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.
"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 ?
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?
> 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.
> 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.
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.
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.
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 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.
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.
> 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.
> 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.
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.
- “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.
> 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.
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.
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.
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.
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.
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).
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.
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.
> 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.
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.
>> 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.
> 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.
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).
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.
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.
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.
> 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.
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.
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.
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.
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.)
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.
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?
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.
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.
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."
Readit News
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.
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.
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.
Sigh.
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 ?
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?
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.
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.
I would say it's exactly the opposite of intended. ROTH IRAs were never intended for professional investors to avoid taxes.
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.
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.
There's always a difference between intent and reality. A hammer can be used for many things other than hitting nails.
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.
Making those shares worth billions of dollars is left as an exercise for the reader.
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.
1 - https://www.investopedia.com/terms/b/backdoor-roth-ira.asp
You can have millions of liquid assets and not have any income and be eligible for income related thresholds.
You dont need to be taking advantage of net operating losses or charitable deductions for any of this.
To quote Daniel Ellsberg: the scandal isn't that they're breaking the law, the scandal is that what they're doing is legal.
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.
The "theft" here is the undervaluation of the shares with which he purchased at
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.
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- 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.
This is a tax dodge, just a legal one.
- “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!”
- “Of course, Mr Thiel, thank you, always eager to help, Mr Thiel.”
- “The pleasure is all mine, Mr Thiel. We are so fortunate, are we not?”
Here nothing abnormal or discounted occurred with the share price
The par value at formation time would have been that
> 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.
[1] https://www.documentcloud.org/documents/20971124-ted-weschle...
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.
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.
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".
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.
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.
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.
If the shares were really purchased below fair value, there's not much in the way of a defense of the activity.
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.
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.
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.
[0] https://www.propublica.org/about
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.
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.
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.
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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.
See John McAfee, Al Capone.
I've seen a lot of this lately too and it feels coordinated.
how did he get access to paypal shares that's <0.1$/share?
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.
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.
Ummmm that's called being an angel investor.
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%.
https://www.theatlantic.com/politics/archive/2012/09/whats-r...
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.
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Yes. The story is shaped and told to feed the "Capitalism and Wealthy People are Bad" narrative.
I think generally they inherit?
It's a robber baron period, not a dynastic wealth period.
I am not a lawyer so take it with a grain of salt and I am very probably wrong.
I expect if you have enough there, you could use the same sorts of schemes as other illiquid wealth.
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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).
It's just a super simple investment that succeeded because his startup won.
That's literally the market rate.
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)
(Source: https://www.law.cornell.edu/uscode/text/26/4975)
So the relatively plain language would almost certainly include anyone who's a co-founder involved in actively managing a company today.
This kind of blatant tax avoidance is going to end badly for our tax regime, which is likely to overcorrect.
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.
https://ritaus.org/how-to-avoid-prohibited-transactions/
It's also confusing. In their "do's":
> Don’t provide more than ministerial services (e.g., decision-making) to your IRA or IRA owned entity (e.g., no “sweat equity”);
But in the "Don'ts":
"Do consider using an IRA when you, a relative or friend starts a new business."
Here's another writeup around that provision by a CFP:
https://www.kitces.com/blog/self-directed-ira-prohibited-tra...
Key quote:
> "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.
Director && % must be satisfied simultaneously
The IRS enforces this and thats what they look for
Nobody else is able to interpret that part of the law to cause an action
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But Thiel did not own >= 50% of PayPal.
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?
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.
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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.
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.
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.
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.
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.
(Unclear whether the original law was written that way or whether this loophole was closed sometime after.)
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.
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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.
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.
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.
[0] https://dqydj.com/average-median-top-net-worth-percentiles/
[1] https://www.propublica.org/article/the-secret-irs-files-trov...
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.
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.
1. https://www.heritage.org/taxes/commentary/1-chart-how-much-t....
Rather that have the rich also pay 30%, don't you think that it would be better if you too have to pay 0%?
1. We have GOT to close some of these loopholes now that we know what they are and…
2. Someone should go to federal prison for this leak
We can’t undo what we now know about avoiding taxes and we cannot condone egregious invasions of privacy like this.
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.)
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.
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.
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.
Google "whistleblowing".
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.
Now if someone just sold the records to TMZ or something, that's a different conversation.
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.
This brings the knowledge everyone sort of knew and makes it common knowledge. That can have a powerful impact.
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.
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.
> 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?”
Whats the argument for being selectively harassed by leaking your sensitive financial details?
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.
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.
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).
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.
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.
How is what Thiel did an end around? He paid taxes on his contributions - https://www.hrblock.com/tax-center/income/retirement-income/...
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.
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.
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.
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).
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.
Would you say the same if someone used a Roth to buy Bitcoin when it was trading at pennies or Gamestop before it blew up?
What's wrong with having the right to invest in your own company? That company pays corporate income taxes. You pay income tax as an employee.
Also, everyone seems to forget Peter Thiel was part of the middle class when he did this...
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.
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How do you know that was below market rate? Startups generally begin with shares worth almost nothing.
Source?
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(edit: typo)
> 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 $139,000 to do that. That includes dividends and capital gains, so it's unlikely post-Paypal Thiel ever made that little. Pre-Paypal Thiel might have.
> Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value.
This might happen for post-Paypal Thiel. Definitely not pre. This is way easier said than done unless you have good access to deal flow (he does) and founders willing to pay for the privilege of having you as an investor vs. some random VC.
> Pay just fractions of a penny per share
You're not paying fractions of a penny per share for something that has a "good chance of one day exploding in value." This investment doesn't exist.
I'd love to see his specific investments. I have a feeling a handful from a specific time window made up the bulk his his returns.
He purchased shares of PayPal at 0.001 when he first founded it using his Roth IRA, it's all explained in the article.
> You're not paying fractions of a penny per share for something that has a "good chance of one day exploding in value." This investment doesn't exist
That's where the article alludes to something maybe slightly fraudulent, for him to have his PayPal startup at the beginning sell shares to himself at 0.001$, 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.
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.
Is there a reason trad -> roth doesn't work in this scenario?
Edit: Using a Roth as collateral is apparently prohibited under IRS rules 4975(c)(1)(B)
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.
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.
Sounds easy and straightforward.
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