The Unusual Tale of Peter Thiel’s Roth IRA

Categories : Financial, News
July 5, 2021

Not everyone starts a tech company and becomes a billionaire. But Peter Thiel did, after his 1998 startup Confinity became successful and valuable. Within 3 years of startup, the company was handling over $3 Billion in annual online payments from over 10 million commercial customers. His success was rewarded and in a novel and unusual manner. Because of his Roth IRA, it is forever tax-free.

In 2000, Confinity merged with, Elon Musk’s online banking site. It was used primarily by eBay. In June of 2001, Confinity became PayPal, which went public in 2002. On day 1 it gained 50%. When eBay bought PayPal in October of 2002, the company was valued at about $1.5 Billion.

Now, about Thiel’s Roth IRA. In 1999, he made a $2,000 contribution to his Roth IRA. Roth IRA assets are never taxed because contributions to the Roth IRA were made using already-taxed funds. In Thiel’s Roth IRA, he purchased 1.76 million shares of his startup company Confinity for $.001/each ($1,760.00). As success was achieved, his Roth IRA stock value rose, and because of Roth Account rules, will never be taxed.

While the average Roth IRA balance today is about $39,100, Thiel’s Roth is currently valued at about $5 Billion (9 zeros). Thiel’s account is exactly the same size as anyone else’s would have been, had they made the same investment when he did, and then let it grow tax-free. He has received no preferential treatment under the law. I should also note that he was audited by the IRS, and passed. Remember that, in an audit, the taxpayer (rather than the accusor) has the burden of proof. Thiel met the burden, and his Roth IRA was declared lawful.

What he has received is criticism from the likes of investigative website ProPublica. In a recent report created by them, they illustrate that a lot of rich people pay little or no taxes. The ProPublica report was based on illegally leaked tax returns for Jeff Bezos, Elon Musk, Warren Buffett, and the like. IRS claims to be looking for the leaker, who has committed several felonies. (As an aside, many of us believe that no one will ever be punished for the leaks.)

What’s the bottom line on those rich people’s returns? They didn’t pay taxes because they didn’t owe any. What a concept! Thiel’s tax-free wealth was due to the Roth IRA’s tax-free environment. Other wealthy people pay little tax due to untaxed capital gains on appreciated stock. Appreciated assets are only taxed upon being sold (so far, anyway).

Taxation rules are defined and codified in the U.S. Tax Code, written by some of the very people who complain about Thiel and other wealthy people. American class envy is at work once again, and some influential people want to change the rules because of Thiel. They want a piece of his enormous pie. Many apparently feel that they deserve it, for reasons I cannot comprehend.

Responses to the ProPublica report ranged from Thiel’s no response to Musk’s single question mark, to Bezos’ explanation that, while he believes the Tax Code needs changing, at his death 99.5% of his fortune will go to a combination of taxes and charities.

Here’s my take on all of this. Get over class envy, America. It doesn’t look good on you. If you care to speculate in your Roth, and if you hit a home run, good for you. A word to the wise in Congress; don’t make any Tax Code changes based on an individual, or even on a small group of people. It never works out well over time.

Van Wie Financial is fee-only. For a reason.