Crazy Rich IRAs: From Peter Thiel to Ted Weschler

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Propublica recently reported that venture captialist Peter Thiel has a $5 billion Roth IRA. Essentially, he bought some lottery tickets using his IRA wrapper, and they paid off. The controversial part is that these lottery tickets weren’t available to everyone. They were dirt-cheap private shares of a startup that were only available to founders and a handful of early investors. At such an early stage, you can pretty much value your private company shares at whatever you wish. Here’s the Propublica version:

Open a Roth with $2,000 or less. Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value. Pay just fractions of a penny per share, a price low enough to buy huge numbers of shares. Watch as all the gains on that stock — no matter how giant — are shielded from taxes forever, as long as the IRA remains untouched until age 59 and a half. Then use the proceeds, still inside the Roth, to make other investments.

It’s not clear how they found this data, but they also included the owners of other large IRAs:

Ted Weschler, a deputy of Warren Buffett at Berkshire Hathaway, had $264.4 million in his Roth account at the end of 2018. Hedge fund manager Randall Smith, whose Alden Global Capital has gutted newspapers around the country, had $252.6 million in his. Buffett, one of the richest men in the world and a vocal supporter of higher taxes on the rich, also is making use of a Roth. At the end of 2018, Buffett had $20.2 million in it. Former Renaissance Technologies hedge fund manager Robert Mercer had $31.5 million in his Roth, the records show.

Ted Weschler, along with Todd Combs, are the heirs to the “stock picking” part of Warren Buffett’s job at Berkshire Hathaway. Greg Abel will be the future CEO and help handle all the wholly-owned subsidiary companies within Berkshire, and Ajit Jain will run the large insurance operation.

As a public figure, Weschler submitted this personal statement defending and explaining his IRA, and it reveals some interesting details. He opened his first “IRA” in 1984 as a 22-year-old Junior Financial Analyst making $22,000 a year. He seems to be mixing up the terms for 401k and IRAs in his letter (confirmed in WaPo story below). His timing was lucky, as 401k plans had just been born with the earliest ones starting around 1980. Here is a 1982 WSJ newspaper scan about these newfangled “salary reduction plans”, which were what 401k plans were initially called.

Anyhow, his 401k/IRA balance had grown to $70,385 by the end of 1989, when he rolled it over into a self-directed IRA at Charles Schwab. Fast forward 23 years, and by the end of 2012, his IRA was worth $131,000,000! Thanks to the new Roth IRA conversion option when he promptly rolled it over into a Roth IRA even though he had to pay $29 million in taxes. By 2018, the balance was at $264 million.

Also significant:

I invested the account in only publicly-traded securities i.e., all investments in this account were investments that were available to the general public.

[…] In closing, although I have been an enormous beneficiary of the IRA mechanism, I personally do not feel the tax shield afforded me by my IRA is necessarily good tax policy. To this end, I am openly supportive of modifying the benefit afforded to retirement accounts once they exceed a certain threshold.

This WaPo article is a follow-up with Ted Weschler about his amazing IRA skills.

I also realized that Weschler wanted to encourage young people to do what he did to accumulate his nine-digit net worth: save and invest, early and often, and take advantage of any retirement account benefits offered by their employer. “In a perfect world, nobody would know about this account,” he said. “But now that the number is out there, I’m hopeful that some good can come of it by serving as a motivation for new workforce entrants to start saving and investing early.”

My takeaways:

  • You may not agree with all the tax rules, but there is a reason why standard personal finance advice includes maximizing your Roth IRA contribution each year AND taking full advantage of your 401k plan with any employer contribution.
  • If you believe that your future tax rate after age 60 will be higher than your current tax rate, then you should consider converting any pre-tax “Traditional” IRA balances into Roth IRAs, even if it requires a big lump sum payment today.
  • If your income is too high to qualify for a regular Roth IRA, check if you are eligible to contribute to a “backdoor” Roth IRA, essentially making a non-deductible Traditional IRA contribution and quickly performing a Roth IRA conversion. If you are high-income and a big saver, look up the “mega backdoor” Roth IRA, which involves making a non-deductible contribution to your 401k plan (if allowed by employer plan document).
  • Roth IRAs have differences from Traditional IRAs beyond just the timing of the tax being upfront or at withdrawal. If you want to leave an inheritance (as these rich people most likely do), realize that Roth IRAs don’t have the required minimum distribution (RMD) rules that apply to traditional IRAs. Bottom line: More compounding + more tax shelter = bigger estate.
  • Consider putting your riskiest investments with the highest potential upside inside your Roth IRA. My Roth IRA holds REITs: low tax-efficiency and higher risk/return profile. No sleepy bonds!
  • As a BRK shareholder, if you were to think of a contest to win “The Next Warren Buffett”, finding the person who built the biggest IRA in the world using publicly-available investments would be a pretty smart filter! Maybe Berkshire Hathaway’s investment side will be alright after Buffett and Munger are gone.
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  1. Do you remember Hillary Rodham Clinton’s stellar Refco account? Demonstrating her prowess as a trader of–what was it–cattle futures? It used to be common practice at Wall Street firms to put in order tickets without account numbers and fill those in at the end of the day. I’m sure it never occurred to anyone to fill in those account numbers with an eye to how the trades fared as of market closing.

    • I want to know how he got around the income rules. Are they written such that capita gains are not income and Theil was making $1 per year?

      These types of shady deals are why raising capital gains taxes on the ultra wealthy and wealth taxes in general are necessary. They have entire teams of brilliant people working how to get around tax rules so they can make more money without paying much or none at all in taxes.

      • I was wondering that too, and I never found the true answer. I figured that he contributed the money back when he had a lower income, and later bought the pre-IPO shares as they became available. As long as one thing blew up from $2,000 to $200,000, then another 100x would be $200 million with no further contributions.

        • It’s pretty insane a middle class retirement vehicle can be commandeered by the ultra wealthy like this then grow tax free.

          That said it’s plausible he wasn’t making much at the time. PayPal launched in 1999, so his income may have all been in equity.

          He definitely had connections at that time to get invited to an exclusive investment.

        • Its noted in the first Propublica piece you linked to: there’s a loophole where you can transfer other non-tax sheltered accounts to a Roth by paying the taxes now. Also noted in that article are that the specific actions Thiel took were fraud. Paypal allowed employees to purchase shares at below market value (Paypals words, not mine) which is a pretty clear cut case of fraud according to IRS rules.

  2. Look, there is no such thing as a start-up that has a “good chance” of multiplying 100x in value, even in Silicon Valley. We are hearing about these big account balances because these people were successful. We aren’t hearing about the many, many more folks who invested in speculative investments in their retirement accounts that languished or went to zero.

    Also, while the Roth IRA is fantastic, a Traditional IRA or 401k/403b plan is actually not that great, because all of the distributions including gains are considered personal income and therefore taxed at the higher income tax rates, NOT capital gains tax rates. Depending on one’s specific tax circumstances and investment strategy, one could be better off by keeping that money compounding in taxable accounts, since capital gains taxes are only due when a security is sold. AND the heirs receive a step-up in basis at the death of the account holder, meaning the heirs could sell everything at the time of death and owe ZERO taxes. Inherited IRA distributions are taxed as income and under the SECURE act all funds must be distributed from the IRA/401k within 10 years of the original account holder’s death–so no more “stretch IRA.”

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