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A Roth IRA is, under the right circumstances, the best retirement vehicle you can have. Just ask Peter Thiel.
According to ProPublica reports, sourced from IRS data, Thiel grew his Roth IRA from $2,000 to more than $5 billion between 1999 and 2021. This is significantly more than the average household’s IRA balance, which is about $129,000, according to Fidelity.
The question is: how did Thiel do it?
Thiel is a recognized investor who, as a founder and investor in the early years of technology, had access to some of the most lucrative pre-IPO stock opportunities in history. This allowed Thiel to use his Roth portfolio to hold private stocks with extraordinary returns, such as PayPal and Facebook. These assets have generated outsized returns that have created a huge amount of completely tax-free wealth for Thiel’s portfolio. Here’s how it works.
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Peter Thiel has long been one of the richest individuals in the world. He made his money as an early investor in technology companies, founding companies like PayPal and Facebook and investing in the early days of the Internet.
Stocks like these are not legally or practically available to most investors. Legally, ordinary investors cannot freely trade private stocks. You must be an accredited investor to buy and sell these assets, a law intended to protect investors from predatory, confusing or opaque investments. Investors can be accredited if they meet certain criteria, such as a net worth of $1 million, meet the recurring annual salary threshold of $200,000, or have certain financial certifications.
In practice, ordinary investors usually do not have access to these options. The average person doesn’t have access to brand new startups and tech founders looking for investments. However, Thiel did. Thiel has long been one of the biggest investors and founders in the tech world. His largest companies include PayPal, Palantir Technologies, Facebook (in which Thiel was one of the original investors), and the Founders Fund (which made Thiel an early investor in many successful technology companies).
Thiel has a self-directed account, meaning he manages the investments in the portfolio. Over the years, he has used his Roth IRA to invest in many early-stage startups, most notably when he used it to hold early shares in PayPal. This allowed Thiel’s portfolio to generate the kind of explosive growth associated with successful tech startups, and Thiel then used those profits to fund future investments. His Roth IRA has at various times owned assets such as Facebook, Airbnb, Palantir and SpaceX, usually all purchased in the early days of a particular company when the stock sold for very little. The tax-free nature of Roth IRA growth allows assets within the account to be sold and purchased without taxes eroding their value.
Thiel’s Roth portfolio also benefited from the tech stock explosion of the late 2010s.
Starting around 2017, and often linked to that year’s high tax cuts, tech stocks began to “hockey stick” across the market. This market began to take off, with many companies doubling or tripling their value in just a few years. According to ProPublica, Thiel’s portfolio increased by about $3 billion between 2016 and 2019, reflecting the growth of the tech industry during that time.
When it comes to Peter Thiel’s Roth IRA, the secret is that there is no secret. Thiel grew his Roth IRA in much the same way as anyone else. He invested in his portfolio and used the money to buy stocks that he thought would do well. The difference is that Thiel had access to both information and assets that the average investor does not have, allowing him to invest early in companies that would later grow exponentially in value.
He used his Roth IRA to do this because, like most people, he gets a lot of benefit from tax-free investing. Keep in mind that everyone’s investment story is different depending on their circumstances, objectives and risk tolerance. Consider talking to a financial advisor to develop a personalized plan for your goals.
A Roth IRA is a form of tax-advantaged retirement account.
With a Roth portfolio, you finance your investments entirely with after-tax money. This means that you either use contributions from earned income on which you have paid income tax, or you convert money from a pre-tax account and pay income tax on the amount moved.
Money in a Roth IRA grows completely tax-free. Even if you withdraw money later in retirement, you do not pay tax on this account.
Contributions to a Roth IRA are limited to no more than $7,000 per year ($8,000 with catch-up contributions for those over 50). This is a cumulative limit that applies to all IRA accounts. So, for example, if you contribute $3,000 to a traditional IRA in 2024, you can contribute up to $4,000 to a Roth IRA that same year. These limits are adjusted every year to account for inflation, and were originally set at $2,000 when the Roth program started in the late 1990s and Thiel opened an account. There is no limit on how much money you can convert from a qualifying pre-tax account to a Roth IRA.
All of this makes Roth accounts a trade-off.
The taxes you pay upfront leave you with less capital to invest today, which can mean significant opportunity costs in the long run. Suppose you earn €1,000 and pay a tax rate of 15% on it. With a Roth IRA, you would have $850 left to invest after taxes. With a traditional IRA or a 401(k), you wouldn’t pay those taxes and could invest the entire $1,000.
In 30 years, at the average market return of 11%, the $850 Roth IRA would be worth $19,458. The $1,000 from the Traditional IRA would grow to $22,892. But then the winnings are taxed at your income tax rate when you go to withdraw money. Whether the tradeoff is worth it likely depends on your tax rate now and your tax rate in retirement.
However, tax-free withdrawals maximize the value of your portfolio and its profits. When your money has enough time to grow in the Roth account, you can save much more on withdrawal taxes than you paid upfront since you (ideally) withdraw much more than you invested. For example, suppose your portfolio has enough time to grow from $100 to $1,000. You pay tax on the initial $100 investment, and no tax on the $900 withdrawal. Assuming a consistent 15% tax rate, that would be a $15 tax bill in exchange for a $135 savings.
Or, in Peter Thiel’s case, you could pay taxes on $2,000 and withdraw $5 billion completely tax-free.
A financial advisor can help you manage a Roth IRA or convert money from other retirement accounts. Click here to get matched with a financial advisor.
Peter Thiel built an enormous amount of wealth in the same account that many Americans use for retirement savings: the Roth IRA. While he was able to gain exposure to private investments in that account, he was still only able to contribute a few thousand dollars a year and managed to build this up to billions tax-free.
Thiel’s portfolio does indeed raise a mechanical question. He owns what’s called a self-directed IRA, which means he makes his own investment decisions about which assets to buy and sell. How exactly do you do that?
A financial advisor can help you draw up a comprehensive retirement plan. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that isn’t at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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