Every year I deposit the maximum amount of money that I'm allowed to do so in my Roth IRA. This is normally done via a backdoor roth ira, where I start a traditional ira and then convert it to a Roth IRA.
A Roth IRA is widely viewed as the premier retirement savings vehicle that you can start. Peter Thiel's roth ira is something of pure awe, and today I'm going to break down the incredible story on how Peter Thiel's roth ira account great from $2,000 to over $5 billion from the years 1999 to 2021.
So how exactly did he accomplish this incredible growth?
Peter Thiel isn't like most of us. In fact, he has a history of huge successful tech startups, he's an accredited investor, and is able to get his hands on some of the largest pre-IPO stock launches that investors like us will never get access to.
Using his Roth IRA, he was able to buy stocks that went on massive runs. Companies like Facebook and Paypal, to name a few.
These significant gains grew in the tax advantaged retirement account that will allow him to have tax free growth on anything he invests through there - the Roth IRA.
Why a Roth IRA Account Does Not Pay Income Taxes
A Roth IRA (“Individual Retirement Account”) is designed so that you contribute after‑tax dollars today in exchange for tax‑free growth and tax‑free withdrawals in retirement.
Here’s how it works:
The Roth account is unlike a traditional ira or even a 401(k) where you enjoy a tax deduction when you invest. You pay income tax on whatever amount you invest prior to putting it in the Roth IRA account.
Once you establish your Roth IRA, the money earned grows tax free. This goes for capital gains, dividends, interest, everything. You will never be required to pay income tax on any of the growth, even if you get it to $5 Billion like Peter Thiel's roth ira!
There are two requirements you must meet to keep the tax free status.
First, you must not withdraw funds until you are 59.5 years or older.
Second, the Roth IRA must have been open for at least 5 years.
When you meet that criteria, you will be able to withdraw all original contributions as well as any earnings that account generated without paying any federal income taxes.
Why Does the IRS Allow This?
The short and sweet facts are that the IRS swaps a tax break now (from say a traditional ira) for a tax break later (in the case of a Roth IRA).
This provides taxpayers with two choices:
Either open up a Traditional IRA or 401(k) and get an immediate tax deduction and instead pay withdrawal taxes in your retirement years.
Or:
Open a Roth IRA and pass on any immediate deduction and instead pay zero withdrawal taxes in retirement.
Benefits of Roth IRA's
Here's a few of the benefits of opening a Roth IRA:
- You won't be required to take required minimum distributions (RMDs.
- You can pass on the Roth IRA account with proper estate planning and they can inherit this account and enjoy the same tax advantages.
- The Roth IRA also provides tax diversification if you have investments in tax-deferred and tax-free buckets. It allows investors to optimize their tax liability amongst their various retirement savings portfolios.
Peter Thiel and How He Grew His Roth Account to $5 Billion
One of the most wealthy investors in the world, Peter Thiel has always been ahead of the curve. He's a big fan of investing in gold, as gold is a safe haven asset, but he's made his fortune largely from founding and investing in firms like Facebook and Paypal.
Let's set aside the fact that he's founded multiple successful tech companies as well as the likes of Palantir Technologies.
The structure he used to invest early on in multiple unicorn valuations was the face that he has a self directed ira. (As do I.....this is where I hold my gold IRA and make other investments that I personally manage.)
Many of his investment ballooned to incredible numbers. He used his Roth account to invest in these, including his early shares in Paypal. This was the catalyst for Peter thiel's roth ira portfolio to grow to $5 billion in just over 20 years.
He kept re-investing those profits to get into other opportunities. SpaceX, Palantir, Airbnb, and more. These were all investments he made when the companies were start-ups and the shares were very cheap in comparison of where they are today. With the advantages the Roth IRA provided, he's literally creating generational wealth without the fear of income taxes cutting into any of it.
Palantir is a publicly traded company that specializes in software platforms for big data analytics.
Thiel's Roth portfolio also gained a lot of momentum from the years 2016 to 2019, where it earned about $3 Billion alone due to the growth of the tech industry.
What Peter Thiel did, if I'm being brutally honest, is something ANYONE can do. I have a Roth IRA and I buy a lot of alternative assets in that account. I hold crypto, play the stock market, and am an active swing trader. This Roth IRA growth is all tax free, just like that of the Roth IRA Thiel's portfolio used.
While I don't have $5 Billion saved (goals!) I enjoy the same tax advantaged growth that Peter Thiel is using.
Roth IRA vs. Pre-Tax Accounts - A Closer Look
If you are looking for tax advantaged retirement accounts, the Roth IRA is your best bet.
As mentioned in this article, you are investing with after-tax money. Your investments give you entirely tax free wealth and you don't pay income tax when you withdraw the funds in retirement.
Roth IRA contribution limits are something to pay attention to. You can invest no more than $7,000 each year and $8,000 in catch-up years if you are over the age of 50.
You can also convert your IRA to a Roth IRA and pay taxes on that during the year you make that conversion. I've done this on several occasions when I had a lower tax obligation.
So there is a trade-off here. You can enjoy a tax break now with a traditional ira, or enjoy it later with a Roth IRA.
A breakdown was done on SmartAsset, where they discussed a hypothetical return of 11%.
After being invested for 30 years, $850 placed in a Roth IRA would be worth $19,458.
In a traditional ira, they used the example of $1,000 invested to account for a 15% tax rate in the example, which is why the Roth IRA number is $150 less. The same $1,000 growing at 11% ends up being $22,892.
However, this number will be taxed when there are withdrawals.
So, you have the tradeoff of paying taxes now and having the chance of not paying taxes later like Thiel's roth ira, or you can select the tax advantage retirement accounts now and save money today.
It have both - which gives me a lot of flexibility in the future. However, whenever humanly possible, I try to get every dollar I can into my Roth IRA. Id like to avoid paying taxes later in life!
Bottom Line
Peter Thiel did something every American has the option to do - he opened a Roth IRA and used his Self directed ira to invest early and then fund future investments with these accounts. This is how his Roth IRA grows - by taking chances on start ups.
FAQS:
What are the Contribution Limits for Roth IRAS?
$7,000 per year or $8,000 if you are age 50 or above.
What is the Average Household's IRA Balance?
The Median Balance as of the latest report in 2022 was $309,130.
About Tim Schmidt Sr.
Tim Schmidt is an Entrepreneur and Serial Investor. Since 2012 he's been an advocate of alternative investments using a Self Directed IRA. His work has been featured in Yahoo! Finance, USA Today, Business Insider, and Tech Times, among others.
