Peter Thiel turned a retirement account into a 5 billion dollar tax-free piggy bank. Here’s the wild story:
In January 1999 a deputy of Peter Thiel’s walked into Pensco Pension Services office in San Francisco. This would be a meeting that would change Thiel’s life.
First things first, let’s understand how a Roth IRA works. With a Roth Individual Retirement Account (IRA) you invest a limited amount of money each year ($6,000). When the money is in your account it’s never taxed again. As long as you don’t withdraw it before you’re 59 1/2.
Thiel had recently embarked on his venture capital career. He raised $1 million from friends and family to launch Thiel Capital Management. Pensco was a small firm that allowed its customers to put almost any investment in a tax-beneficial retirement account.
Pensco’s founder was Tom Anderson. Anderson introduced Thiel to the Roth IRA, a new account that wouldn’t make you pay tax when you took the money out. Thiel seized the opportunity with two hands. He was about to become Pensco’s whale.
But what happened next cost the US government millions. The average American typically uses their retirement account to purchase stocks or bonds. The value of which is set by a public stock exchange. Thiel used his Roth IRA to purchase shares in his new startup, PayPal.
In 1999, the maximum annual contribution to your Roth IRA was $2,000. Thiel paid $0.001 per share for 1.7 million shares. This cost him only $1,700.
One month after Thiel bought the shares in his Roth, PayPal raised $500,000. Then in August, another $4.5 million from Nokia’s venture fund. The dot-com boom was happening and happening quickly… The reported value of Thiel’s Roth at the end of 1999? $1,664.
After 1999, Thiel never contributed money to his Roth IRA again. In 2000, the value of his Roth jumped to $3.8 million. A cool 227,490% increase. In 2002, eBay purchased PayPal. Thiel sold the shares and bagged $28.5 million inside his tax-free wrapper.
If Thiel held these shares outside of the Roth, he would’ve owed the IRS 20% of the gains and another 9% in tax to California. What happened next? Rinse and repeat…
Thiel founded Palantir in 2003. A data analytics company backed by a CIA venture fund. Thiel used the $28.5 million sloshing around in his Roth to buy shares of Palantir. There was another opportunity sitting on the table. In 2004, Thiel met Mark Zuckerberg.
He invested $500,000 into Facebook from a place no other than his Roth IRA. By the end of 2008, his Roth was worth $870 million.
As of 2019, Thiel’s Roth IRA crossed $5 billion. What if you also started a Roth in 1999 and maximized your contribution each year? You’d have $258,000.
So what’s the secret? 1. Open a Roth with $2,000 2. Buy founder’s shares for a fraction of a penny 3. Shield yourself from tax until you’re 59 and a half 4. Use the proceeds to make other investments 5. Find yourself on the beach sipping a cold one (6. Meteoric startup growth)
If Thiel waits until he’s 59 1/2 in April 2027, he won’t have to pay tax on a penny of the $5 billion. 1 in 4 working-age Americans have nothing saved for retirement. The average Roth IRA was worth $115,400 at the start of 2020.
