Back in June of 2021 ProPublica released a story detailing how Peter Thiel, co-founder of PayPal, was able to accumulate $5 billion (yes with a B) inside of his Roth IRA, which means that, if he plays by the rules, he will never have to pay a penny of tax on any of those dollars… ever.
What’s amazing about this story is the fact that in 2022, Roth IRAs have a maximum annual contribution limit of $6,000 for those under 50 years old & $7,000 for those age 50 & up. The Roth IRA also has income phase-out limits whereby, for example, if you make over a certain amount of money the IRS prohibits you from taking advantage of this tax advantaged shelter.
So, how the heck did Peter Thiel grow his Roth IRA – which according to ProPublica was worth $2,000 in 1999 – into an almost incomprehensible $5 billion tax-free nest egg?
Back in 1999 single taxpayers could contribute to a Roth IRA if they made less than $110,000 in that year. Peter Thiel’s income in 1999? According to records obtained by ProPublica, $73,263. Which, being below the threshold, allowed Peter to contribute the maximum amount of $2,000 into this Roth IRA.
As I mentioned, Thiel was one of the co-founders of PayPal which gave him a unique opportunity not widely available to the average investor. That is, to buy shares in a private company, and in this instance, Thiel was able to purchase 1.7 million shares of PayPal for a tenth of a penny—(yes you read that correctly). 1.7 million shares of PayPal for a tenth of a penny came to a total purchase price of around $1,700.
As money began pouring into Silicon Valley at the height of the dot-com bubble, and while PayPal was growing, those original 1.7 million shares owned by Thiel, were—let’s just say, worth much more than a tenth of a penny.
eBay purchased PayPal in 2002 for about $1.5 BILLION at which point Thiel reportedly sold his shares, still inside of his Roth IRA, bringing his account balance to $28.5 million. Had Thiel held those shares outside of his Roth IRA, he would have owed the IRS 20% of his gains and another 9% to the state of California – but again, because of the tax shelter a Roth provides – he didn’t have to pay a dime to Uncle Sam.
Thiel would then go on to use his Roth IRA to invest in other startups, like that small company Facebook – amongst others, in which Thiel would add significantly to his already gargantuan fortune.
The piece by ProPublica was very in depth and I strongly recommend you check it out – but I want to shift focus away from Peter Thiel to a more low profile man named Ted Weschler who turned his $70,000 IRA into $264 million in just under 30 years. Now, it’s not great compared to Thiel’s $5 BILLION, but not too shabby in his own right. Insert eye roll.
The main difference between Thiel’s & Weschler’s monumental IRA balances is that Weschler did not grow his account by investing in start-up companies at a staggering discount like Thiel. Rather, Weschler, in his own words said that “all investments in his account were investments that were available to the general public.”
Weschler first opened his IRA in 1984 as a 22 year old Junior Financial Analyst making $22,000 a year working for W.R. Grace & Co. in New York City. He says by maxing out his contributions, taking advantage of his employer match, and market appreciation – his IRA grew to just over $70,000 by the end of 1989 when he left Grace to start his private equity firm.
Weschler then transferred that account into a self-directed IRA which gave him complete control over how his money was invested. In other words, he was now the maker of his own destiny, buying & selling at his discretion. Over the next nearly 3 decades, Weschler would see his retirement account balloon by over 300,000%, significantly outperforming major market indexes like the S&P 500.
In fact, for comparison sake, if you had taken that original $70,000 IRA account value and invested in the Vanguard S&P 500 index your account would have been worth just over $1.6 million as of June 2021, roughly a 23-times gain, which is no small amount if not being compared to an account value of $264 million managed by a flat out investment guru.
Now it would be very easy for some folks reading this to think, “Man, if Ted could do it, then I could do it too!”. While that might be true, we must make it very clear that Ted is a professional in the field of investment management and has been with Berkshire Hathaway since 2012 managing billions of dollars. In other words, Ted is not some random guy picking a combination of stocks from Reddit & out declaring that DogeCoin will go to the moon. Again, he is a seasoned professional.
It also hasn’t been all sunshine & rainbows for Ted as he experienced a 52% loss in his IRA back in 1990, but he kept swinging for the fences. In fact, and I love this, he says that, “One of my personal investment mantras is that there’s no such thing as a loss, it’s just an unmonetized lesson.” Boy isn’t that true.
So what are some lessons that we can learn from Mr. Weschler with respect to our own portfolios? Well how about we hear directly from the man himself. In a letter to Dr. David Kass, expounding on index funds, Weschler gives 4 action items to the would be long term investor:
- Start early
- Maximize your employer match, if you have one
- Invest 100% in equities (though of course your goals, risk tolerance, timeline, & capacity might prove otherwise)
- Ignore all the other noise
Now an important note is that Mr. Weschler converted $131 million of his traditional IRA into a Roth IRA in 2012 which added an additional $28 million to his federal tax bill that year. Unlike Peter Thiel, who originally had his investments inside his Roth, Weschler had initially accumulated this wealth in a pre-tax account which he later, as mentioned, converted into a Roth, taking advantage of updates to the tax code made in 2010.
For those reading this who have a substantial amount of their wealth in qualified retirement accounts, and given the likelihood of future income tax increases, deploying a strategy like the one Tim did in 2012 might be advantageous long term.
This strategy is what we refer to as a Roth Conversion, by which the IRS allows you to move some or all of your retirement savings from a qualified (pre-tax) account into a Roth IRA. There are no age limits or income restrictions for a conversion, unlike those who want to make new contributions to a Roth.
With a Roth Conversion you pay taxes that you would have paid in the future at the time of conversion, based on your current tax rate, & from there your earnings grow tax free while also being able to withdraw without paying taxes.
This may or may not be appropriate for you but it is worth considering. If you would like more information on Roth IRAs, Roth Conversions, or other tax advantaged vehicles, drop us a line at 757-955-8131 or send an email with your questions to email@example.com. We can’t wait to hear from you.
In a letter to ProPublica, Ted wrote, “The investing success of this account has been a function of careful stock selection, exceptional luck and a multi-decade time period. To have a sum of this magnitude built up in my Roth IRA is certainly beyond anything that I ever expected but it was implemented in a way that was available to all taxpayers with an appropriately long investment runway, i.e., the result is exceptional but it is not the products of exclusionary tax strategies”
Food for thought.
Parker Financial Group
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Please remember that converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including (but not limited to) a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA. It is generally preferable that you have funds to pay the taxes due upon conversion from funds outside of your IRA. If you elect to take a distribution from your IRA to pay the conversion taxes, please keep in mind the potential consequences, such as an assessment of product surrender charges or additional IRS penalties for premature distributions. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. This material is intended to provide general information to help you understand basic retirement income strategies and should not be construed as financial advice. The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference. Parker Financial Group is an independent financial services firm that utilizes a variety of investment and insurance products. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Parker Financial Group are not affiliated companies. 01203329 02/22