Last week, ProPublica published an investigation about how venture capital billionaire Peter Thiel has managed to turn a $2,000 initial investment into a $5 billion fortune inside of a Roth IRA, a type of retirement account that allows money to grow tax free, meaning he will never pay taxes on his investment gains. The tactic used by Thiel is upsetting to people who would like to see the ultra-wealthy meaningfully taxed. The article hit different for another subset of people, though: Thiel’s strategy is now the hottest advice in the personal finance world.
The personal finance online media ecosystem consists of a large set of bloggers, podcasters, YouTubers, and TikTokers who give people common sense financial advice like “pay down debt,” “have an emergency fund,” and “invest money.” The hottest subset of personal finance influencers at the moment are those who are trying to help people achieve Financial Independence (FI), the point at which you can quit your job and live off your investment returns, money from rental properties, or other investments (this is also called FIRE—Financial Independence, Retire Early).
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The advice to achieve FI varies slightly from influencer to influencer, but one thing most everyone in the entire personal finance world is obsessed with is the Roth IRA, a type of retirement account created by Congress in 1997 that people can put post-tax money into (as opposed to pre-taxed money, like a 401k). The thing about a Roth IRA is that you pay tax on the money before you invest it (i.e., when you get it from your paycheck), but crucially you do not pay taxes on it when you take it out, regardless of how much that money grows over time. This means you can invest $5,000 when you are 20, let it grow at an 8 percent average rate of return for 35 years, and take out ~$183,000 when you’re 65, without paying taxes on all of the growth. This tax-free growth makes it one of the backbones of many investment strategies.
The government has restrictions on Roth IRA accounts—namely, you can only put in a certain amount of money every year (for 2021, it’s $6,000). There are also, theoretically, restrictions on who can use a Roth IRA. If you make more than $140,000, you are not supposed to be able to contribute to a Roth IRA. There is a loophole around this called the “Backdoor Roth,” which is widely practiced, codified into law, and is the subject of hundreds of podcast episodes and articles. To do this, you basically open a regular IRA and then “convert” it into a Roth IRA, which somehow magically bypasses the income restrictions.
Personal finance professionals are obsessed with the Roth IRA because it’s a way to, over time, make a lot of money without having to pay taxes at the end. The other thing that people in the personal finance world are obsessed with are index funds, which are stocks or mutual funds that mirror the performance of the stock market. The thought here is that it’s difficult to pick winners and losers if you are investing in a single stock, but that generally speaking, capitalism’s endless obsession with growth requires that the stock market go up over long periods of time.
If you’re privileged enough to have money to invest, putting your money into a Roth IRA is one of the most common pieces of advice you’ll get. Unlike betting on the value of Dogecoin or a GameStop “short squeeze,” it’s basic, relatively safe financial advice. The prevailing advice has been to “max out” your Roth IRA, with the actual investments inside of the Roth being inside index funds, which will grow at a relatively predictable and stable pace over the course of decades.
This is not what Peter Thiel did, and, when ProPublica revealed that Thiel had made an incredible sum of untaxable money based on a very small initial investment, the personal finance world was NOT like “wow, our tax code is broken, tax the rich, wealth redistribution now.” Instead, it was like “wow, what the fuck, we should do that, amazing.”
Rather than dump his money into index funds or some other safe investment, Thiel spent $1,700 for 1.7 million shares of PayPal (a company he cofounded), at $.001 per share, inside his Roth. Within a year, the value of his PayPal shares skyrocketed from $1,664 to $3.8 million. Thiel then sold those shares (still within the Roth), meaning the value of his Roth became millions. Crucially, once he sold those shares, that money was “cash” in that investment account. He could then invest those millions (and any future growth of that) into anything inside of this tax-sheltered account, forever. This means that the $6,000 contribution limits to the Roth IRA functionally no longer mattered, Thiel had an actual large sum of money with which to invest, tax free, forever. He has now turned that into $5 billion, according to ProPublica.
Thiel showed that you do not need to invest in index funds in a Roth IRA, which is what most people have been saying investors should do for a long time. The thing that is blowing the personal finance world’s minds is the idea that people can and perhaps even should be much more aggressive within their Roth IRAs in hopes of running into some stock that goes bananas, therefore giving you a personal, tax-free slush fund to invest in anything for the rest of your life.
Market Watch ran an article about how to invest in a Roth like Peter Thiel (which later showed up on Barron’s). So did Business Insider and NerdWallet (which was later posted on ABC News). Fellow venture capitalist Jason Calacanis called Thiel a “financial genius,” on his This Week in Startups podcast and said the only issue here is that regular people can’t invest in private companies: “If anybody could do this, then you could have invested in Uber, PayPal, Facebook, LinkedIn, whatever company it was and you could have put that into your Roth IRA and people are doing that today on sites like Republic, Seed Invest, etc. They are literally buying private companies because there is equity crowdfunding which is a path to all people being able to invest in all companies, and so when we get there, that will solve this problem.”
Most of these articles are relatively measured and point out that getting a ridiculous deal on a company you cofounded is not a thing that happens to very many people.
“Thiel is an outlier. It’s an extraordinary example of the power of a Roth IRA,” TJ van Gerven, host of the DO MORE WITH YOUR MONEY podcast, said. “I am a little concerned that what this is going to do is encourage people to take massive speculative bets owning things in their Roth account to try and replicate what Thiel did. And it’s not replicable, in my opinion.”
Other podcasts, like Radical Personal Finance, went all-in, explaining how you could be like Thiel if you wanted to be:
“You want to put in [to a Roth IRA] highly undervalued assets that could grow massively in value,” Joshua Sheats, the host of the show, said on an episode that extensively praised Thiel’s strategy. “You can create a family business to move the shares of your business into, you can discount them for being privately controlled arand for having a non liquid market … and those shares can grow over time completely tax free … you need to do the same things that Thiel did.”
“You can do the same thing too,” he added. “He followed the rules, you can follow the rules, and yet you can have above-average results.”
