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Peter Thiel's $5B Roth Forces Congress...


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...to consider changes to investment account rules.  He played by the rules, but this certainly isn't in the spirit of what these accounts were intended for.  Personally, I think a $15M cap is more than reasonable.  Cheers!

 

https://www.marketwatch.com/story/peter-thiels-5-billion-roth-ira-moves-congress-to-consider-changes-to-investment-accounts-rules-11625786725?siteid=yhoof2

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It seems ridiculous that you can put private shares in a Roth IRA. I'm sure in 1999 everyone at Paypal knew that their shares were worth more than $0.001, but the IRS just accepts $0.001 as the price since there's no public way to value them? Strange.

 

Peter Thiel definitely seems to want to make a run at the title of 'Most Hated Billionaire'. 

 

 

 

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While the bulk of the money was probably from FB and other legit private investments, I am quite skeptical that the initial investment in Paypal followed the rules. You're not supposed to be able to buy shares at below market value with an IRA, nor do I think you are allowed to buy a closely held company with your IRA if you're the one controlling it. And if he didn't get that initial gain then he would have no money in the account for all the other investments. I do wonder if that transaction was ever audited.

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On 7/9/2021 at 7:14 PM, aws said:

While the bulk of the money was probably from FB and other legit private investments, I am quite skeptical that the initial investment in Paypal followed the rules. You're not supposed to be able to buy shares at below market value with an IRA, nor do I think you are allowed to buy a closely held company with your IRA if you're the one controlling it. And if he didn't get that initial gain then he would have no money in the account for all the other investments. I do wonder if that transaction was ever audited.

 

I would think that the IRS also reads the WSJ, so we'll see if anything comes of it. My understanding is the same as yours - you can't have private companies you control in your self-directed IRA. 

 

That being said, the dude is rich and can hire much smarter tax professionals than me to help him find a way around that rule or some legal structure that makes it ok. It's quite possible this follows the letter of the law, but not the intent. No different than backdoor Roth contributions via conversion which are legal, but clearly are skirting the intention of the law and income limits. 

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If you haven’t read Ted Weschler’s response to his large Roth, I highly recommend it.  It not only explains how Ted grew his account legally, but also indirectly explains why he is such a good match for Berkshire.

 

As for putting limits on IRA’s, all I ask is that whatever cap is placed on IRA accounts comes with an annual inflation adjustment. Many investors  starting their IRA’s in their 20’s with  50 year runways will hit what today would seem like an extremely high should we get a bad decade or two  of inflation.  The crime shouldn’t be the magic of compounding, but illegally putting mispriced private assets in the accounts in the first place.
 

 

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Good for Thiel, hope he keeps it all. It’s been 30 years….the IRS missed it and that’s on them imo. People (government and salty investors) only care when someone “wins”. Look at all the shit Roaring Kitty went through when there was absolutely nothing questionable. 
 

Meanwhile we have Nancy Pelosi with better timing than the Sports Almanac equipped Biff from Back to the Future…silence….govt printing billions of dollars and handing it out….silence

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1 hour ago, SharperDingaan said:

You got that big number because you repeatedly took on risk, and won.

And the bigger the number became, the less incremental risk you had to take.

You cannot penalize people for simply being good at what they do.

 

SD

If you are talking about Ted Weschler I agree. He did the research and took the risk. 
 

As for Peter Thiel. Does anyone believe PayPal shares were worth $0.001 per  share? Im sure everyone would like to buy shares at made up prices in Roth IRA accounts. 

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3 hours ago, adesigar said:

If you are talking about Ted Weschler I agree. He did the research and took the risk. 
 

As for Peter Thiel. Does anyone believe PayPal shares were worth $0.001 per  share? Im sure everyone would like to buy shares at made up prices in Roth IRA accounts. 

Without hindsight bias what was it worth at the time?

 

- He put it in his Roth in 1999

- 3m of seed funding 1999 June

- Email service available to public inOctober 1999

- 1999 total revenue was 350k 

- PayPal didn’t go public till 2002

 

Company could have been a zero. There was no guarantee of success. I think at the time the he put the shares in the Roth it wasn’t worth much. Not sure how you can legislate on hindsight valuation. I can’t find an initial share count or valuation, but it’s likely it was a penny stock no? 350k rev and 3m in funding? We also only know the year which he put the shares in the Roth. 

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Well, what seems to be largely missed here, is that Paypal stake was HIS. But now let the excrement debate and figure out how it should be divvied up....or why its not fair he's better at life than others.

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I guess the issue is if you are dumping private shares into an IRA you can value them however you'd like?

 

Wouldn't it be abusive if I can throw my HouseCo. LLC into an IRA and value it at .001c/share, then sell it for $XX Millions and pocket the change tax free?

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44 minutes ago, LC said:

I guess the issue is if you are dumping private shares into an IRA you can value them however you'd like?

 

Wouldn't it be abusive if I can throw my HouseCo. LLC into an IRA and value it at .001c/share, then sell it for $XX Millions and pocket the change tax free?

Did he break a law? Not sure he did. Maybe the IRS should be slashed an simpler tax codes should be put in place. People are just mad because he gamed the system. Reminds me of Kerry Packer situation. 

 

"It’s a wildly inappropriate use of the Roth IRA, even if it’s legal,” said Steve Wamhoff, the director of federal tax policy at the Institute on Taxation and Economic Policy and a former tax policy analyst for Sen. Bernie Sanders, I-Vt.

 

“With no total limit on IRA accumulations, the government forgoes millions in tax revenue.”

 

Whats inappropriate is the amount of money we give to the government every year so they can waste it. :classic_tongue:

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58 minutes ago, LC said:

I guess the issue is if you are dumping private shares into an IRA you can value them however you'd like?

 

Wouldn't it be abusive if I can throw my HouseCo. LLC into an IRA and value it at .001c/share, then sell it for $XX Millions and pocket the change tax free?

 

The more apt analogy might be starting a new entity to use for a professional practice, like a consultant. At the time of the formation there's no business or assets so the entity is legitimately worth nothing no matter where you have one share or a million shares outstanding. But when you run the company you can make it worth a lot of money if you can be the professional behind the practice, especially if you take a very low salary in relation to what you are earning. So if you start this company and put the shares in a Roth IRA you can transform your sweat into tax free Roth IRA money, whereas it would normally be ordinary income.

 

That level of control over the company is why it's quite different than just picking a winning public company or investment in a private company run by someone else. He controlled the company and could set his own taxable salary and the capital structure going forward, which dramatically affect the value of those shares in his IRA. And so he really shouldn't have been able to put the PayPal investment in the IRA, which makes all subsequent gains, no matter how legimate, fruit of a poisoned tree. Of course he should be allowed to make all those decisions, just not with an IRA investment, as that's not what the vehicle was designed for.

 

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In Canada, you used to be able to exchange shares between a tax-deferred, and a non tax-deferred account, at 'value'. The securities could transfer at any price between the high and low of the day. If there had been no trades that day, the high and low of the most reeent trade could be used. If there had been no trades for a month, you could transfer at a nominal value of your choice, arguing the shares had no value as there was no market for them. Consequently, a very large number of shares could be contributed at a value of 1c each (PayPal). If/when the shares start trading again at a healthy price, good on you.    

 

Sadly, today you have to sell the shares into the market instead. To get the same result, the account you want to transfer into just makes a market bid, at the nominal price you want to transfer at. To some people this is abuse, to others it is simply explicit recognition that nothing prevents the buyer and seller from being the same person - exactly as occurrs every time there is an internal transfer between accounts.

 

Theil had a smart accountant; others are just pissed, 'cause they didn't think of it as well.  

You cannot penalize people for just being good at what they do.

 

SD

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4 hours ago, Castanza said:

Without hindsight bias what was it worth at the time?

 

- He put it in his Roth in 1999

- 3m of seed funding 1999 June

- Email service available to public inOctober 1999

- 1999 total revenue was 350k 

- PayPal didn’t go public till 2002

 

Company could have been a zero. There was no guarantee of success. I think at the time the he put the shares in the Roth it wasn’t worth much. Not sure how you can legislate on hindsight valuation. I can’t find an initial share count or valuation, but it’s likely it was a penny stock no? 350k rev and 3m in funding? We also only know the year which he put the shares in the Roth. 

Didn’t PayPal go public with about 60 million shares outstanding. If all 60 million had been from the first funding round (there were 4) and it was a 3 million funding round that would make each share priced at $0.05  as opposed to the reported $0.001 which is 50x. 

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6 hours ago, adesigar said:

Didn’t PayPal go public with about 60 million shares outstanding. If all 60 million had been from the first funding round (there were 4) and it was a 3 million funding round that would make each share priced at $0.05  as opposed to the reported $0.001 which is 50x. 

But it wasn’t all from the first round, which is my point. Even if it was only a few months later for round 2. The fact is he did this with at most 3m funding, no public usage, 350m in rev and no profit. Did he know he had something special? Probably, but that doesn’t matter. There were dozens if not hundreds of tech companies who thought they had something special. But most ended up going to zero (1999 after all). 
 

Tax evasion is wrong. But tax avoidance is expected no? We don’t have all the details yet, and I’m not sure that .001 number is even verified yet. But PayPal definitely wasn’t worth 60m at the time he bought and put shares in a self directed Ira. 
 

There was an HSA thread on here a year ago where everyone was talking about how you can save your receipts and pay out of pocket up front. Then when you reach collection age you can show proof of receipts and instead of using the HSA “in the spirit it was intended” you basically used it as a triple tax advantage retirement account. Everyone “games” the system as much as they can with every investment vehicle. 

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This is why you have to do the transfer via a sale into the market, and a buy out of the market. The transfer was 'at market', and every independent in the market at the time of the trade had the opportunity to take the bid. You simply made a competitive, and therefore independent trade, proving market fact. Whether or not there actually were independents in the market at the time of the trade is not your problem - they just have to have had the oportunity to hit the bid. Of ciurse, the IRS may have a different opinion - but facts trump it.

 

In Canada we have the TFSA account, intended for tax free savings. Taxpayers can contribute to it every year up to the current life-time maximum of $75,500.

Imagine an investment of 50K invested in 250,000 shares of an o/g stock at $0.20/share. The shares subsequently go to $10.00/share, the TFSA has $2.5M of value in it, and the entire gain is tax-free. The same trade in a taxable account at a 50% tax rate, would have generated a 612.5K tax bill (2.45Mx50%x50%). With 2.5M of capital, If all future trades are done in the TFSA, you will NEVER pay tax. https://www.wealthsimple.com/en-ca/learn/tfsa-limit?gclid=EAIaIQobChMI6Imw4Ofd8QIVlh-tBh1RhAf2EAAYBCAAEgJkRPD_BwE

 

Many would say this is abusive, whereas the facts evidence that it is far from it. You played within the rules, took the risk, and it worked out - it could also have failed. Retroactive penalizing simply because it worked out 'too well' is the abuse, not the trade itself.

 

SD

 

 

 

   

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If you're buying small cap spec stocks in the public markets and manage to hit it big, I have no problem with that. Ted Weschler's Roth seems completely fine to me; he played by the rules, and he played very well. Good for him. Thiel's Roth looks a lot more like self-dealing, as Spek has highlighted. That just looks like blatant tax fraud and should incur the proper penalties.

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The cost of trying to make a Roth airtight just isn't worth the benefit.

The reality is that there will always be a few very big winners, but as long as they are discreet about it, it really shouldn't stop the broader public from benefiting via the program. The winners are eventualy going to end up donating much of their win, to the benefit of a great many - in the meantime, they are really just 'care taking' the money. One individual in Canada used to have a TFSA so large, that it eventually funded the business school of one of Torontos universities.

 

SD

 

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7 hours ago, Pauly said:

If you're buying small cap spec stocks in the public markets and manage to hit it big, I have no problem with that. Ted Weschler's Roth seems completely fine to me; he played by the rules, and he played very well. Good for him. Thiel's Roth looks a lot more like self-dealing, as Spek has highlighted. That just looks like blatant tax fraud and should incur the proper penalties.

 

Yeah, it's fine to go for the fake outrage or clickbait, but that article sabataged itself.  Lumping folks who appear to do things seemingly fair and straight with Thiel's suspicious dealings was just poor judgment.

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Mr. Weschler, in his response to the ProPublica 'investigation', summarized well a reasonable and balanced way to improve the equity outcome for all, concerning this specific aspect (intent of the underlying legislation):

"In closing, although I have been an enormous beneficiary of the IRA mechanism, I personally do not feel the tax shield afforded me by my IRA is necessarily good tax policy. To this end, I am openly supportive of modifying the benefit afforded to retirement accounts once they exceed a certain threshold."

 

For the Roth-IRA equivalent in Canada (TFSAs), there is no effective cap but the CRA (IRS-equivalent) appears to be more pro-active (for better or for worse) and they seem to base their audit efforts and legal actions on $ thresholds.

Based on a few relevant inputs, once in the audit phase, the CRA looks at the composition of the portfolio, at the frequency of 'trading' and a good defense is to show investment-based decisions in tax-deferred accounts that are proportional to what happens in non tax-deferred accounts. 

Rules could be clarified though instead of waiting for case law to develop and retroactive changes raise fairness issues as well. A simple cap or a simple cap-equivalent seem to be the most effective way to deal with this.

In Canada, the tax-deferred education funds (RESPs) do not have hard caps but have effective functional caps because of the finite life of the programs. If you end up with excess funds (more money than was necessary to pay for higher education), you have three choices: 1-use available room elsewhere to move the funds to another form of registered tax-deferred accounts (based on available contribution limits per year so no compounding possible), 2-transfer the excess funds to an education institution as a donation (not tax deductible) or 3- retire the funds as ordinary income taxed at 70 to 75%. The rules are somewhat cumbersome overall and you have to think like a defined benefit pension plan with fairly unknown assumptions but i think most dedicated participants 'get' it.

 

 

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  • 2 months later...

Peter Thiel Gamed Silicon Valley, Donald Trump, and Democracy to Make Billions, Tax-Free

 

In an exclusive excerpt from The Contrarian, a new biography, the disruption-preaching power broker is revealed as just another rich guy desperate to keep his fortune from the IRS.

 

https://www.bloomberg.com/news/features/2021-09-15/peter-thiel-gamed-silicon-valley-tech-trump-taxes-and-politics?srnd=premium

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I bet if they waived the same 10% early withdrawal penalty ONLY for individuals with retirement account totals exceeding $3m it would elicit outrage.

 

And of course those same people get outraged that these accounts exceed what they deem necessary for retirement...

 

And that penalty is only there to be a disincentive to spend retirement savings early to ensure there is enough late in life...

 

c'mon.

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