What To Know About Peter Thiel's $5B Tax-Free IRA

A new article from the nonprofit news site ProPublica claims Peter Thiel, co-founder of Palantir Technologies PLTR and one of the early investors in Facebook Inc FB, accumulated $5 billion by 2019 in a tax-free Roth individual retirement account (IRA) that he opened 20 years earlier with $1,700.

The Story: ProPublica’s article, titled “Lord of the Roths: How Tech Mogul Peter Thiel Turned a Retirement Account for the Middle Class Into a $5 Billion Tax-Free Piggy Bank,” highlighted how Thiel deposited 1.7 million in one-tenth-of-one-cent shares of the then-private PayPal Holdings Inc PYPL into his Roth IRA in 1999. Within a year, Thiel’s Roth saw its value expand to $3.8 million, and he later used some of the funds from this account to finance his tech industry investments.

At no point in the story did ProPublica identify Thiel as violating U.S. tax codes or any federal laws, although it liberally used phrases like “risked running afoul of rules” and “a Bermuda-style tax haven right here in the U.S.” to describe the investor and his vehicle.

The article noted Thiel was audited on his taxes in 2011, but nothing amiss was found, and it also made four different references to Thiel's application for residency in New Zealand, although that had nothing to do with his Roth IRA.

ProPublica noted that PayPal’s filing with the U.S. Securities and Exchange Commission filing prior to its initial public offering showed Thiel’s founders’ shares were among those sold at “below fair value.” Although the regulator didn't raise a red flag at the time, ProPublica found belated outrage from Victor Fleischer, a tax law professor at the University of California, Irvine.

“That’s a huge scandal,” Fleischer said. “How greedy can you get?”

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The Story Behind The Story: Much of the data presented by ProPublica is sourced from Thiel’s federal income taxes, which are supposed to be confidential records that are not in the public domain.

Earlier this month, ProPublica stated it "obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation's wealthiest people, covering more than 15 years." How the nonprofit gained this data is unclear, since ProPublica acknowledged this data is confidential. The Internal Revenue Service is investigating the source of leak.

But while ProPublica didn't find anything illegal to pin on Thiel, Justin Elliott, one of the reporters who authored the coverage, told CNBC it nonetheless seemed unfair. While acknowledging Thiel “couldn’t know it was going to be worth tens of millions” when he opened the Roth IRA in 1999, Elliott was unsatisfied with how Thiel used the vehicle.

“The larger policy issue here is that when Congress created Roth IRAs in the late 90s, it was really intended to be a sort of modest incentive for middle-class Americans to save for retirement,” he said. “The question now is: Is there really any policy justification for ultra-wealthy people like Peter Thiel having literally billions of dollars in a tax-free account – why should he get that advantage versus another investor? Clearly that is more than enough to retire on.”

Photo: Heisenberg Media / Flickr Creative Commons.