The Roth Individual Retirement Account (IRA): How PayPal co-founder, Peter Thiel, grew his Roth IRA from $2,000 in 1999 to $5 billion+ (even though he didn’t contribute to it after 1999)
Introduction:
How often do you take time to think about retirement? Do you have a 401(k), a Roth IRA, 403(b), etc.? Unfortunately, most individuals think about their retirement just as much as they think about their finances and investments. Why do we say that? As Fuscaldo (2021) highlights
“A 2019 research study from Northwestern Mutual found that 22% of adults in the U.S. have less than $5,000 saved for retirement, while another 15% have no retirement savings at all. The same survey reported that, on average, people think there’s a 45% chance they’ll outlive their savings.”
Despite this, in the arena of retirement, there is one individual, Peter Thiel, that has taken the world of the Roth IRA by surprise. Why? Malito (2021) notes that his account “jumped more than $3 billion in just three years, even though he didn’t contribute money to his Roth after 1999.” At first glance, it appears that the numbers and logic do not add up. Let’s dive into this a bit. The Roth IRA was established in 1997 under the Taxpayer Relief Act and was sponsored by Senator Roth. The primary difference between the Roth IRA and other retirement accounts is that individuals contribute after-tax dollars to the Roth IRA and the growth/withdrawals from the Roth IRA are tax-free. The catch? Individuals can only contribute up $6,000 per year into their Roth IRA in 2021 and individuals over the age of 50 can contribute up to $7,000 (there is also phasing out based on income levels).
So, given the contribution limitations, income phase outs, and the various restrictions, how was Peter Thiel able to grow his Roth IRA into the billions? Back in 1999, Thiel bough approximately 1.7 million shares of PayPal, the company he co-founded, for $0.001 per share. As Malito describes,
“With this strategy, investors are able to buy a large number of shares in a startup at fractions of a penny per share. When those investments garner large gains, investors can use the proceeds from these investments still inside the Roth IRA to make other investments. Substantial gains could be derived if the company goes public and its share price skyrockets.”
An interesting fact is that given that this all occurs within Thiel’s Roth IRA, the gains from those sales are tax-free! The important note for you as investor – with a Roth IRA, you have the ability to choose your favorite assets and then put your Roth IRA to work (ensure you review IRS constraints and rules). As an example, imagine you come together with some family members, each of your-all’s respective Roth IRAs, to purchase an asset that appreciates and cash flows. Interesting idea, right?
Sources: 1. Carrillo, Cristian, https://quetzalcapitalgroup.com/using-retirement-funds-to-invest-in-real-estate-the-self-directed-ira/
2. Fuscaldo, Ebony, ‘Retirement Without Saving,’ https://www.investopedia.com/articles/personal-finance/111815/what-retirement-will-look-without-savings.asp
3. Malito, Alessandra, ‘How Peter Thiel turned $2,000 in a Roth IRA into $5,000,000,000, https://www.marketwatch.com/story/how-peter-thiel-turned-2-000-in-a-roth-ira-into-5-000-000-000-11624551401 4. Northwestern Mutual. “Planning and Progress Study 2019.” Accessed Dec. 29, 2020.
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