Peter Thiel, the billionaire co-founder of PayPal, was able to grow a Roth IRA retirement account worth $2,000 into $5 billion. The account, which Thiel hasn’t contributed to since 1999, jumped over $3 billion in value in only three years and was worth $5 billion at the end of 2019. So, how did he do it?
Roth IRA vs. Traditional IRA
Roth IRAs are funded with after-tax dollars, meaning that when the holder withdraws from the account, that money is tax-free. On the other hand, traditional IRAs are funded with pre-tax dollars, so any money withdrawn is taxed. It’s difficult for an average person to gain this kind of fortune through a Roth IRA, as there are contribution limits of $6,000 a year, as well as income restrictions. But Thiel was able to grow his fund without contributing for over 20 years.
How Thiel took advantage
The account was able to generate these returns because when it was set up in 1999, Thiel bought 1.7 million shares of PayPal (which was a small start-up) for $0.001 per share, or $1,700 total. When the share price grew, the value of the shares inside the Roth IRA meant that Thiel realized substantial tax-free gains.
You might be thinking to yourself, “How did he do that!? Paypal went public in 2002, not 1999, and it was worth $13 a share when it first went public! I thought you could only invest in stocks, bonds, mutual funds and ETFs in an IRA account?” Well, Thiel did something a little different when he opened his Roth IRA that many people don’t know about. Theil did a self-directed IRA/Roth IRA. To put it simply, a self-directed IRA/Roth IRA allows the individual to place alternative asset classes — such as real estate, collectibles, notes and small businesses — into their portfolio.
A brilliant strategy
Thiel had a large percentage of shares in PayPal before it went public. So, he took his pre-IPO shares of PayPal in 1999 — which was worth nothing since the company was founded a year earlier —and placed them into his Roth IRA so they wouldn’t be taxed in the future. It was a brilliant strategy on his part. And now he’s reaping the benefits.
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Eric Hanfling contributed to this article.
