According to a new ProPublica report, Peter Thiel, one of Paypal’s founders, had $5 billion in a Roth IRA as of 2019, up from under $2,000 in 1999.
He allegedly utilised a self-directed Roth account, which allows you to invest in alternative assets such as private business shares or real estate that you wouldn’t normally be able to do with a conventional Roth.
Peter Thiel allegedly built a $90+ million tax-free Roth IRA.
The crazy part? The maximum amount you're allowed to contribute to a Roth is $6,000 per year.
Time for a thread 👇👇👇
— Pomp 🌪 (@APompliano) March 1, 2021
What a luxury it would be not to have to work for a living, right? So it’s never too early (or too late, for that matter) to begin thinking about retirement savings. In fact, the earlier you begin, the sooner you will be able to retire (or the wealthier you will be when you do). The Roth IRA is one of the greatest investment options available, and if you qualify, you should take advantage of it.
Traditional IRAs and Roth IRAs
Individual retirement accounts (IRAs) are tax-advantaged accounts where people can save and invest for their future.
Traditional IRA contributions are tax-deferred. You may deduct the money you save from your income each year, which means you won’t have to pay as much income tax today. When it comes time to withdraw the money in retirement, though, you will have to pay taxes.
The Roth IRA allows the growth of your money tax-free. Of course, you can’t deduct your contributions from your income as you can with a Traditional IRA, but you won’t have to pay taxes when you withdraw the money in retirement since you’ve already paid them.
Why is Roth IRA preferred?
Roth’s tax-free growth is one reason why so many professionals and private investors love it, but it’s not the only one. So let’s look at each of its benefits in more detail.
If you remove those profits at retirement, the money you make through investing is also tax-free in a Roth. As a result, the Roth is especially advantageous if you start while you’re young or at the start of your career. Your money will have more time to grow, and since you’ll be at a higher tax rate when you retire, paying taxes now will give you more bang for your buck. In addition, the amount of money you may put into a Roth depends on your income.
Roth’s tax advantage also protects you from future tax increases. Of course, it’s impossible to predict if the federal tax rate will climb in the future, but if it does, you’ve already paid taxes at a lower rate with your Roth.
How did Thiel do it?
Thiel appears to have sheltered his money in a self-directed Roth IRA. This account has the same tax advantages as a traditional Roth account, including tax-free growth and untaxed withdrawals. Still, it also allows you to invest in assets that are not available in traditional Roth accounts.
According to ProPublica, a self-directed Roth IRA may include investments like real estate or private business shares, which Thiel initially owned in his account in 1999 before PayPal became a publicly listed corporation.
Self-directed IRAs are generally only available through specialist custodians, rather than large financial organisations like Fidelity Products or Vanguard, which provide a wide variety of investments, including publicly traded equities, bonds, mutual funds, and the like.
Custodians of self-directed IRAs, on the other hand, have no control over the investments you make in your account.
Once the assets are in the account, you may sell them later — perhaps for a profit — and use the profits to buy new investments in the account, all while benefiting from the tax-free Roth status.
Even if a self-directed Roth IRA isn’t right for you, you can still benefit from the tax advantages by investing in a conventional Roth IRA.
Roth accounts can also assist you to avoid the uncertainty of where your tax rates will be when you retire.
If you have money in a conventional IRA or 401(k), it will be taxed when you remove it, and the rate you pay may be greater than it is now. Furthermore, during the lifetime of the original account owner, Roth accounts have no mandatory minimum distributions (amounts that must be given yearly after you reach the age of 72).
Thiel very likely would have had to pay capital gains taxes to federal and state authorities in California, where he lived at the time if he hadn’t used this strategy.
Why is Roth IRA popular?
The Roth IRA is popular for a reason: it offers a slew of benefits. However, a Traditional IRA still offers tax benefits, the most important of which is investing tax-deferred. If you’re planning on making a large purchase shortly, not paying taxes may help you get closer to your objective.
The essential thing is that you’re saving for retirement in the first place. There are a few advantages to the Roth, but none compares to achieving financial freedom.