell them at that point (if he were willing to do so and legally allowed) he would have gotten far more than that. He (rather, the company that he controlled) just declared a value by fiat.
The stock had no true market price because there was no market: at that point, the shares could not be sold to outsiders, so there were no willing buyers or sellers to set a price.
> He found a loophole, sure, but it's morally fraudulent even if legally allowed.
Morality is relative. You can't legally police other people based on your personal morality. To me, morality is maximizing your self-benefit, so there's nothing wrong with what Thiel did. If other people disagree, then there are plenty of avenues to campaign for outlawing what he did.
$2000 hasn't been the contribution limit for almost 20 years. It's $6K now, but we could argue that it's still not enough.
Private companies that are raising money have a valuation on them done periodically ("409A valuation"), and this is what private stock options and common shares are based on. This is the IRS's own rules.
He basically bought those shares from himself, which is why he was able to set the price arbitrarily low.
The point of the Roth IRA is to encourage middle and lower class people to invest in their retirement by offering a tax incentive. But to avoid being abused by the rich the total yearly contribution limit is set very low. Thiel avoided this limit by simply selling himself a huge amount of stock for fractions of a penny on the dollar, knowing the actual price on the open market would be far higher. However, nobody can prove that the price of the private share would have been higher at the time because they weren't on a market.
It would be like if you were trying to avoid taxes by selling your 1,000 acre mansion to a LLC that you own for $1 and paying the tax on that $1. This doesn't work for real estate, but the Roth IRA system is not as sophisticated so you can get away with it.
>Claiming that the value of a share of PayPal was 1/10 of a cent was nonsense.
It was the valuation at the time and there is nothing illegal about that. You can invest your Roth in penny stocks or sub penny stocks today if you want.
The real question is if it was legal to purchase stocks in a company he also managed.
The only way that was a true valuation of the shares at the time would be if he were willing to sell those shares to someone else at that price ($0.001) at the end of 1999. If not, that's not true value, that's just accounting fraud.
For a valuation, there has to be a market and a market clearing price. If there is no market (no buyers and sellers), valuation is meaningless.
That's not how tax law works. When you found a company you buy founder's stock, with an initial valuation filed with the IRS and this is the value until the next qualified valuation event, where it may change. Share prices of $0.01 to $0.00001 are common. I guarantee that $0.001 was the founders share price filed with the IRS at company formation.
Sure, $0.001 is the value on paper (and under current law). The point is, it's exploitable (let's say I'm an Apple engineer, I start a new company and get a wink wink from some friends in high places who want to invest in my company doing X. I put in my founders stock into IRA in return for first dibs on placement for the investor - 1 year later company has valuation, my stock has risen many %%. Sure, I'm technically doing everything legally, but practically it's somewhat equivalent to insider trading + avoids taxes).
I would personally ban non-public investments in Roth IRAs. That way a debate about market value doesn't have to happen.
Congress doesn't write laws - people like Peter Thiel do. You sound like these billionaires are innocent virgins. "Oppsies, I made all these billions because the incompetent congress let me do it". Uh huh.
It's a pretty smart loophole but it's not like he came up with this. He has tax specialists for that. Now, it's probably not a good idea for loopholes like these to exist. Articles like these can certainly make a difference to close them. Although it's definitely not black and white, excluding private shares would be too broad imo but maybe a different mechanism to determine the value should be used.
More general I'd say Peter Thiel is both loved and hated and everything in between on HN, there is no real consensus.
Why would excluding private shares be too broad? What portion of non-super-rich IRA's do you think have private shares in them? Probably approaching zero, right? Do people really need private shares to be able to set up retirement accounts? People can buy private shares when they have access to do so, they just can't use their IRA for it.
I don't have any experience with the US tax system but where I live we have certain accounts that exclude private shares (and many other things). The main problem is valuing these shares correctly and if this can be done in an appropriate way I think it makes sense to not exclude them. For example... Private shares can be traded and are sometimes relatively liquid even though they're not public, in that case the trading price should be pretty representative of its real value.
I did not criticise Thiel at all, he did well. That said he did have the ability to capture the entire leap from option pennies into mature trading stock at many many dollars, and roll that over a few times.
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.