Our politicians are at it again, trying to find any way they can to steal from the winners. A report came out recently detailing that Peter Theil has amassed a Roth IRA worth over $5 billion, this seems really odd given the fact that you can only contribute $6,000 a year to a Roth IRA. Peter Theil followed the law, contributed to his IRA as allowed, and now is being vilified by radical members of congress who propose stealing from those who have done well.
Peter Theil Was Not Wealth When He Invested In His Roth IRA:
Peter Theil was not a wealthy man, or at least not a super wealthy man when he cofounded PayPal. In fact, his net worth was most likely less than Elizabeth Warren or Bernie Sanders today! PayPal stock was worth nothing when he put his PayPal shares in his Roth IRA. It was a startup. He was in his early 30s and put his share of this startup company valued at just under $2,000 into his Roth IRA in 1998/1999. There was a much higher likelihood that his 1.7 million shares of PayPal would have become worth $0 than worth several million, and being able to sell the company to eBay for $1.5 billion in 2002. His total shares inside and outside his Roth IRA were worth around $55 million at the time of the sale. Still a very far cry from $5 billion. He founded Paypal and still was not super rich, if he stopped right there, no one would have ever cared about his Roth IRA size. How then did he grow his money 100X in the last 19 years?
Peter Theil became an investor, much like on Shark Tank. He looked for speculative startups in Silicon Valley and invested as he saw fit. His most notable investment was buying 10% of Facebook for $500,000 in 2004 as its first outside investor. You don’t hear about the investments that went bust. I’m sure in 2003/2004 he made multiple $500,000 investments in his Roth IRA that went to $0.
Theil sold most of his Facebook winnings soon after the IPO, turning that $500,000 into $1 billion. He has also been an early investor in Airbnb, Yelp, Spotify, SpaceX, LinkedIn, and dozens of other companies. His Founders Fund also invested around $20 million in bitcoin in 2017, so there’s that too.
He made smart investments. This isn’t some loophole tax shelter for the super rich. He wasn’t super rich when he put the money in! He’s built that wealth over the last 20 years with several smart investments. He has the same rights to use a Roth IRA as anyone else with earned income.
“The investment decisions leading up to Thiel’s massive Roth IRA “definitely was strategic, and certainly not what the vehicle was intended for — but again, it is legal,” said Allison Schrager, a senior fellow at the Manhattan Institute, a right-leaning think tank.
She’s 100% wrong. The investment decision was exactly what the Roth IRA was intended for. It was intended to shield capital gains from taxes. It was intended to be a vehicle for investments likely to appreciate in value substantially. Shares of a startup company squarely fit into the category of “assets with potential to appreciate in value.”
She goes on to defend the idea that a certain value should not trigger taxation of these accounts, however she states that perhaps limiting investment options to publicly traded companies would be best. I am strongly against this and it reeks of the ilk that the left has proposed of “protecting” small investors by requiring them to invest a certain percentage of their 401Ks in T-bills.
No Man’s Property is Safe While The Legislature Is In Session:
Now that his Roth IRA is worth over $5 Billion dollars, politicians are saying “not so fast” we want a cut. They are trying to change the rules midway through the game. If they can steal Peter Thiel’s money and tax treatment, they can do it to yours to. The line may not always be drawn at $5 billion, it may be drawn at $50 million, or $5 million, or $1 million.
A new proposal in Congress calls for a massive overhaul of retirement accounts and specifically Roth retirement accounts. I will go over the main points in descending order of importance.
Point 1: Required Distributions For Having “Too Much” Money:
“If the individual’s combined traditional IRA, Roth IRA, and defined contribution retirement account balances exceed $10 million at the end of the prior year, and has taxable income above $400,000 for single filers and $450,000 for married filing jointly, then there would be a new RMD that is generally 50 percent of the aggregate amount above $10 million. ”
This is extremely problematic. Note that the outrage was over a $5 billion account, and they decided to draw a line at $10 million, 2% of $5 billion. Not only are they looking to require RMDs for accounts that never had them before, they plan to do this for the aggregate of all accounts, and regardless of age. Taxes and penalties would be through extremely high in this scenario.
The basic thought process here is asset seizure. Investors put their money in Roths because it was promised that those investments would NEVER be taxed, and that RMDs would not exist. Changing the rules on this now because someone saved and invested “too well” is essentially theft. You might be thinking, this only affects really rich people so why should I care? The problem is that the definition of really rich is subjective. We were just talking about $5 billion and we are now talking about $10 million. $10 million may seem like a lot, but when paired with inflation many more people will become decamillionaires. I am 35 and am not yet a millionaire, but it virtually a mathematical certainty that my retirement accounts will grow to well over $10 million.
If at 55, I had $12 million in my account, An RMD of $1 million would be required. This would be taxed, with most of it at the highest tax rate of around 40%, AND I would owe a 10% penalty for early withdrawal, bumping it up to 50%. This is $500,000 that would essentially be confiscated in a single year.
What about for Peter Theil? He would have an RMD of $4.99 Billion, requiring a distribution of $2.49 billion and taxation of over $1.25 billion. Then this would continue every year until the account was essentially empty.
Not only is this immediate theft of the assets that are required to be withdrawn, it is also theft of the value those assets would grow to over the next 10, 20, 30, 40, or 50 years, which SHOULD all be shielded from taxation.
Point 2: Disallow Contributions If $10 million in combined accounts:
Not only would RMDs be required for amounts over $10 million, but for those who wanted to contribute more, they would not be allowed to. Although I don’t like this and I don’t see the logic in it, I think this is a far smaller problem then the above point. Point #1 changes the deal for assets already invested, this point changes the deal for assets that have NOT yet been invested, this is a major policy distinction.
Point 3: Eliminate Investments in Non traditional assets:
The government should not be saying what investments an individual can and can’t make. Many investors looking for better returns go for self directed IRAs which allow for investment in businesses and other assets that are not traded on the stock or bond market. As an example, many investors buy startup shares through a service like Startengine.com inside of their Roth IRAs. Other investors buy physical real estate and even crytocurrency in their self directed IRAs.
This move will kill self directed IRAs and paves the way for the government to eventually require a percentage, or even all of the investments in retirement accounts to be “invested” in government T bills.
Point 4: Eliminate the backdoor Roth IRA: The backdoor
The backdoor Roth IRA is a way to make Roth contributions for people who earn too much money to contribute following the normal rules. Essentially the high earner contributes non tax deductible funds into a traditional IRA or 401K, then does a Roth IRA conversion, paying taxes on the contribution, to move the money into a Roth account. I believe that this process existing was not intended by congress, and is a work around or loophole if you will. This is also much more palatable a change than the $10 million threshold for total invested assets because it is about investing new money, not about how existing money is treated.
Point 5: Lower the Ownership Threshold for Roth Exclusions:
Currently IRA investors are not allowed to invest in businesses in their IRA in which they own 50% or more of the equity in. This proposal will lower this threshold to 10%.
Actions You Can Take:
- Call your house member and Senator and tell them this is unacceptable.
- Develop a plan for investing in taxable accounts as well as tax advantaged accounts
- Put more money into real estate investing
- Rather than putting more money into your tax advantaged accounts, look for ways to contribute to your children’s accounts, rather than yours to avoid hitting the future $10 million buffer.
I think this is bad policy that is designed not to raise actual tax revenue, but to “soak the rich”. What do you think of these proposed changes?