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June 25, 2021 at 03:37 PM
What You Need to Know
- Jeffrey Levine digs into ProPublica's revelation that billionaire Peter Thiel grew a $1,700 Roth IRA investment into $5 billion.
- There is evidence that some of the shares Thiel bought with IRA money were undervalued, which could theoretically draw the IRS' attention (but probably won't).
- It's extremely risky for clients to use their retirement accounts to invest in their own businesses, Levine warned advisors.
In 1999, budding investor Peter Thiel used $1,700 in his new Roth IRA to buy startup shares of the firm he co-founded, which would later become PayPal. That account is now worth more than $5 billion — with no tax bill awaiting Thiel upon withdrawal of the assets, as long as he waits until six months before his 60th birthday.
ProPublica, an investigative news outlet, reported this story in an article, “Lord of the Roths: How Tech Mogul Peter Thiel Turned a Retirement Account for the Middle Class Into a $5 Billion Tax-Free Piggy Bank.” The article sparked debate over Thiel’s use of a Roth IRA as a massive tax shelter — and how other investors and the government might respond.
Thiel’s purchase of founders’ shares and hedge fund investments within his Roth IRA might not have been a prohibited transaction when initiated, but the way those shares were valued could draw the attention of tax authorities, said Buckingham Wealth Partners Chief Planning Officer Jeff Levine, CPA and CFP, who weighed in on the topic in a live Twitter Spaces chat Thursday.
“It wasn’t a prohibited transaction when he made the initial purchase,” Levine told ThinkAdvisor in a separate conversation Friday. “[However] I could see some potential prohibited transaction concerns when he had a liquidity event and may have used some of that [Roth IRA] money to invest in his own hedge fund.”
He noted that “there is more to unpack there, and unfortunately we don’t have all the details.”
But “there are several strong pieces of evidence that the shares [Thiel bought] were not valued properly,” Levine said.
The key evidence was a PayPal filing with the Securities and Exchange Commission stating that these shares were undervalued when Thiel bought them. He paid, according to ProPublica, a fraction of one cent for each share.
“He bought significant amounts of the company for $1,700 when the company later said that it undervalued those shares and sold them at less than fair market value, and then within weeks [PayPal was] bringing in large investments,” Levine explained.
IRS Interest
Levine said he decided to host a discussion about the matter after receiving several questions tied to the ProPublica story.
The tax expert doubts that the Internal Revenue Service will go after Thiel because the agency has such limited resources. But if it did, it would focus on valuation issues, he said.
“That’s a bigger issue than the initial investment in the IRA,” Levine explained.
Although Thiel might claim the statute of limitations ran out on any actions tied to this 22-year-old investment, Levine doesn’t see that argument panning out.
That’s because the IRS requires Form 5329 to be filed by IRA owners to report penalty taxes they may owe, for example in the case of an early withdrawal or “Roth stuffing,” which includes the practice of putting shares of early-stage companies into a Roth IRA at very low valuations.
If that form isn’t filed — and it usually isn’t, Levine says — then there is no statute of limitations, and there could be penalties on failure to pay a tax.
