Yes, this is what it was made for. I got mine up to $150,000 based on the annual increment and a few smart buy/sell.
I wish I had bought $50,000 Apple at $2, it would have turned into $25 million. A few like Thiel do better.
Want to hurt Thiel? Hurt us all is your only way.
Block options etc, so only trading shares can go in. No 'popcorn' shares that expand by 100 to one or more after they vest etc.
I did not criticise Thiel at all, he did well. That said he did have the ability to capture the entire leap from option pennies into mature trading stock at many many dollars, and roll that over a few times.
Congress doesn't write laws - people like Peter Thiel do. You sound like these billionaires are innocent virgins. "Oppsies, I made all these billions because the incompetent congress let me do it". Uh huh.
It's a pretty smart loophole but it's not like he came up with this. He has tax specialists for that. Now, it's probably not a good idea for loopholes like these to exist. Articles like these can certainly make a difference to close them. Although it's definitely not black and white, excluding private shares would be too broad imo but maybe a different mechanism to determine the value should be used.
More general I'd say Peter Thiel is both loved and hated and everything in between on HN, there is no real consensus.
Why would excluding private shares be too broad? What portion of non-super-rich IRA's do you think have private shares in them? Probably approaching zero, right? Do people really need private shares to be able to set up retirement accounts? People can buy private shares when they have access to do so, they just can't use their IRA for it.
I don't have any experience with the US tax system but where I live we have certain accounts that exclude private shares (and many other things). The main problem is valuing these shares correctly and if this can be done in an appropriate way I think it makes sense to not exclude them. For example... Private shares can be traded and are sometimes relatively liquid even though they're not public, in that case the trading price should be pretty representative of its real value.
No, it isn't what it was made for. You're limited to a $2000 contribution. Claiming that the value of a share of PayPal was 1/10 of a cent was nonsense. He found a loophole, sure, but it's morally fraudulent even if legally allowed. To close the loophole, putting private shares into a Roth IRA should be banned because they have no true market price that indicates their worth.
He basically bought those shares from himself, which is why he was able to set the price arbitrarily low.
The point of the Roth IRA is to encourage middle and lower class people to invest in their retirement by offering a tax incentive. But to avoid being abused by the rich the total yearly contribution limit is set very low. Thiel avoided this limit by simply selling himself a huge amount of stock for fractions of a penny on the dollar, knowing the actual price on the open market would be far higher. However, nobody can prove that the price of the private share would have been higher at the time because they weren't on a market.
It would be like if you were trying to avoid taxes by selling your 1,000 acre mansion to a LLC that you own for $1 and paying the tax on that $1. This doesn't work for real estate, but the Roth IRA system is not as sophisticated so you can get away with it.
$2000 hasn't been the contribution limit for almost 20 years. It's $6K now, but we could argue that it's still not enough.
Private companies that are raising money have a valuation on them done periodically ("409A valuation"), and this is what private stock options and common shares are based on. This is the IRS's own rules.
> He found a loophole, sure, but it's morally fraudulent even if legally allowed.
Morality is relative. You can't legally police other people based on your personal morality. To me, morality is maximizing your self-benefit, so there's nothing wrong with what Thiel did. If other people disagree, then there are plenty of avenues to campaign for outlawing what he did.
> To close the loophole, putting private shares into a Roth IRA should be banned because they have no true market price that indicates their worth.
Why should they be banned? Everything has a price. IIRC, in a self-directed IRA you can put anything... paintings, gold, collectibles, houses. Why not random shares?
I see a huge problem here. Roth IRAs were made with certain guarantees. That some people would make outsized returns in a country of almost 400 million should be expected. Why do we find it necessary to then go and 'get our fair share'? Didn't we already set the rules? Why must we now change them since some guy got lucky?
Ideally, we should just say 'good job Mr Thiel', you held up your end of the bargain and we'll hold up ours. The deal was already struck. This is why no one trusts the American government.
Also, I'd point out that the roth IRA mentioned here is only nominally worth $5b. If he were to sell all the shares there would likely be a huge drop in price. Either way, what goes unmentioned is that the $5b wouldn't be taxed anyway if it was all in unrealized capital gains.
The transaction was dishonest from day one. Those shares were worth more than 1/10th of a cent each. Had he offered to sell them at that point (if he were willing to do so and legally allowed) he would have gotten far more than that. He (rather, the company that he controlled) just declared a value by fiat.
The stock had no true market price because there was no market: at that point, the shares could not be sold to outsiders, so there were no willing buyers or sellers to set a price.
>Claiming that the value of a share of PayPal was 1/10 of a cent was nonsense.
It was the valuation at the time and there is nothing illegal about that. You can invest your Roth in penny stocks or sub penny stocks today if you want.
The real question is if it was legal to purchase stocks in a company he also managed.
The only way that was a true valuation of the shares at the time would be if he were willing to sell those shares to someone else at that price ($0.001) at the end of 1999. If not, that's not true value, that's just accounting fraud.
For a valuation, there has to be a market and a market clearing price. If there is no market (no buyers and sellers), valuation is meaningless.
That's not how tax law works. When you found a company you buy founder's stock, with an initial valuation filed with the IRS and this is the value until the next qualified valuation event, where it may change. Share prices of $0.01 to $0.00001 are common. I guarantee that $0.001 was the founders share price filed with the IRS at company formation.
Sure, $0.001 is the value on paper (and under current law). The point is, it's exploitable (let's say I'm an Apple engineer, I start a new company and get a wink wink from some friends in high places who want to invest in my company doing X. I put in my founders stock into IRA in return for first dibs on placement for the investor - 1 year later company has valuation, my stock has risen many %%. Sure, I'm technically doing everything legally, but practically it's somewhat equivalent to insider trading + avoids taxes).
I would personally ban non-public investments in Roth IRAs. That way a debate about market value doesn't have to happen.
> Yet, from the start, a small number of entrepreneurs, like Thiel, made an end run around the rules: Open a Roth with $2,000 or less. Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value. Pay just fractions of a penny per share, a price low enough to buy huge numbers of shares. Watch as all the gains on that stock — no matter how giant — are shielded from taxes forever, as long as the IRA remains untouched until age 59 and a half. Then use the proceeds, still inside the Roth, to make other investments.
I also 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.
They're not squirreling away $5B in a Roth IRA, they're squirreling away $2000 and putting it in an asset whose value grows from $2000 -> $5B. In theory someone who put Dogecoin in their Roth IRA in 2014 could do the same.
It would make sense to limit Roth IRAs to publicly-traded assets. If you're investing in securities that you need to be an "accredited investor" for (> $1M liquid net worth), that's not really a tool for the middle class.
The harm here isn't that he invested in startups, but that it's become such an insanely high profit that's now entirely shielded from taxes. What would preventing startup investments accomplish that a simple cap on shielded gains (let's say 10 or 20 million) wouldn't?
All the money coming into the Roth IRA is post tax money, whether it was cash or IRA conversion. Once in the Roth IRA, you can sell for a profit and rebuy different stocks without paying tax on that profit. Outside the Roth IRA selling for a profit would be a taxable event. Trading stale stocks for fresh new winners without paying the tax inbetween is an incredible advantage to growing your wealth.
That's the intended benefit of Roth IRAs though, even for middle-class investors. That you can buy & sell within them without paying capital gains tax.
It's not usually a huge problem in the public markets because they're extremely liquid, with generally symmetric information across all participants, and that liquidity makes it hard to generate extremely excessive investment returns except by luck. But private companies are illiquid, oftentimes with huge asymmetries of information, and that lets you generate 10,000%+ investment gains by happening to have an opportunity to invest in a rocket ship that other people can't get into.
There is no "spirit of that law", law is as written. If there is a spirit that the letter excludes, then it is the fault of the lawmakers - why shouldn't they face penalties instead?
There are many legal traditions in the world, and most of them (both by number, volume of territory, amount of people governed, etc) take the opposite approach.
Only a very narrow English line of black letter law that ascribes to the black letter above all else... and even in that system a completely twinned system of courts allowed for ethical adjustments to law through the courts of equity.
Most continental systems of law and currently standard constitutional constructions provide very clear, very codified release valves for situations in which the written law is bullshit. Which is often.
I'm not sure if it's bad that he invested in startups with that money. It's quite risky and if discourage it for that reason. If we implemented your proposal of capping the amount of shielded returns the problem would be gone. Most of this problem word be gone even with a very high cap in the tens millions.
On the other hand, are we optimizing for an edge case that gets media attention but is ultimately insignificant? Edge cases often make bad laws.
This isn't an edge case though. This is a common case. And it's frankly, a common abuse case. This stuff is famous for the being used by the Mitt Romneys and Pete Thiels of the world, but I know people who've bragged about doing the same thing on a much smaller scale. It just happens to work better the more money/influence one has.
All you need is a tax attorney and enough money to found a business to exploit this cheat. Start a business worth $5000, and move it into a Roth. Then shovel other investments into this new business and viola, you have a several million bucks parked in a tax-free, judgement-proof vehicle that can be passed onto your kids and grow until the end of the USA.
The longer we wait to fix this, the more it's going to distort our economy.
An asset cap is a simple solution and it hurts nobody who using this as an actual retirement vehicle. But there are other solutions as well that, again, don't hurt people who intend to take distributions in retirement but prevent abuse like this (minimum required distributions, like 401ks have); dissolution of the Roth upon transfer due to death of the owner, etc.
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.
Why did ProPublica omit exactly when the funding round for additional millions was in tweet 10 and 11?
> 10/ So.
>Right pointing backhand index IRS records show that in 1999 Thiel purchased 1.7 million shares of his startup, which would soon become PayPal, for just $1,700 — a tenth of a penny per share.
> 11/ Even though Thiel's startup received millions in funding within months, Pensco still told the IRS these founders' shares were worth less than $1,700 at the end of 1999.
>See where this is going?
The only reason I can think of is ProPublica intended to suggest Thiel committed fraud by misstating the company’s valuation in 1999, but ProPublica wants to maintain plausible deniability because the funding round did not happen in 1999.
It is great that ProPublica is pointing out how tax deductions/exemptions/credits allow for loopholes to exist, but I do not see a reason for them go after specific people for using them.
Wow they sure try to sledgehammer the fact that thiel has a lot of money here with the first 3 paragraphs and visuals making sure that you understand that 5 billion is in fact a lot of money.
Sure, I absolutely think they should pursue it. I'm just saying, say the guy is rich once. You didn't even need to say it once, 95% of everyone reading knows very well that he is rich as hell. I don't need a visual to explain to me that 5 Billion is more than 30k
I am sweating here the fact that I am making more than is allowed in order to contribute. Fidelity lets me, so I do, but someone like Thiel, of course, can find ways.
How in the f*k do you invest into startups with something that is not publicly traded anyway? Was PayPal over the counter? Why was it so cheap?
You can invest in many asset classes in a Roth. You can buy a house. What I'm interested in is if Theil offered to invest $100 from his Roth at a $1,000 valuation with a handshake that he would then invest $1,000,000 at a $100,000,000 valuation. Or numbers that make more sense.
Of course, if you're not an accredited investor, you cannot invest in startups. The idea is you could not recover from a loss. So I have no idea why a Roth should be allowed to invest as an accredited investor.
The accredited investor rules irk me. Not because investing in startups is a good way to accumulate wealth, but because of the double standard. The government happily separates literally tens of billions of dollars from poor people every year through the lottery, why can't we let those people crowdfund interesting new ideas if they want to?
Due to the long history of investment scams. The lottery takes large sums in aggregate, but doesn’t use high pressure sales tactics or let people easily place their life savings in it. Aka, it would take significant effort to buy 500,000$ worth of lottery tickets.
The lottery gives players a moment to fantasize about what it’d be like to be rich. I see no difference to buying a beer for a few moments of entertainment.
Obviously people can overdo gambling, but the same goes for beer.
There is a secondary benefit in that it influenced people like me to save, invest, and work very very hard to get that status. I invested in one YC startup after achieving it and that felt like a major personal win.
However, the financial goal posts were set 20+ years ago should have been periodically updated for inflation.
Blame scam artists. Before these rules were in place, scammers were taking people's life savings through shoddy investments. This happened often enough that people asked the government to step in to protect these people. And the "Accredited Investor" was born.
Maybe things would be better today if they revoked the rules. Or maybe they would be worse. But either way it exists for a reason.
And to be honest, $1MM is not a huge hurdle to overcome. Anyone looking to invest in risky ventures would be wise to accumulate a meaningful amount of wealth in order to shield them from the loss of capital they will very likely incur. Plus, there are ways around this in certain situations.
A better approach would be to address the reporting requirements that are preventing startups from going public earlier. Startups used to IPO a few years after founding, but now they are going for 10+years.
I think you can have houses that are bought for investment (e.g. rented out to others) but not a house you live in. You need IRA custodians that allow alternative investments.
You create an LLC that you invest in, that LLC then buys the house. Pretty much anything but (a) collectables or (b) S-Corps can be owned by a Roth the same way.
You cannot live in it, your family cannot live in it (for some level of closeness), nor can any of you even replace a broken window. But it's totally doable. You need a self directed Roth and paperwork done. You are allowed to do the paperwork yourself.
If you're making direct Roth contributions over the limit, those are disallowed and may come back to bite you. It may be possible to recharacterize your already-done disallowed contributions as Traditional IRA conversions; I would talk with Fidelity or a tax advisor.
I push a button that says "Contribute", and it's fraud. Donald Trump buys land in New Jersey for $2 million to develop a golf course, the golf course is deep sixed by the town, he writes "$100 million loss because that is what it is worth in my opinion", and it's fine.
God forbid I make a few thousand dollars tax-free, let alone by accident.
I realized after the fact that I have been contributing above my income level - I was sort of aware I might have been out of the range but I never paid attention. The screens are nagging you about being at $0 contributions.
> How in the fk do you invest into startups with something that is not publicly traded anyway? Was PayPal over the counter? Why was it so cheap?*
He was one of the founders of Paypal. At that stage, the strike price of the shares would have been fractions of a cent. More importantly, the "fair market value" of the shares of a non-public company is what the board says it to be which pre-funding is whatever they choose. Post-funding, there's usually a floor set because outsiders (aka investors) have done some analysis.
Normal people pay X% tax on the difference between strike and FMV. (X varies based on a bunch of things.)
That's all Stock Options 101.
Normal people can take advantage of the situation by executing as soon as they have the strike price. That makes the difference $0 so any % of that is still zero. The risk is that the actual value of the shares could go to zero too.
The "loophole" with Thiel is doing it all with an IRA.. which legally anyone can do BUT it's complicated and requires a specific process.
I've followed RocketDollar the past few years because they help with that and document all of it properly.
You should be very careful. There is another way to do this, it's called a backdoor Roth. Despite the sketchy name, it's perfectly legal and used in practice by millions of people. A simple way is to contribute $6,000 of post-tax money into a traditional Roth, then submit what is called a Roth conversion to convert the $6,000 into a Roth IRA account. Do this through the proper channels so all the documentation is there.
Thats where I got the inspiration from for thinking about a lot of accounting differently. Financial engineering that people seem to neglect or be to scared of considering.
With him sometimes Bain Capital made separate share classes, and I think they would give massive dividends periodically to the separate share class that only the 401k investors at Bain Capital would receive. I think its a really great strategy!
Buffett should be doing that in Berkshire Hathaway for their employees instead of being sad about how much tax his secretary pays
Or, the government should change the tax code to not make this possible and make the advantages of doing this moot. People need to be taxed, and we shouldn't have a system which requires a bunch of extra paperwork just for people to avoid it.
These simplistic ideas are exactly why it never will happen
Roth versions of tax deferred accounts only exists because the government is an irresponsible spender and needed revenues. It made the contract with the people because its like a degenerate crack addict child scrounging for cash, in its case only to keep convincing international investors that it can slowly pay debt. Wow the contract worked and you just caught on 22 years later.
What is your issue with people making good trades in a tax deferred and tax exempt accounts? That it needs more revenues again? The government will be fine, international investors are content with its revenue sources. These kinds of accounts are already subject to massive penalties and even UBTI regulations
My issue is that as a society, we want a percentage of the wealth that is created to be democratically controlled. We can debate which percentage and how that should be acquired, but the end social contract is that part of all wealth produced has some democratic component to it. For the last 5 is that decades, we've had groups of people gradually trying to evade more and more of that responsibility, and we aren't going to produce a functioning society that way.
> That January, The Wall Street Journal reported that Mitt Romney, the former private equity executive running for the GOP nomination, had listed on a financial disclosure form that he had amassed an IRA worth between $20 million and $102 million. The story ran on the front page and launched waves of coverage in other publications. Romney had a traditional IRA, not a Roth. But how, people wondered, could the account have grown so large, given that the government imposed strict limits on how much money could be put into one of the tax-deferred accounts?
> Citing former company insiders and documents, the Journal reported that during Romney’s time as CEO at investment giant Bain Capital, executives there had effectively bypassed the contribution limits by putting extremely low-valued shares from private equity deals into their IRAs, then watching them balloon.
I do this with my 401ks and IRAs and Roth products too and unlike my non-profit entities in the 501 tax section the big trouble with the 400 tax section is that you cant do in-kind contributions
So you cant contribute assets you have to contribute cash and then buy the assets, whereas with nonprofits you can also contribute assets directly
This is just a small administrative hurdle, when you have contractual authority over an organization you can write options agreements and other grants that your 400 section tax deferred entity can afford. Self directed 400 section entities are typically formed as trusts, so it is easy to interact with them as distinct investors even if you are signing both sides of every contract.
I think its funny in the article where the person quoted said they were “in favor of change” to the tax code. Add in kind contribution to tax deferred products like 401ks and IRAs!
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 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.
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.
You simply have more investible dollars to use. Therefore any losses can be spread across a larger base, or, alternatively, you have potentially more gains available to you as a result of more exposure.
more investments over a greater pool of assets, chasing returns, also increase your surface area of error. Examples abound.
There's a reason its easy for funds to get big with a small LP commitment round, and there's also a reason most funds close after hitting certain numbers, increasing the AUM means increased complexity, and thus, potential implosion.
The real world bears many examples of growing AUM portfolio that blew up past a certain size.
There's no counterexample that I know of , of a fund with a consistent growth pattern that started small, hit size, and then increasing further their size with the same trajectory from having more investment dollars to use.
Agreed - though the numbers in the Thiel Roth aren't at that level of scale. Therefore having more money to invest in the market allows for an advantage.
From your statement I can't tell if you think that having more after tax money is a benefit or a drawback for Thiel's investments.
Also at higher AUM VC you have the Softbanks (and now every major VC firm that needs to compete at that level or be left in the dust)
Taxes drive a lot of investment strategies. A large number of strategies to increase returns are things like tax loss harvesting, because every sale forces a taxable event that is going to reduce your total capital base. Not being taxed obviates all of that and opens up a number of opportunities.
I 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.
> 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.
Seems fairly equivalent to funding a new building at a university that is already mostly populated by rich kids, who by and large are doing things less useful to society than building a decentralized computing platform used around the world.
Although I'm a pretty huge skeptic of the performance of the thiel fellowship (knowing some fellows personally and also knowing some of the showrunners), I don't think calling it a rich kid's club is fair, with the exception of Austin Russel.
I was calling universities a rich kid's club (esp. the ones that get the most gifts from the megarich). Trying to make the point that, while the Thiel Fellowship may not be objectively "good", it seems at least as good or better than the OC's suggestion that it is preferable for the megarich to fund things like universities.
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.
Most people are barely aware of crypto, let alone the negative effects of it. Once people become more informed, hopefully more and more people will see what a plague on society it is.
The people who have that specific stance on crypto are usually those who know just enough to have to form an opinion but not enough to realize how little they know.
If you are going to make a point against Ethereum, I recommend this: It encourages scams, gambling addiction, people losing money accidentally, and the usual criminal activity associated with crypto.
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.
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."
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?
Right, so this is an example of journalism that reduces people’s trust. Or at least it did mine with regards to ProPublica, which I had previously held in higher regard.
You're also not allowed to put ISOs or anything "earned" into a Roth IRA (or buy it from yourself).
The problem here is that this was clearly a prohibited transaction, but the IRS state of limitations is effectively 3 years for stuff like this (unless you have really pissed someone off). It's likely that by the time the stock was worth enough (in terms of 409A guesstimate) to look in to, or there was any kind of reportable transaction showing a gain, the time frame on investigating the initial transaction was long past.
> IRS records show that in 1999 Thiel purchased 1.7 million shares of his startup, which would soon become PayPal, for just $1,700 — a tenth of a penny per share
> Even though Thiel's startup received millions in funding within months, Pensco still told the IRS these founders' shares were worth less than $1,700 at the end of 1999.
Under certain circumstances, there is no statute of limitations. If Pensco did knowingly misrepresent the value of the shares, and if the funding round did imply a wildly different valuation, IRS could still pursue the case.
But I cannot fathom the cries of "IRS Pursuing Investigation against a single Tax Transaction from 20 years ago against vocal Trump supporter" would go over well.
> The problem here is that this was clearly a prohibited transaction
I have been unable to find any source for this claim. Even ProPublica, the people with the original documents and the most incentivized to break the news, do not claim this.
IRAs can be shareholders in anything. They can be 100% shareholders as well. They can even form their own companies from the beginning.
Being a minor shareholder in a corporation isn't a prohibited transaction or run afoul of self dealing regulations.
Even in circumstances that they would, you having less than X% of voting shares mitigates that, the X depending on what type of tax deferred or exempt entity is in question. SOME tax deferred/exempt entities have stricter self dealing regulations and even they wouldnt have had an issue here as Peter Thiel was one of several co-founders.
But if you work for a company owned mostly by your Roth IRA, that's easily abused.
Suppose you're a consultant and your one-person consulting company is owned by your Roth IRA. You could deliberately draw a very small taxable salary, so that most of your work goes towards increasing the company's untaxed value in your IRA.
You're basically making your earnings tax free.
Obviously, your Roth IRA's company employing you at below market rate isn't a fair, arms length transaction.
>But if you work for a company <i>owned mostly by your Roth IRA</i>, that's easily abused.
As I understand it, you can't own a company that you(or a relative) own a controlling interest in with your IRA. I can see the sense in this because if own 20% the person(people) who own the other 80% have an incentive to make sure I'm not playing any kind of games with the finances.
In the case of Thiel, it seems like he took $2000 and made a moonshot investment in Paypal. At that point his investment could have just as easily went to $0 as it was to hit $5 billion. He took the risk, why shouldn't he have gotten the reward?
> He took the risk, why shouldn't he have gotten the reward?
And he should get the reward, minus capital gains tax.
This country provided an environment for that investment to turn into five billion. He couldn't have done the same thing in Somalia, or Vietnam, or Greece. Why shouldn't it reap its share?
Nearly everyone else pays their fair share of taxes.
He invested a tax advantaged $2000. If he had invested that $2000 in the S&P 500 in 1995 he would have a tax advantaged $25,000. He would have been out that tax advantaged $25,000 if paypal didn't take off. Instead he decided to make a much longer shot bet and for him it paid off.
I can understand adding legislation that would tax distributions on Roth IRA's for billionaires. Thiel would be fine if he had to pay taxes on that windfall.
I just think that it is a mischaracterization that he isn't paying his fair share of taxes. To me, it doesn't seem like he did anything wrong. He took advantage of a system that is accessible to everyone.
The issue is as far as people can tell he illegally invested 2000$ from an IRA. You’re not allowed to invest in a company with an IRA if:
an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10 percent or more of the yearly wages of an employer) of a person described in subparagraph (C), (D), (E), or (G)https://uscode.house.gov/view.xhtml?hl=false&edition=1994&re...
Being the CEO clearly qualifies. That said, the statute of limitations means you can often get away with things if they go unreported for long enough. It may be he’s currently in the clear.
> In 2011, Thiel caught the attention of the IRS. The agency launched an audit, tax records show. The records don’t spell out what the IRS was looking at or if it involved Thiel’s Roth. Whatever the case, the audit was closed years later and Thiel didn’t owe any more taxes, tax records show.
He was CEO of PayPal until 2002, which means in 2011 this would presumably be past the statute of limitations for many things. It’s unclear if this falls under Tax Fraud or not.
> That said, the statute of limitations means you can often get away with things if they go unreported for long enough.
What I find most interesting in regards to this is that by the time there was any reportable gain (2002 sale), and thus any reason it would even be looked at, the 3 year statute of limitations would be up on the initial prohibited transaction. Which is... interesting.
I think the problem is these IRAs were not designed to shield the super rich from taxes. It's meant to help the average person. Implemented properly it should have an upper limit, probably under a million dollars. Letting it grow to five billion tax free is a loophole that shouldn't exist and does not benefit society at large.
> IRAs can be shareholders in anything. They can be 100% shareholders as well. They can even form their own companies from the beginning.
> Being a minor shareholder in a corporation isn't a prohibited transaction or run afoul of self dealing regulations.
Yes, obviously, and is exactly how the real estate example I provided works. The IRA opened a company. Obviously it is a company in order to financially benefit the owner of the IRA. That's literally the whole point of investing, and is not what I am debating here.
It is different when you are then taking an active role in the day-to-day management and/or operation of that business, which is obviously what Thiel did at PayPal.
Oh by property that to you meant real estate, I didnt catch that
Peter Theil did not have 100% voting shares of Paypal, and if he did that went away very soon after with the other co founders and investors diluting him fast enough for it to satisfy IRS regulations.
That would work now as well, but it is also possible that it worked better 22 years ago as the IRS may have lacked clarity back then.
> Peter Theil did not have 100% voting shares of Paypal,
First, that's not the requirement.
> and if he did that went away very soon after with the other co founders and investors diluting him fast enough for it to satisfy IRS regulations.
Your argument here is "even if he made illegal investments into a tax-advantaged account that has set him up to not pay taxes on 50000000000 dollars, we should ignore it because if he made the investment later it wouldn't have been illegal".
By that logic let's just throw out insider trading laws. "Well if he made the investment after the information was public, it would have been fine"
> the IRS may have lacked clarity back then.
They didn't. It was still explicitly not allowed for a officer/director of a company, someone with a similar role, > 10% share-holder, etc to make investments like this with a Roth IRA.
Owning 3.5% after a acquisition by/merger with x.com, and raising $200M in funding is not anywhere near the same thing as owning 3.5% at the time of the Confinity founding (which is apparently why $0.001/share is valid?).
It doesn't matter if the ownership percentage changed quickly throughout the year of 1999
These kinds of sanctions are based on the result by time of reporting or audit, not by their mere action
and as we’ve already gone over, he very well may have chosen to pay a self reported penalty if his accountant’s tax software just spit out that additional number of $2000
>"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.
1. Thiel was not Mega rich, but he had money, he had worked as a lawer for a few years and managed his own venture capital firm. Either way, this is irrelevant as he met the income requirements to contribute to an IRA.
2. It very well may have been illegal, as mentioned in the top level post. The purchase price was the legal value, but using an IRA as a vehicle to invest in your own company appears be prohibited by IRA regulations. At the time, it was a purchase <$2000, and may not have been reviewed. If paypal was someone else's company, there would be no legal issue.
>The IRS would have come down on him with a hammer already
Part of my work is in financial investigations. The finances of large, multi-entity organizations are expensive to create, difficult to parse, and require extensive periods of time of trained, expensive staff to understand.
Assuming that 'things would have been caught' flies in the face of the fact that they almost never are. Accounting rules change frequently, software systems for logging information is changed, and records are lost. Emails have to be read in tandem with entries to understand the intentions.
Even in cases where we have confessions that someone has embezzled money, we often need to spend multiple weeks tracking down records to isolate when/where/how it occurred.
Even during audits, requests for records can be baked. 'Random' samples of given entries can just exclude the questionable ones.
I've appeared in front of federal tax courts in my practice, the game isn't fair - don't base your reasoning on the idea that it must be.
Easy. He doesn't own the company, shareholders do, and he happens to be a shareholder. If you work for Microsoft, can you buy Microsoft shares in your IRA? Yes. This is why the IRS can't do squat about this. It's completely legal. If he owned a controlling interest (>50%) things would have been different.
If you bought the property as part of an incorporated entity, it would be entirely legal for you to do work or be contracted by that entity.
It specifically sweeps in classes of people with responsibilities that are held by typical active co-founders: "(H) an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10 percent or more of the yearly wages of an employer) of a person described in subparagraph (C), (D), (E), or (G)"
Very difficult to a) be a cofounder with meaningful equity b) not do any work so this provision doesn't trigger c) keep your equity and d) have it be worth anything.
Oh that is interesting. This must get very complicated for officers or directors of companies in the S&P 500. Could you not buy index funds that hold shares of the company you work for?
They probably just have to buy the shares in taxable accounts.
Edit: misread this. I would be surprised if index/mutual funds are subject to the same rules because holders of an index fund don't own shares in any of the underlying securities.
I have to assume you're just feigning naivete here.
First, officers or directors of S&P500 companies are almost definitely above the income level to open a new Roth IRA.
Second, you're really grasping at straws here trying to trace a relatively minuscule investment through mutual fund in order to defend Thiel here.
Someone is saying "Bank robbers are bad because they steal other people's money" and you're sitting over here saying "Well technically when I pick up a penny on the ground, it's not mine. So it's basically the same thing. We have to find a solution that solves both problems at the same time".
I am trying to wrap my head around these rules regarding IRA transactions. I’m certainly not trying to defend Thiel here. Would you mind pointing me to what in my comment lead you to that conclusion?
Also I would be shocked if there aren’t directors at publicly traded companies making under 208,000 and are filing jointly in a single income household.
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.
>> 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.
Does anyone know whether this kind of tax planning is available to today's startup investors? Are there any administrators which support this kind of illiquid investment?
Yes, Roth IRAs are quite simple as you can literally just have a stack of cash in your apartment labelled “Roth IRA” if you wanted to. All the reindeer games with IRAs are just so the accounting is hard to mess up, with separate usually electronic accounts.
I'm curious how he was able to get a Roth IRA in the first place. Apparently Roth IRA began in 1997 and there's a contribution limit if you make above a certain amount.Given that Thiel started "Thiel Capital Management" in 1996, I'm willing to bet he was above the earning limit.
Anybody can have a Roth IRA. Even if you're over the income limit for a Roth, you can still convert a traditional to a Roth IRA after you pay taxes on the amount. These conversions are pretty common and well known.
If you're reasonably wealthy and you start a firm, there's no problem just taking a smaller salary. It's a little bit surprising that the rules don't address this though. Why not just say Roth IRA is for people with net worth under some figure? Or as mentioned in the article, put a cap on the amount of tax exempt money?
The intent of ProPublica's entire series of articles is to imply that wealthy Americans are immorally building their wealth. They are taking advantage of the fact that the public doesn't have basic financial literacy to turn the public against wealthy Americans and some of our most important systems in America (Entrepreneurship, Joint-stock companies, etc).
Thiel bought a lotto ticket in his Roth IRA, after which he invested the earnings into other high-risk ventures which also worked out.
It is fascinating how the ProPublica articles are redistributed in mainstream media (BBC, CNN, etc) even though they are obviously wrong, biased and even based on stolen private data.
The big argument was whether it was a true lotto ticket (say buying Bitcoin at 1 cent, where everyone accepts it's valued at 1 cent), or whether it was actually self dealing (real best-estimate value of shares was maybe $0.10 a share, and he bought in IRA for $0.001 a share). That means the true value of his IRA "contribution" becomes $170,000 instead of $1,700, which is clearly tax evasion.
Still a lotto ticket, but that first transaction becomes a lot less innocent.
I have basic financial literacy, and found that article insightful and alarming. Maybe your political views coloured your dismissal of the article series and “the public”.
I don’t think tax shelters for retirement accounts were designed to let financiers such as Thiel and Romney buy undervalued promising lottery tickets from themselves or their buddies, or should be used as such.
The fact that someone used a vehicle that limits your yearly contribution to $5500 a year to amass $5 billion is worth investigating. The investment return needed for that is close to 60% annually, an inconceivably high rate of return for any long period of time.
I mean, considering no-one has achieved that rate of return (in the public markets) with compounding ever, that's probably a fair observation. The closest was the Medallion Fund, but that's a non-compounded return at $10B AUM.
But also somewhat irrelevant as the main point of the article focuses on that first investment ($2K -> $33M in 2-3 years via private Paypal shares).
I have no skin in the game but "in the public markets" is a very key part of this discussion. If he did purchase his stock allocations from founding PayPal (regardless of of if this was legal) this would have not been in the public market. This is an extremely high risk time and money investment that could have been worth $0 the next day. This is why a lot of people end up trying to start a startup. To get huge financial gains for themselves.
Yes, this is what is being criticized. Other investors have no ability to do this, and there is little to know what to verify that the stock that was purchased was actually fairly evaluated. If it wasn’t then he was able to invest far more money tax free than should be allowed.
I'm not quite sure I follow. Most people who work for a startup (<10 people) and receive stocks get a similar deal. I've had to buy exercise options at previous companies. I also know people who have had options for $0.10/share for stocks that were then trading at $1.00/share after IPO.
If I worked at a startup pre-Series A, I got 1000 shares at $0.001/share, and then 1 year later they got a Series A and my shares became valued at $0.01/share, and then in a few more years we IPO'd and my shares became worth $100/share the IRS shouldn't have the ability to say "woopsie, yea, you actually paid too little taxes because that company that succeeded was actually worth way more than we expected back when it looked like it was going to fail"
That's just my opinion. I'm not sure if I'm misunderstanding something here. A startup is a high risk prospect. If you buy shares of a startup you're essentially putting money into a shredder in hopes that people pay you a bunch of money to play with the confetti. When a pre-Series A startup offers me "$50k/year in stock options" I instantly value that at $0/year in income mentally because there's no guarantee for any return. Its like options trading penny stocks.
Sure, start ups are insanely risky, but that doesn't mean stock in them can't be incredibly undervalued, and often is. Any tax incentivized investment plan, that allows investment in private companies, whose worth is going to very difficult for the government to judge, given there is a lack of public bids on them, is ripe with opportunities for fraud.
> "Person uses retirement account to save money for retirement."
... with a few extra "twists" that utterly subvert the intention of the Roth IRA, making it possible to accumulate an astronomical dynastic fortune without having to pay taxes on it like normal people.
Indeed. I'm surprised this is not a main part of the HN conversation. It concerns me that the IRS leaking personal financial information is not the main story.
Thiel then used the wealth amassed in his Roth to invest in other startups
How? I thought the whole point is you can't touch this money? Did he take on loans, promising to pay them back once he was 60?
In 2004, he provided Facebook's first large outside cash infusion, investing $500K. His Facebook shares would grow tax-free in his Roth.
I'm not sure I understand. Did he invest in FB and independently purchase shares (less than 2k pa) in his Roth? So the 500K was not the private purchase of shares?
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.
How is there a market rate if his startup was not publicly trading?
The nominal value of the shares in my startup are £0.01. Sure, that's not what we've sold shares for, but the price we have sold them for was purely what the buyer was willing to pay for them.
So, I was reading into this a bit recently after getting an equity offer (also in the UK). The "fair market value" is open to interpretation, but if the inland revenue come calling, you need to be able to explain it. For a startup with no assets that has not previously sold shares, £0.01. Is just fine. But if you've got assets, or you've previously sold shares as more than that, then quite clearly the market value is more than a penny.
I mean, what better definition of "fair market value" is there than "what the buyer was willing to pay for them"?
The Roth IRA is not suppose to be a tax shelter for people to get super rich off their own creations. You are not getting a reduced priced Bitcoins or Gamestop stock. You are gambling with your own funds based on information that everyone else has and paying the same price as anyone else. If you get Bitcoins and/or Gamestock at a reduced price, then you are abusing the Roth IRA and the IRS should stop and fine you.
Would Thiel have been willing to sell his shares to someone else at $0.001 at the time he put them into the IRA? Because that's ultimately what market value is about.
It's also one of the valuation proposals for people playing valuation games with illiquid assets. You can declare them at whatever value you want (and pay tax on that value), but you are forced to sell if someone offered you that value for the asset (if you claim your house is worth $1M, we'll let you pay property tax on $1M, but if someone offers you $1.1M for your house, you're forced to sell). That would cut down on people inflating/deflating asset valuations to game tax codes.
What happened was Thiel buying 1.7M shares of stock in his own startup at a value of $0.001 per share in 1999 in his Roth IRA (and then cashing out for $30M+ in 2002). It's debatable whether it was legal (because he was an officer/director of the company and that law is on the books), but the better question would be - should it have been illegal, and the answer to that, in my opinion, is a resounding yes.
I believe non-public investments should be banned from Roth IRAs (and that we should close all of the backdoor loopholes to them as well). They were meant for a certain group of people at the outset and were then twisted around in knots to provide more tax-breaks for the well-off (which should be rolled back). I think mega backdoor Roth should not be a thing, rollover Roth IRA should not be a thing - bring Roth back to it's original vision.
>It's debatable whether it was legal (because he was an officer/director of the company and that law is on the books)
I am interested in finding out the answer to this, as others have posted in this thread the text of the law which makes it seem like he should not have been able to, and what reasoning could possibly have made it legal.
You won't find the answer, because you're innocent until proven guilty. The laws are not formally defined, it would need to go in front of courts, and then people could argue whatever interpretation and evidence they want to convince one way or another.
I think what's more clear is that it's clever and probably an unintended loophole, be it technically legal or not isn't so important. What matters in the end is a bunch of money didn't go to maintaining society's infrastructure, paying for military, and all that, instead money from other sources and other people's pockets was used. Do you care? Do we care? I think that's the more relevant dimension to think about and discuss.
The IRS apparently agreed with you. The article sloppily doens't doesn't give a year, but:
> The IRS, meanwhile, was floundering in its efforts to police retirement accounts. At one point the agency recommended Congress prohibit IRA accounts from buying investments that aren’t traded on a public market, such as founders’ shares. That went nowhere, too. Instead, Congress began slashing the IRS’ budget, kneecapping the agency for more than a decade.
> Would Thiel have been willing to sell his shares to someone else at $0.001 at the time he put them into the IRA? Because that's ultimately what market value is about.
Well... no. (Can't believe I'm defending Peter F-ing Thiel)
I might own some AAPL shares that I think are worth $1000/share--so I'm not willing to sell my AAPL shares for less than $1000 each. The market (today) thinks they are worth $133/share. Who is right?
Thiel might have really truly believed that his 2M shares would be worth a few billion dollars one day. But if you can't find anyone who is willing to buy them for that price, then it doesn't matter. The "fair market value" (what the IRS cares about) of those shares is not a few billion dollars. It doesn't become a FMV until you can find an arms-length buyer who is willing to buy the shares for that price.
You could pay someone to create an independent valuation of the shares--but for a brand new company that has no employees and no assets, not even IP, why would you expect the valuation to come back at much more than $2k?
> PayPal later disclosed details about the early history of the company in an SEC filing before its initial public offering. The filing reveals that Thiel’s founders’ shares were among those the company sold to employees at “below fair value.”
The article implies 0.001$ was below fair value based on PayPal's own declaration at the IPO. That's why.
In any case, I think this is unimportant, the important question is can a founder always transfer their owning shares into a tax advantaged Roth IRA? Does this make sense to permit?
If I start a company today and just buy my shares into my Roth IRA before I even write a single line of code or hire anyone, so that if my startup grows all my owning shares of it are tax exempt.
And if it does, to what extent? Should there be no cap?
In reality it's all just a political question, who should pay taxes, how much, and in what circumstances.
Articles like this I think help people understand and think through some of the edge cases around that, to better allow them to form an opinion on it.
I did, but I'm not sure I have enough information to conclude if what was done should be illegal/allowed or not, since this is based on various sections of leaked documents, but it's quite possible some bad things were involved. (One may remark that turning small investments into the many billions quickly clearly is a sign that foul play was involved, but recall that his original 10% stake in FB would be worth almost $100B today in less than 20 years. I do think he sold most of the stake long ago, though.)
TFA. Although I think they’re wrong on this account. It doesn’t matter that the stock was worth more mere months later when the cashed their investment checks.
But what is an issue is the self-dealing of buying shares in a company he holds a major role in the management of.
> 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).
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.
Their claim that the shares were below market value doesn't stack up. They did this when they founded the company, the company has no value at formation so it's fair priced. Just because they raised money a few months later doesn't mean it was worth anything at formation.
If you have knowledge that people want to inject money into your startup (and thus raising the value), then stuffing shares into a Roth IRA before a raise (that you know will happen) would surely be skirting the idea of fair-market value.
That very same year, there were two or three funding rounds, according to the article, for $0.5m and $4.5m. Yet at the end of the year, the shares in the Roth were reported to be worth less than the initial $1700.
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).
IMO the only thing he did "wrong" was to make excellent returns within the bounds of a tax vehicle and with investment classes that most of us are typically excluded (accreditation, VC exclusivity)
If we should be mad about anything it's that it's so difficult for the general public to get a good slice of diversification including the asset classes that turn 1000s into millions.
Yes we can go work at a startup, but that is all the eggs in one basket. Better to spread that risk around 10+ investments like VCs do
I agree. All the annoying animations and hyperbole in the article notwithstanding, it does not seem as malicious as the article tries to portray it. It is rather disappointing that there are barriers to some of these investments but I think without these barriers you would open the gates for all sorts of malicious actors taking advantage of unsophisticated investors.
I wonder if there are good VC firms that would let people participate in funds around the $1000 threshold? Like if I could give Garry Tan $1000 to just participate, no questions or interaction required just fill out the forms sign the check, see you in 10yrs... I know part of the issue is that many VCs have a high touch process for the people signing $100k checks, but maybe if they made it more streamlined they could generate more diverse investor base and just say to them "You wont hear from us, no you cant help, see you in 10yrs" kind of mentality.
They actually are opening up to unaccredited investors, you just need to have a CFP or CPA or something like that (not sure of the actual requirements, I just know that they recently changed them)
The change is that having one of those certs now makes you an accredited investor.
You don't have to be accredited to invest in something like a VC fund anymore using something like Wefunder. However it's extremely risky and generally painful to even find out if the thing you invested in 3 years ago even still exists.
I think the fraud to be found here is whether or not the purchases these IRA's made were made at fair value. Given the astronomical rates of return realized by some, not all, of these mammoth IRAs, you can probability establish such facts. Similar to Madoff's eternally steady fund returns being impossible.
A good litmus test would be, what is the rate of return of a person's investments made outside an IRA vs inside the IRA.
“When I was poor and complained about inequality they said I was bitter; now that I'm rich and I complain about inequality they say I'm a hypocrite. I'm beginning to think they just don't want to talk about inequality.”
Not his fault the tax rules are broken for the ultra-rich. They always have been throughout history...so I don't expect any changes.
If we tried, it would require regulation on how politicians can be compensated for the rest of their lives after taking office. Need to close the revolving door where politicians help out rich people/corporations while in office, then are compensated indirectly after leaving office.
Sure it is, not his alone, but the ultra rich bribe the government to make sure the rules are broken. They are all at fault. Any attempt to fix these things is stopped by the ultra rich. They have even put their own people on the supreme court! (see comments by the Koch brothers stating this explicitly)
>Not his fault the tax rules are broken for the ultra-rich.
This isn't some accidental software defect. The rich write these laws to their benefit. He's part of the class whose fault it absolutely is and considering his political position as a conservative, he advocates and helps keep up the corrupt system he benefits from directly, even if he didn't lobby for this specific tax regulation.
Anyone actually done this with normal stock options (NSO if it matters) and have advice? My understanding is that it might be achievable with Pensco as the IRA custodian but I'd be interested in hearing how it worked in practice
I’ve done it, you have to have executive authority over the issuing company to do it, as other directors and their legal counsel are too uninspired to do anything outside of the norm.
Your IRA is a legal entity and you can grant an option to it. It needs the cash to exercise it. Options can have shares at any price in them, such as discounted to nothing but it comes down to which consequences you care about. Making a potentially screwy 409a valuation isn't a big deal, but also avoided if done before other investors come in. Either way it can be a tolerable level of consequence.
1.7m shares of Paypal at .001 is worth 5B at the current share price of 295.
Obviously debatable whether you can mark shares of your own company / PE firm sponsor equity / etc at near zero in a tax sheltered vehicle. But if Thiel held shares in a personal account and borrowed against them he wouldn't have owed tax either, as unrealized capital gains are not taxed.
Buffett, Musk, Bloomberg, etc. all have the vast majority of their wealth in businesses they founded, and have subsequently paid de minimuis taxes relative to their net worth.
All have arguably made significant contributions to society and world at large, magnitudes higher than their net worth and taxes paid.
827 comments
[ 2.4 ms ] story [ 412 ms ] threadThe funny thing is, there is never any verbal defense - just downvotes.
However this seems quite shady. The rich should still have to pay taxes.
More general I'd say Peter Thiel is both loved and hated and everything in between on HN, there is no real consensus.
The point of the Roth IRA is to encourage middle and lower class people to invest in their retirement by offering a tax incentive. But to avoid being abused by the rich the total yearly contribution limit is set very low. Thiel avoided this limit by simply selling himself a huge amount of stock for fractions of a penny on the dollar, knowing the actual price on the open market would be far higher. However, nobody can prove that the price of the private share would have been higher at the time because they weren't on a market.
It would be like if you were trying to avoid taxes by selling your 1,000 acre mansion to a LLC that you own for $1 and paying the tax on that $1. This doesn't work for real estate, but the Roth IRA system is not as sophisticated so you can get away with it.
Private companies that are raising money have a valuation on them done periodically ("409A valuation"), and this is what private stock options and common shares are based on. This is the IRS's own rules.
Morality is relative. You can't legally police other people based on your personal morality. To me, morality is maximizing your self-benefit, so there's nothing wrong with what Thiel did. If other people disagree, then there are plenty of avenues to campaign for outlawing what he did.
Can you detail the immorality?
> To close the loophole, putting private shares into a Roth IRA should be banned because they have no true market price that indicates their worth.
Why should they be banned? Everything has a price. IIRC, in a self-directed IRA you can put anything... paintings, gold, collectibles, houses. Why not random shares?
I see a huge problem here. Roth IRAs were made with certain guarantees. That some people would make outsized returns in a country of almost 400 million should be expected. Why do we find it necessary to then go and 'get our fair share'? Didn't we already set the rules? Why must we now change them since some guy got lucky?
Ideally, we should just say 'good job Mr Thiel', you held up your end of the bargain and we'll hold up ours. The deal was already struck. This is why no one trusts the American government.
Also, I'd point out that the roth IRA mentioned here is only nominally worth $5b. If he were to sell all the shares there would likely be a huge drop in price. Either way, what goes unmentioned is that the $5b wouldn't be taxed anyway if it was all in unrealized capital gains.
The stock had no true market price because there was no market: at that point, the shares could not be sold to outsiders, so there were no willing buyers or sellers to set a price.
I love how this approach will just leave you surprised in the 2040s about what anybody with reading comprehension skills is doing in 2021
https://news.ycombinator.com/newsguidelines.html
It was the valuation at the time and there is nothing illegal about that. You can invest your Roth in penny stocks or sub penny stocks today if you want.
The real question is if it was legal to purchase stocks in a company he also managed.
For a valuation, there has to be a market and a market clearing price. If there is no market (no buyers and sellers), valuation is meaningless.
https://gust.com/launch/blog/how-to-value-startup-stock
I would personally ban non-public investments in Roth IRAs. That way a debate about market value doesn't have to happen.
If you make a smart or lucky in somebody else's company, bitcoin, or whatever, it isn't an exploit, it is the point.
This approach will just leave you surprised in the 2040s about what anybody with reading comprehension skills is doing in 2020s.
Also greater private equity access was just expanded in the tax code for tax deferred roth products. So the opposite is happening.
> 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.
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.
It would make sense to limit Roth IRAs to publicly-traded assets. If you're investing in securities that you need to be an "accredited investor" for (> $1M liquid net worth), that's not really a tool for the middle class.
It's not usually a huge problem in the public markets because they're extremely liquid, with generally symmetric information across all participants, and that liquidity makes it hard to generate extremely excessive investment returns except by luck. But private companies are illiquid, oftentimes with huge asymmetries of information, and that lets you generate 10,000%+ investment gains by happening to have an opportunity to invest in a rocket ship that other people can't get into.
Only a very narrow English line of black letter law that ascribes to the black letter above all else... and even in that system a completely twinned system of courts allowed for ethical adjustments to law through the courts of equity.
Most continental systems of law and currently standard constitutional constructions provide very clear, very codified release valves for situations in which the written law is bullshit. Which is often.
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.
All you need is a tax attorney and enough money to found a business to exploit this cheat. Start a business worth $5000, and move it into a Roth. Then shovel other investments into this new business and viola, you have a several million bucks parked in a tax-free, judgement-proof vehicle that can be passed onto your kids and grow until the end of the USA.
The longer we wait to fix this, the more it's going to distort our economy.
An asset cap is a simple solution and it hurts nobody who using this as an actual retirement vehicle. But there are other solutions as well that, again, don't hurt people who intend to take distributions in retirement but prevent abuse like this (minimum required distributions, like 401ks have); dissolution of the Roth upon transfer due to death of the owner, etc.
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.
Is there a reason trad -> roth doesn't work in this scenario?
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.
Sounds easy and straightforward.
> 10/ So.
>Right pointing backhand index IRS records show that in 1999 Thiel purchased 1.7 million shares of his startup, which would soon become PayPal, for just $1,700 — a tenth of a penny per share.
> 11/ Even though Thiel's startup received millions in funding within months, Pensco still told the IRS these founders' shares were worth less than $1,700 at the end of 1999.
>See where this is going?
The only reason I can think of is ProPublica intended to suggest Thiel committed fraud by misstating the company’s valuation in 1999, but ProPublica wants to maintain plausible deniability because the funding round did not happen in 1999.
It is great that ProPublica is pointing out how tax deductions/exemptions/credits allow for loopholes to exist, but I do not see a reason for them go after specific people for using them.
Edit: copied tweets for easy reference
How in the f*k do you invest into startups with something that is not publicly traded anyway? Was PayPal over the counter? Why was it so cheap?
Of course, if you're not an accredited investor, you cannot invest in startups. The idea is you could not recover from a loss. So I have no idea why a Roth should be allowed to invest as an accredited investor.
I also have seen that some Angel Investment firms will pay cost of accreditation from your fees to them.
Obviously people can overdo gambling, but the same goes for beer.
However, the financial goal posts were set 20+ years ago should have been periodically updated for inflation.
Maybe things would be better today if they revoked the rules. Or maybe they would be worse. But either way it exists for a reason.
And to be honest, $1MM is not a huge hurdle to overcome. Anyone looking to invest in risky ventures would be wise to accumulate a meaningful amount of wealth in order to shield them from the loss of capital they will very likely incur. Plus, there are ways around this in certain situations.
A better approach would be to address the reporting requirements that are preventing startups from going public earlier. Startups used to IPO a few years after founding, but now they are going for 10+years.
You cannot live in it, your family cannot live in it (for some level of closeness), nor can any of you even replace a broken window. But it's totally doable. You need a self directed Roth and paperwork done. You are allowed to do the paperwork yourself.
This is inadvisable. There is a legal way to do this. https://en.wikipedia.org/wiki/Roth_IRA#Traditional_IRA_conve...
If you're making direct Roth contributions over the limit, those are disallowed and may come back to bite you. It may be possible to recharacterize your already-done disallowed contributions as Traditional IRA conversions; I would talk with Fidelity or a tax advisor.
God forbid I make a few thousand dollars tax-free, let alone by accident.
There is a proper way to do it though. Contribute to a traditional IRA and immediately convert it.
He was one of the founders of Paypal. At that stage, the strike price of the shares would have been fractions of a cent. More importantly, the "fair market value" of the shares of a non-public company is what the board says it to be which pre-funding is whatever they choose. Post-funding, there's usually a floor set because outsiders (aka investors) have done some analysis.
Normal people pay X% tax on the difference between strike and FMV. (X varies based on a bunch of things.)
That's all Stock Options 101.
Normal people can take advantage of the situation by executing as soon as they have the strike price. That makes the difference $0 so any % of that is still zero. The risk is that the actual value of the shares could go to zero too.
The "loophole" with Thiel is doing it all with an IRA.. which legally anyone can do BUT it's complicated and requires a specific process.
I've followed RocketDollar the past few years because they help with that and document all of it properly.
This is not financial advice.
With him sometimes Bain Capital made separate share classes, and I think they would give massive dividends periodically to the separate share class that only the 401k investors at Bain Capital would receive. I think its a really great strategy!
Buffett should be doing that in Berkshire Hathaway for their employees instead of being sad about how much tax his secretary pays
Roth versions of tax deferred accounts only exists because the government is an irresponsible spender and needed revenues. It made the contract with the people because its like a degenerate crack addict child scrounging for cash, in its case only to keep convincing international investors that it can slowly pay debt. Wow the contract worked and you just caught on 22 years later.
What is your issue with people making good trades in a tax deferred and tax exempt accounts? That it needs more revenues again? The government will be fine, international investors are content with its revenue sources. These kinds of accounts are already subject to massive penalties and even UBTI regulations
> That January, The Wall Street Journal reported that Mitt Romney, the former private equity executive running for the GOP nomination, had listed on a financial disclosure form that he had amassed an IRA worth between $20 million and $102 million. The story ran on the front page and launched waves of coverage in other publications. Romney had a traditional IRA, not a Roth. But how, people wondered, could the account have grown so large, given that the government imposed strict limits on how much money could be put into one of the tax-deferred accounts?
> Citing former company insiders and documents, the Journal reported that during Romney’s time as CEO at investment giant Bain Capital, executives there had effectively bypassed the contribution limits by putting extremely low-valued shares from private equity deals into their IRAs, then watching them balloon.
So you cant contribute assets you have to contribute cash and then buy the assets, whereas with nonprofits you can also contribute assets directly
This is just a small administrative hurdle, when you have contractual authority over an organization you can write options agreements and other grants that your 400 section tax deferred entity can afford. Self directed 400 section entities are typically formed as trusts, so it is easy to interact with them as distinct investors even if you are signing both sides of every contract.
I think its funny in the article where the person quoted said they were “in favor of change” to the tax code. Add in kind contribution to tax deferred products like 401ks and IRAs!
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).
How is what Thiel did an end around? He paid taxes on his contributions - https://www.hrblock.com/tax-center/income/retirement-income/...
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.
It's similar to leverage.
There's a reason its easy for funds to get big with a small LP commitment round, and there's also a reason most funds close after hitting certain numbers, increasing the AUM means increased complexity, and thus, potential implosion.
The real world bears many examples of growing AUM portfolio that blew up past a certain size.
There's no counterexample that I know of , of a fund with a consistent growth pattern that started small, hit size, and then increasing further their size with the same trajectory from having more investment dollars to use.
From your statement I can't tell if you think that having more after tax money is a benefit or a drawback for Thiel's investments.
Also at higher AUM VC you have the Softbanks (and now every major VC firm that needs to compete at that level or be left in the dust)
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.
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.
https://www.investopedia.com/terms/p/proof-stake-pos.asp
https://en.wikipedia.org/wiki/The_Ocean_Cleanup
Founder of Figma is another.
https://en.wikipedia.org/wiki/Figma_(software)
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?
ProPublica specifically omitted this information, so assuming that it was all kosher seems reasonable.
The problem here is that this was clearly a prohibited transaction, but the IRS state of limitations is effectively 3 years for stuff like this (unless you have really pissed someone off). It's likely that by the time the stock was worth enough (in terms of 409A guesstimate) to look in to, or there was any kind of reportable transaction showing a gain, the time frame on investigating the initial transaction was long past.
> Even though Thiel's startup received millions in funding within months, Pensco still told the IRS these founders' shares were worth less than $1,700 at the end of 1999.
Under certain circumstances, there is no statute of limitations. If Pensco did knowingly misrepresent the value of the shares, and if the funding round did imply a wildly different valuation, IRS could still pursue the case.
But I cannot fathom the cries of "IRS Pursuing Investigation against a single Tax Transaction from 20 years ago against vocal Trump supporter" would go over well.
I have been unable to find any source for this claim. Even ProPublica, the people with the original documents and the most incentivized to break the news, do not claim this.
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.
It is completely legal to own a company and pay yourself below market rate, or even not at all. In fact, it is how many small business work.
In your example, the company still has to pay corporate tax, even though it is owned by the IRA.
The only tax advantage to your consulting scheme would come at the time you sold it to someone else, or liquidated it.
As I understand it, you can't own a company that you(or a relative) own a controlling interest in with your IRA. I can see the sense in this because if own 20% the person(people) who own the other 80% have an incentive to make sure I'm not playing any kind of games with the finances.
In the case of Thiel, it seems like he took $2000 and made a moonshot investment in Paypal. At that point his investment could have just as easily went to $0 as it was to hit $5 billion. He took the risk, why shouldn't he have gotten the reward?
And he should get the reward, minus capital gains tax.
This country provided an environment for that investment to turn into five billion. He couldn't have done the same thing in Somalia, or Vietnam, or Greece. Why shouldn't it reap its share?
Nearly everyone else pays their fair share of taxes.
I can understand adding legislation that would tax distributions on Roth IRA's for billionaires. Thiel would be fine if he had to pay taxes on that windfall.
I just think that it is a mischaracterization that he isn't paying his fair share of taxes. To me, it doesn't seem like he did anything wrong. He took advantage of a system that is accessible to everyone.
an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10 percent or more of the yearly wages of an employer) of a person described in subparagraph (C), (D), (E), or (G) https://uscode.house.gov/view.xhtml?hl=false&edition=1994&re...
Being the CEO clearly qualifies. That said, the statute of limitations means you can often get away with things if they go unreported for long enough. It may be he’s currently in the clear.
> In 2011, Thiel caught the attention of the IRS. The agency launched an audit, tax records show. The records don’t spell out what the IRS was looking at or if it involved Thiel’s Roth. Whatever the case, the audit was closed years later and Thiel didn’t owe any more taxes, tax records show.
What I find most interesting in regards to this is that by the time there was any reportable gain (2002 sale), and thus any reason it would even be looked at, the 3 year statute of limitations would be up on the initial prohibited transaction. Which is... interesting.
It seems the whole point of these Roth IRA is so people don't have to pay their fair share of taxes. I'd blame the government for creating that.
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.
Peter Theil did not have 100% voting shares of Paypal, and if he did that went away very soon after with the other co founders and investors diluting him fast enough for it to satisfy IRS regulations.
That would work now as well, but it is also possible that it worked better 22 years ago as the IRS may have lacked clarity back then.
First, that's not the requirement.
> and if he did that went away very soon after with the other co founders and investors diluting him fast enough for it to satisfy IRS regulations.
Your argument here is "even if he made illegal investments into a tax-advantaged account that has set him up to not pay taxes on 50000000000 dollars, we should ignore it because if he made the investment later it wouldn't have been illegal".
By that logic let's just throw out insider trading laws. "Well if he made the investment after the information was public, it would have been fine"
> the IRS may have lacked clarity back then.
They didn't. It was still explicitly not allowed for a officer/director of a company, someone with a similar role, > 10% share-holder, etc to make investments like this with a Roth IRA.
He likely was within the thresholds back in 1999 or very quickly after
its director && >= 10%
not or
but feel free to split hairs about that nuance, this isnt an area the IRS is splitting hairs, they go with the percent ownership
These kinds of sanctions are based on the result by time of reporting or audit, not by their mere action
and as we’ve already gone over, he very well may have chosen to pay a self reported penalty if his accountant’s tax software just spit out that additional number of $2000
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.
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.
2. It very well may have been illegal, as mentioned in the top level post. The purchase price was the legal value, but using an IRA as a vehicle to invest in your own company appears be prohibited by IRA regulations. At the time, it was a purchase <$2000, and may not have been reviewed. If paypal was someone else's company, there would be no legal issue.
Part of my work is in financial investigations. The finances of large, multi-entity organizations are expensive to create, difficult to parse, and require extensive periods of time of trained, expensive staff to understand.
Assuming that 'things would have been caught' flies in the face of the fact that they almost never are. Accounting rules change frequently, software systems for logging information is changed, and records are lost. Emails have to be read in tandem with entries to understand the intentions.
Even in cases where we have confessions that someone has embezzled money, we often need to spend multiple weeks tracking down records to isolate when/where/how it occurred.
Even during audits, requests for records can be baked. 'Random' samples of given entries can just exclude the questionable ones.
I've appeared in front of federal tax courts in my practice, the game isn't fair - don't base your reasoning on the idea that it must be.
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.)
[0]: https://www.irafinancialgroup.com/learn-more/self-directed-i...
https://news.ycombinator.com/item?id=27621342
It specifically sweeps in classes of people with responsibilities that are held by typical active co-founders: "(H) an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10 percent or more of the yearly wages of an employer) of a person described in subparagraph (C), (D), (E), or (G)"
Very difficult to a) be a cofounder with meaningful equity b) not do any work so this provision doesn't trigger c) keep your equity and d) have it be worth anything.
Edit: misread this. I would be surprised if index/mutual funds are subject to the same rules because holders of an index fund don't own shares in any of the underlying securities.
First, officers or directors of S&P500 companies are almost definitely above the income level to open a new Roth IRA.
Second, you're really grasping at straws here trying to trace a relatively minuscule investment through mutual fund in order to defend Thiel here.
Someone is saying "Bank robbers are bad because they steal other people's money" and you're sitting over here saying "Well technically when I pick up a penny on the ground, it's not mine. So it's basically the same thing. We have to find a solution that solves both problems at the same time".
Backdoor Roth method allows people of any income level to put money in a Roth IRA. I don’t think there’s any income limit to open the account.
I am trying to wrap my head around these rules regarding IRA transactions. I’m certainly not trying to defend Thiel here. Would you mind pointing me to what in my comment lead you to that conclusion?
Also I would be shocked if there aren’t directors at publicly traded companies making under 208,000 and are filing jointly in a single income household.
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.
No one is claiming Thiel did anything illegal. But it does seem a bit preposterous that billionaires can amass $5B Roth IRA accounts.
If you're reasonably wealthy and you start a firm, there's no problem just taking a smaller salary. It's a little bit surprising that the rules don't address this though. Why not just say Roth IRA is for people with net worth under some figure? Or as mentioned in the article, put a cap on the amount of tax exempt money?
Thiel bought a lotto ticket in his Roth IRA, after which he invested the earnings into other high-risk ventures which also worked out.
It’s almost as if someone is having an agenda…
Still a lotto ticket, but that first transaction becomes a lot less innocent.
I don’t think tax shelters for retirement accounts were designed to let financiers such as Thiel and Romney buy undervalued promising lottery tickets from themselves or their buddies, or should be used as such.
I don't think that word means what you think it means
But also somewhat irrelevant as the main point of the article focuses on that first investment ($2K -> $33M in 2-3 years via private Paypal shares).
If I worked at a startup pre-Series A, I got 1000 shares at $0.001/share, and then 1 year later they got a Series A and my shares became valued at $0.01/share, and then in a few more years we IPO'd and my shares became worth $100/share the IRS shouldn't have the ability to say "woopsie, yea, you actually paid too little taxes because that company that succeeded was actually worth way more than we expected back when it looked like it was going to fail"
That's just my opinion. I'm not sure if I'm misunderstanding something here. A startup is a high risk prospect. If you buy shares of a startup you're essentially putting money into a shredder in hopes that people pay you a bunch of money to play with the confetti. When a pre-Series A startup offers me "$50k/year in stock options" I instantly value that at $0/year in income mentally because there's no guarantee for any return. Its like options trading penny stocks.
... with a few extra "twists" that utterly subvert the intention of the Roth IRA, making it possible to accumulate an astronomical dynastic fortune without having to pay taxes on it like normal people.
They appreciate in value to $1,000 per share.
You sell the shares, now there is $2,000,000 cash value in your Roth IRA, which you can use to make other investments.
Repeat ad infinitum without those transactions incurring any sort of tax burden, as long as you don't withdraw any of that money until you're 60.
It stays in the roth account, but you can buy and sell assets as often as you want with the money you put in.
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 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.
I mean, what better definition of "fair market value" is there than "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...
It's also one of the valuation proposals for people playing valuation games with illiquid assets. You can declare them at whatever value you want (and pay tax on that value), but you are forced to sell if someone offered you that value for the asset (if you claim your house is worth $1M, we'll let you pay property tax on $1M, but if someone offers you $1.1M for your house, you're forced to sell). That would cut down on people inflating/deflating asset valuations to game tax codes.
You have an interesting proposal for valuations though, although, it seems to have a few logistic hurdles that cross my mind.
I believe non-public investments should be banned from Roth IRAs (and that we should close all of the backdoor loopholes to them as well). They were meant for a certain group of people at the outset and were then twisted around in knots to provide more tax-breaks for the well-off (which should be rolled back). I think mega backdoor Roth should not be a thing, rollover Roth IRA should not be a thing - bring Roth back to it's original vision.
I am interested in finding out the answer to this, as others have posted in this thread the text of the law which makes it seem like he should not have been able to, and what reasoning could possibly have made it legal.
I think what's more clear is that it's clever and probably an unintended loophole, be it technically legal or not isn't so important. What matters in the end is a bunch of money didn't go to maintaining society's infrastructure, paying for military, and all that, instead money from other sources and other people's pockets was used. Do you care? Do we care? I think that's the more relevant dimension to think about and discuss.
> The IRS, meanwhile, was floundering in its efforts to police retirement accounts. At one point the agency recommended Congress prohibit IRA accounts from buying investments that aren’t traded on a public market, such as founders’ shares. That went nowhere, too. Instead, Congress began slashing the IRS’ budget, kneecapping the agency for more than a decade.
Well... no. (Can't believe I'm defending Peter F-ing Thiel)
I might own some AAPL shares that I think are worth $1000/share--so I'm not willing to sell my AAPL shares for less than $1000 each. The market (today) thinks they are worth $133/share. Who is right?
Thiel might have really truly believed that his 2M shares would be worth a few billion dollars one day. But if you can't find anyone who is willing to buy them for that price, then it doesn't matter. The "fair market value" (what the IRS cares about) of those shares is not a few billion dollars. It doesn't become a FMV until you can find an arms-length buyer who is willing to buy the shares for that price.
You could pay someone to create an independent valuation of the shares--but for a brand new company that has no employees and no assets, not even IP, why would you expect the valuation to come back at much more than $2k?
The article implies 0.001$ was below fair value based on PayPal's own declaration at the IPO. That's why.
In any case, I think this is unimportant, the important question is can a founder always transfer their owning shares into a tax advantaged Roth IRA? Does this make sense to permit?
If I start a company today and just buy my shares into my Roth IRA before I even write a single line of code or hire anyone, so that if my startup grows all my owning shares of it are tax exempt.
And if it does, to what extent? Should there be no cap?
In reality it's all just a political question, who should pay taxes, how much, and in what circumstances.
Articles like this I think help people understand and think through some of the edge cases around that, to better allow them to form an opinion on it.
Source?
But what is an issue is the self-dealing of buying shares in a company he holds a major role in the management of.
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).
How do you know that was below market rate? Startups generally begin with shares worth almost nothing.
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.
(edit: typo)
If we should be mad about anything it's that it's so difficult for the general public to get a good slice of diversification including the asset classes that turn 1000s into millions.
Yes we can go work at a startup, but that is all the eggs in one basket. Better to spread that risk around 10+ investments like VCs do
You don't have to be accredited to invest in something like a VC fund anymore using something like Wefunder. However it's extremely risky and generally painful to even find out if the thing you invested in 3 years ago even still exists.
A good litmus test would be, what is the rate of return of a person's investments made outside an IRA vs inside the IRA.
― Russell Brand
What he did wasn't actually legal. He just got away with it.
If we tried, it would require regulation on how politicians can be compensated for the rest of their lives after taking office. Need to close the revolving door where politicians help out rich people/corporations while in office, then are compensated indirectly after leaving office.
This isn't some accidental software defect. The rich write these laws to their benefit. He's part of the class whose fault it absolutely is and considering his political position as a conservative, he advocates and helps keep up the corrupt system he benefits from directly, even if he didn't lobby for this specific tax regulation.
Your IRA is a legal entity and you can grant an option to it. It needs the cash to exercise it. Options can have shares at any price in them, such as discounted to nothing but it comes down to which consequences you care about. Making a potentially screwy 409a valuation isn't a big deal, but also avoided if done before other investors come in. Either way it can be a tolerable level of consequence.
but we’re all comfortable seeing the private tax records of these individuals that were stolen. the media has such massive biases
Obviously debatable whether you can mark shares of your own company / PE firm sponsor equity / etc at near zero in a tax sheltered vehicle. But if Thiel held shares in a personal account and borrowed against them he wouldn't have owed tax either, as unrealized capital gains are not taxed.
Buffett, Musk, Bloomberg, etc. all have the vast majority of their wealth in businesses they founded, and have subsequently paid de minimuis taxes relative to their net worth.
All have arguably made significant contributions to society and world at large, magnitudes higher than their net worth and taxes paid.
Very arguable. I would take up that argument. I don't believe this too be true.