How Peter Thiel Built a $5 Billion Tax-Free Fortune from a Middle-Class Retirement Account

Peter Thiel, co-founder of PayPal, Palantir Technologies, and Founders Fund, was the first person outside the company to invest in Facebook. In 2004, he put $500,000 into Facebook. After Facebook went public in 2012, Thiel sold some of his shares for over $1 billion. This means he waited 8 years to see a big return on his investment.

Thiel doesn’t need a man-made island to avoid paying taxes.

He has something just as effective: a Roth Individual Retirement Account.

Over the past 20 years, Thiel has transformed his Roth IRA, a simple retirement savings account, into a massive tax-free fund, according to private IRS data. By using special stock deals that most people can't access, he grew his account from under $2,000 in 1999 to $5 billion. If Thiel waits until April 2027 to take out his money, just before he turns 60, he won't have to pay any taxes on those billions.

Data from IRS tax returns on thousands of the wealthiest people in the country gives us a glimpse into the financial lives of America's richest individuals, whose enormous fortunes make them some of the wealthiest people in history. This secret information shows that while most Americans are paying their taxes to support things like the military, roads, and social programs, the wealthiest people are finding ways to avoid paying taxes.

From the beginning, a few business people, like Thiel, found a way to work around the rules:

• Start a Roth IRA with $2,000 or less.

• Get a special deal to buy shares in a startup that might become very valuable.

• Pay a very low price per share, allowing you to buy a lot of them.

• As the stock value grows, all the profits are tax-free, as long as you don't withdraw from the IRA until you're 59 and a half.

• Then, you can use the money in the Roth to make more investments.

About ten years after the Roth was created, Congress made it simpler to use these accounts as big tax shelters. They allowed everyone, even the wealthiest Americans, to move money from traditional retirement accounts to a Roth account. After paying a one-time tax, their money could grow without being taxed further, like a tax haven within the U.S.

Warren Buffett uses a Roth account and had $20.2 million in it at the end of 2018. Thiel, who likes J.R.R. Tolkien's work, had placed his Roth under a family trust company named Rivendell Trust. In "The Lord of the Rings," Rivendell is a hidden valley where elves live, offering protection from dark forces.

In his bestselling book on startups, “Zero to One,” Thiel wrote: “Money makes money.” In his book “Zero to One,” Thiel argues that fortunes are built not by luck or unfair advantage, but by discerning investors and founders who are more courageous than their peers, leaders who zig when the crowd zags. Thiel devotes an entire chapter to the importance of keeping secrets, writing that “every great business is built around a secret that’s hidden from the outside.”

In 2010, a new way to convert traditional IRAs to Roth IRAs became available, leading many wealthy individuals to make the switch. This included hedge fund managers, industrialists, and heirs. Warren Buffett, converted $11.6 million. After paying the required taxes, he saw Roth account growing significantly.

Some wealthy people found ways to avoid paying a one-time tax. For example, the Ebrahimi family, who made a lot of money from the software company Quark, moved $65 million into Roth IRAs in 2010 and 2011. Farhad Ebrahimi, one of the family members, converted $19.4 million into a Roth IRA, which should have resulted in a $6.8 million tax bill. However, he used losses from other investments to cancel out the tax.

A Roth IRA offers several advantages that make it an attractive option for retirement savings. One of the primary benefits is the tax-free growth and withdrawals it provides. Since contributions to a Roth IRA are made with after-tax dollars, the money grows tax-free, and qualified withdrawals during retirement are also tax-free, which can be a significant advantage if you expect to be in a higher tax bracket in the future. The combination of tax benefits, flexibility, and accessibility makes Roth IRAs a compelling choice for many individuals looking to secure their financial future.

For more tailored advice, consult a tax pro at Taxagon.