How did billionaire Peter Thiel, co-founder of PayPal and one of the first investors in Facebook, turn $2,000 Roth individual retirement account into more than $5 billion without allocating more money to it? This “wonder” is reported by the MarketWatch website in an article dedicated to the subject.
According to the report, Thiel used a Roth Personal Management Provident Fund (IRA), a U.S. financial tool designed to allow for retirement savings without the saver being required to pay tax at the time of withdrawal.
The value of Thiel’s IRA Roth account in 1999, according to U.S. tax authorities, was less than $2,000 and soared more than $3 billion in just three years. This is although he has not set aside additional funds in the account since 1999.
The 53-year-old Thiel only has to wait until the age of 59 and a half to withdraw the tax-exempt funds.
Thiel used his IRA account slightly differently than the average American. For example, in 1999, he bought about 1.7 million shares of PayPal for $0.001 a share, or $1,700. According to data collected by ProPublica, at the end of 2019, Thiel’s account value was $5 billion.
Through this strategy, investors can purchase enormous shares in startups at a few pence per share price.
Once these investments yield large profits, investors can use the profits from these investments included in the Roth IRA account to make additional investments. They may post particularly large profits if the company becomes public and the stock price soars.
The profits from these sales are tax-exempt because they happen within the account.
Another way to put money into an account is to transfer money from a traditional pension account to a Roth account and pay a one-time tax on them. This tactic makes it possible to circumvent the restrictions on transferring funds.
Thiel did not respond to MarketWatch for the report.