CNBC’s “TechCheck” team discusses tech mogul Peter Thiel’s $5 billion retirement account with one of the reporters behind the story, Justin Elliott of ProPublica. For access to live and exclusive video from CNBC subscribe to CNBC PRO:
Sometimes, it can seem like only rich people can benefit from the tax code.
Some ultra-wealthy individuals have amassed hundreds of millions — or even billions — of dollars in tax-sheltered Roth individual retirement accounts, according to a report released Thursday from ProPublica, an investigative news outlet. However, the strategy is generally available to anyone who wants to use it.
“The great thing about the Roth is that it’s everyone’s best tax shelter,” said Ed Slott, CPA and founder of Ed Slott and Company.
For traditional 401(k) plans and IRAs, you generally get a tax break when you make contributions and then pay taxes on the withdrawals in retirement. In contrast, Roth versions of those accounts come with no upfront tax break, but qualified withdrawals are excluded from federal income taxes.
While there are income limits set for who can contribute directly to a Roth, investors with higher income are able to convert assets in a traditional IRA or 401(k) — whose withdrawals in retirement are taxed as ordinary income — to a Roth.
Taxes are paid on the money converted, yet it then can grow tax-free and be withdrawn completely tax-free as long as you have held the account for at least five years and are age 59½ or older.
Among the billionaires who have exploited the rules for Roth IRAs is Peter Thiel, one of Paypal’s founders, whose account was worth $5 billion as of 2019 after a value of under $2,000 in 1999, according to the ProPublica report. (CNBC has not independently verified any details in the report.)
A self-directed Roth IRA
Thiel apparently used a self-directed Roth IRA to shelter his investments. This type of account comes with the same tax benefits as a standard Roth account — tax-free growth and untaxed distributions — but also allows you to invest in assets that are unavailable in regular Roth accounts.
For instance, a self-directed Roth IRA can hold investments like real estate or private company shares, the latter of which is what Thiel first held in his account in 1999 before PayPal was a publicly traded company, according to ProPublica.
Self-directed IRAs typically are only available through specialized custodians — not big financial firms like Fidelity Investments or Vanguard, which offer a broad range of investments such as publicly traded stocks, bonds, mutual funds and the like.
In contrast, custodians that hold self-directed IRAs have nothing to do with the investments you put in your account.
“They won’t police you,” Slott said. “They won’t advise you about breaking tax laws — that’s on you. You have to know what you’re doing.”
In addition, there are valuation issues, he said. While you can know the worth of publicly traded securities, some alternative assets are harder to value, and the onus is on you to get it right so you don’t run afoul of tax laws.
However, once the assets are in the account, you can sell them at some point — presumably at a profit — and use the proceeds to purchase other investments in the account, all under the tax-free Roth umbrella.
Even if a self-directed Roth IRA wouldn’t be a good fit for you, you’d still get the tax benefits if you invest through a standard Roth IRA.
“Anything you think has high growth potential should go in a Roth,” Slott said.
Roth accounts also can help avoid the uncertainty of where tax rates will be when you retire, Slott said.
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The lower and middle classes will suffer the loss of significant advantage – but these garbage reports use the success of the wealthy to perpetuate harm to the lower classes.
Peter Thiel is an anomily. Most people will never be able to do what he did rich people or non rich people. I say good for him,let him have it, he deserves it.
CNBC, are you high?
Roth IRA is doing what it's designed to do and the politicians are cranky about it.
The politicians needs to spot acting like this entitled tax collector and try to learn how to use the money they already collect in taxes in the most cost effective and efficient way.
Everyone of us know how to budget and cut spending. The government should do too.
He's brilliant you don't go after it it's the stupid gov faults. You don't go after citizens who do not break the law you idiots
Why are you calling it a “loophole”? It is not. More nonsense from CNBC.
Imagine being jealous of someone who has incredible vision to the point you accuse them of being a hack gtfo
Not a big fan of Thiel but not able to follow the exploitation part of the story. Is picking the winner stock is the exploitation?
I thought u can only put a certain amount from what I understood n that u will pay taxes on gains just cheaper lower when u 59 1/2 unless it change
3:30 'Why should he have the advantage?' He didn't. He used the Roth like everybody else could have in his position at the time.
Show me thy master. Its going to be worth quad trillions. Leave Thiel alone.
What a hero…
"Thats really the question here." . . .wow dude.
If AAAAANYBODY deserves it it's PT. You think he ain't about to make the world a better place (FOR REAL) with all those gains?? …just because YOU would retire you think "okay he can retire, game over, lock it up…" like he should just retire? you're an amateur.. …HE'S JUST BETTER THAN YOU – DEAL BUDDY.
Palantir will be bigger than Jesus.
PETER THIEL FOR EMPORER OF THE UNIVERSE
I saw most of you haters sound like y’all want to live off government checks for the rest of y’all life..!
Couldn’t take this serious when Carl says publica like “poo” guess he knows what the story truly is
There is no such thing as a "loophole". It is tax law written by lawyers that know precisely what they have written. Envy, so far as sins go is just as deadly as greed. Lol
So back in 1999 when dial up ruled the world, he made a smart bet that PayPal would grow in the next few years and he invested in it…why go after him?
If this was you, and you picked a company's shares to put in your ROTH IRA decades ago, and it was worth many times more than it was then, you would not be complaining. The only reason I see for Peter Thiel haters here, is he is now wealthy, and they are not.
I'm reading he wasn't wealthy in 1998, but became wealthy. Why should he now have to be penalized for following the rules? I don't see why this is exploiting the ROTH IRA unless it was illegal to put shares in his ROTH IRA that were not at fair value. Who gets to determine what fair value is? If the IRS has some way to show his investment was not legal, wouldn't we be reading about it here? Sounds like someone is jealous of someone else fortune or wealth.
Yes. There is absolutely nothing wrong with what he did. This is not an exploit. The reason why he is a billionaire is because he was a founder of one of the largest companies in the world that creates value for millions of people. How is this against the law?
People crying about Peter Thiel being smart. US tax law is not being 'hacked by the rich'.
I love how the MSM reports on illegally obtained tax returns but still won’t discuss Hunter Biden’s laptop he left behind…
Imagine if they said Joe Biden "exploits" a loophole in his S-Corp to avoid paying more taxes.
This is just dumb. It isn't a loophole, it's part of the tax code that we all currently agree to, supposedly. The wrong people make money, the media hates it.
Notice how they avoid saying the Roth IRA is available to anyone with earned income, and instead call it a "special account." That's on purpose, not on accident.
Btw for anyone who got sucked in by his answer to, "how could he have known the shares would be worth much more?" The guy DID NOT answer the question and clearly doesn't know how markets value securities. Raising money is not some promise of share price increase. Companies raise money all the time, it's literally the point of going public. Doesn't mean the shares are guaranteed to go up in value.
Bravo ProPublica! Great journalism is the foundation for democracy!
Anyone can invest pre-IPO/startups and alternate investments within a ROTH if you set up a self-directed/self-managed ROTH as opposed to having a traditional roth with a financial institution which is limited to a few investment options. Thiel invested time and money in startups early in his career and he got lucky by hitting three home runs: paypal, facebook, and palantir.
What exploitation? Peter Thiel used the Roth IRA the way it is intended. So according to the media and those in power, if a lower or middle class American manages to achieve extraordinary returns and reaches a billion in investment value in their Roth IRA account, it then becomes a problem, even though there was no guarantee of those returns? That doesn't make any sense. No one, not even Peter Thiel, could have predicted those returns 20 years ago. The fact that those in power find this problematic is truly worrisome. Politicians should simply leave America's retirement accounts alone.
Don't HATE, LEARN young padawan.