Last I heard (years ago), Peter Thiel had a $5 Billion Roth IRA. No doubt it’s more today.
I have no problem with the $5 Billion, but there should be some cap on how much of it is “tax-free” – like maybe $5 or $10 million.
intercst
8 Likes
This is merely another way to tax the wealthy.
People who found new companies often get stock in the company or option when stock is worth pennies. If they manage to get it into a Roth and see its value increase by 1000 fold, why should they be penalized.
We should realize their creative efforts have done much for our economy. And jobs. We should respect and encourage their contribution.
5 Likes
Agreed.
Doy. When the uber rich don’t pay their share, we need to come up with ways to tax them.
That’s not what Thiel has done. You can’t just convert company stock into an IRA, the stock has to be sold first. Then, taxes must be paid on the sale and the remaining cash can be used to open an IRA where the stock can be repurchased.
Thiel opened an IRA, funded it with $2000 and then used that money in his IRA to purchase millions of shares of startup companies, at a fraction of a penny per share. These are not investment opportunities that your typical Joe Blow investor can access. When those startups IPO, booyah! And since it’s all happening inside an IRA, double booyah!
Thiel’s creative tax dodging scheme is not doing anything for our economy, other than hurting it. He’s taken advantage of a tax loop-hole that is contributing to the bankrupting of our country.
9 Likes
I suspect that their creative efforts are driven more by the desire for wealth than by altruistic values to help our economy. And jobs.
Per Claude AI:
“A 2021 ProPublica analysis, using IRS data, calculated a “true tax rate” for the 25 wealthiest Americans (income vs. wealth growth) at around 3.4%.”
Many loopholes exist that create this perfectly legal ability to pay little to no taxes.
I understand many of the tactics they use such as borrowing against shares rather than selling and paying capital gains so they have no taxable income. Again, perfectly legal under current rules.
My friend intercst (no, we’ve never met) has explained many times that earning wages is not the most efficient way to create wealth.
However, I think it’s a fair question to ask, as a society, is it healthy to have multi-billionaires pay a considerably lower tax rate than, say, a teacher or a policeman?
If multi-billionaires can legally avoid taxable income, is it fair to create other means to tax them at approximately the same rate as we mere mortals?
I think the answer to the 1st question is no, and the second yes.
I believe that as level a field as possible is much better for a functioning democracy. Or as our Founding Fathers said, a more perfect union.
12 Likes
The IRA was created as a vehicle to help middle income people to save for retirement. The reason why the amount you can contribute is capped is because if you can contribute more than that, then you don’t need help from the US taxpayer. Originally, there was an excise tax on IRAs over $1 million. Same reason. You don’t need help at that point.
Roth IRA contributions are capped by income. Same logic. If you have a high income, you don’t need help saving.
Peter Thiel is one of the richest human beings on the planet. He doesn’t need help from the US taxpayer to save for retirement. What’s next? Do we have to buy fuel for his private jets to thank him for his efforts?
10 Likes
It’s an interesting view of survivorship bias. In essence, Thiel demonstrates what is potentially possible with a Roth account.
Now that he’s played the game masterfully, and assymetrically, (harming no one else, by the way), how do we place better side boards on the results without harming more run of the mill individuals.
If I played the game and build an enormous fortune through hard work, correct choices and positive reinforcement in the system, how far should it be allowed to run before the game is called?
I would be in favor of a cap, provide it’s inflation indexed and beyond the high net worth threshold (Greater than $10MM?)
Paying taxes twice on the same result should be carefully scrutinized and evaluated. That is a slippery slope, if it becomes an expectation by those who spend other’s money.
2 Likes
And when in an IRA, RMDs force you to distribute part of it every year. And all gains are taxed at ordinary income tax rates. There is no way to avoid that tax. You can donate the RMD to charity but that depletes your assets.
Yes, you can do a Roth conversion on the IRA but that requires paying ordinary income tax rates on every dollar.
It is still a choice between funding your Roth w after tax dollars and then no more taxes on distributions or fund IRA w pretax dollars and then pay regular taxes on all distributions. Those two choices are mathimatically equal but you can do better if you make the right choice.
None of this is tax free. The wealthy do pay these taxes.
2 Likes
We are talking capital gains. We are not discussing a wealth tax.
1 Like
The IRA was created to help middle income Americans save for retirement. There is no version of this story where Peter Thiel must rely upon the generosity of the American taxpayer in order to retire.
6 Likes
So…how much in taxes would someone pay if they opened a Roth IRA with $2000, then let it ride all the way up to $5 billion? Zero, zilch, nada.
Many of the super wealthy are expert tax dodgers. I guess we have to let them do it because they’re delicate geniuses.
4 Likes
We can “respect and encourage their contribution” while taxing them at some minimum rate – like say what a teacher or firefighter pays on their lifetime earnings.
Nobody ever gave me a big tax break to recognize my creativity in taking out a loan to bet on buying an engineering degree. I had to retire early and quit working to get in on the “Tax-free” Reagan scam that punishes working people to shower big tax breaks on those who forswear wage & salary income.
Give them what they voted for – good and hard
intercst.
6 Likes
The Tax Reform Act of 1986 included the following provisions precisely because the legislation authors understood that uncapped tax breaks yield tax dodges for the wealthy.
-
The Original Penalty: The Tax Reform Act of 1986 introduced a 15% excise tax on “excess distributions” from tax-qualified retirement plans, including IRAs. [1]
-
The Threshold: The threshold was set to a “maximum defined distribution” that avoided the penalty, which was $112,500 per year (or $150,000 for a lump-sum distribution, adjusted for inflation over the years). [1, 2, 3, 4]
-
The Repeal: Phil “Senator from Enron” Gramm (R-TX) fiercely opposed this tax, coining it the “success tax” because it essentially penalized individuals for being successful at saving and building large retirement nest eggs. Gramm successfully championed its repeal in 1996, when it was officially abolished under the Taxpayer Relief Act. [1] }}
Senator Gramn was a big supporter of crony capitalism and the bipartisan culture of corruption in Washington. (He was so bipartisan in his pursuit of corruption that he switched parties from DEM to GOP in 1983.) He was a long time water carrier for the wealthy and well connected.
intercst
10 Likes
We are not talking capital gains. Distributions from an IRA are fully taxed as ordinary income but contributions to the IRA can be deductible, ie pretax.
Roth contributions are taxed at ordinary income tax rates. Distributions are then tax free. We are discussing whether those distributions should be taxed after some max.
1 Like
These assets are not income in the first place. They are stock issued to founders. Not really the same as stock options to rank and file.
The matter can be divided differently, and probably is elsewhere in the tax code.
The entire thing we are discussing is skirting the legal requirements in the tax code.
Putting your own startup into your Roth IRA is generally not allowed if you control or run the business, due to strict IRS “prohibited transaction” rules. While a specialized self-directed IRA can technically hold startup shares, you cannot buy stock in a company where you are a primary owner, take a salary, or engage in self-dealing. [1, 2, 3]
The Rules on Startups and Self-Directed IRAs
- Prohibited Transactions: IRS rules ban your retirement account from transacting with “disqualified persons,” which includes you, your spouse, and companies you control.
- Ownership Limits: If you own 50% or more of the startup, or hold operational control, using your IRA to fund or hold it can disqualify the entire retirement account, triggering heavy taxes and penalties.
- Passive Investments: An IRA can sometimes buy a minority, passive stake in a third-party startup where you do not work or manage, typically by using a Self-Directed IRA custodian. [1]
If you’d like to proceed, please share:Your ownership percentage in the startupWhether you plan to draw a salary or work for the companyIf you are looking to invest cash already inside an existing IRA into a separate business
AI can make mistakes, so double-check responses
[2] Using a Roth IRA to Fund Your Start-up | Baker Tax Law
There is a lot more you can google.
1 Like