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Peter Thiel's $5 Billion Roth IRA: Tax Pro Jeffrey Levine Weighs In

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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.

Still, Levine doesn’t believe much will happen to Thiel and other wealthy investors who have taken advantage of the Roth IRA. 

For instance, Berkshire Hathaway executive Ted Weschler was found to have $264.4 million in his Roth at the end of 2018, according to ProPublica.

Weschler told ProPublica that his IRA had relied on traded investments that were available to other investors. He also noted he was “openly supportive of modifying the benefit afforded to retirement accounts once they exceed a certain threshold,” according to the news report.

‘Threat’ to Roth IRAs

Levine predicts that this story will continue to get further media attention. As a result, advisors will get more questions from clients about Roth IRAs and how they can use them. 

“But these stories represent the greatest threat to Roth IRAs,” because despite these products being “universally loved” by investors and politicians, anger at billionaires like Thiel who find back doors might spur Congress into making changes. 

That said, the IRS hasn’t been clueless about these types of actions.

In 2014, a report from the Government Accountability Office stated that Congress initially created IRAs to “prevent the tax-favored accumulation of unduly large balances. But concerns have been raised about whether the tax incentives encourage new or additional saving.”

It estimated that the federal government would forgo $17.45 billion in tax revenue that year from IRAs Roth and traditional IRAs.

The GAO noted that “founders of companies who use IRAs to invest in nonpublicly traded shares of their newly formed companies can realize many millions of dollars in tax-favored gains on their investment if the company is successful.” 

In 2020, the GAO issued another report looking at high-risk IRA asset types associated with abusive tax schemes.

Advisor Warning

Levine predicts the hubbub around the ProPublica story will cause a greater workload for advisors who will need to answer questions from clients about how they, too, could score a huge payout using a Roth IRA, particularly a self-directed one.

He warns that clients should avoid investing IRA money in their own businesses, as they could run into prohibited transaction concerns. “It’s really difficult to walk that fine line,” Levine said.

The reality, he states, is that most new businesses fail, so such an investment puts a client’s retirement security at risk.

“As a planner, we want people to take the right steps,” he said. “[The ProPublica story] will spur questions, but we aren’t all Peter Thiels.” 


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