Roth IRA’s have been trending on Twitter recently because it was discovered that Peter Thiel accumulated over $5 billion in his Roth IRA. Peter Thiel was one of the original founders of Paypal in 1999 when the Roth IRA was still in its infancy. At that time, his salary qualified him to contribute to his Roth IRA and he placed 1.7 million shares of Paypal into his account. The shares started off at the value of one-tenth of one penny ($1700), and after Paypal went public, those same shares rose to over $50 each.
With all this wealth in his Roth IRA, Peter Thiel used it as a slush fund for his other investments. In 2004, Mark Zuckerberg solicited a $500,000 investment from Peter, made within his Roth IRA, and that went on to grow considerably. By the end of 2012, Peter Thiel’s Roth IRA was valued at roughly $1.7 billion.
Mitt Romney did something similar, where he put undervalued shares into his own Roth IRA, which ended up creating a lot of negative press for him. By 2019, a large majority of Peter Thiel’s investments took place under the umbrella of his Roth IRA. He has over $5 billion spread across 96 different sub accounts reflecting different investments in different companies.
Peter Thiel plans on living to 120 and is making investments in antiaging technologies. In that situation, by the year 2087 he would have roughly $263 billion in his Roth IRA.
In 2010, Congress removed the income threshold that prevented people from converting to a Roth IRA. This led hedge fund managers and venture capitalists to convert portions of their existing IRA, but Mitt Romney did not. Mitt now has around $100 million in his traditional IRA. In a rising tax rate environment, Mitt should have adopted the Peter Thiel approach. Under Joe Biden’s tax proposals, Mitt stands to lose upwards of 70% of that money upon distribution.
The best course of action for Mitt would be to bite the bullet and convert all of that money in a single year. Even with all the taxes he would pay now, it pales in comparison to what he would pay once Joe Biden’s tax reform bill comes into play. According to the Power of Zero principles, Mitt is foolish to have that much money in his IRA. He should take advantage of the tax year of 2021 because it’s never going to be a better rate than 37% for him.
One thing you can draw from the Peter Thiel approach is the power of the Roth IRA. Once you put the after-tax dollars in, they grow in a tax-free way no matter what you invest them in.
Contrasted with Mitt Romney, the larger his wealth grows, the larger his tax bill grows. He will probably end up paying at least 50% in taxes by the time he needs to take that money out, unlike the venture capitalists like Peter Thiel, Warren Buffet, and others that have taken advantage of the Roth Conversion.