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A Roth IRA, under the right conditions, is the best retirement vehicle you can have. Just ask Peter Thiel.
According to ProPublica reporting sourced from IRS records, between 1999 and 2021 Thiel grew his Roth IRA from $2,000 to more than $5 billion. This is significantly more than the average household’s IRA balance, reported by Fidelity to be around $129,000.
The question is, how did Thiel do it?
Thiel is an accredited investor who, as an early tech founder and investor, had access to some of the most lucrative pre-IPO stock opportunities in history. This allowed Thiel to use his Roth portfolio to hold private stocks with extraordinary returns, such as PayPal and Facebook. These assets have generated outsized returns that created a vast amount of entirely tax-free wealth for Thiel’s portfolio. Here’s how it works.
Peter Thiel has long been one of the world’s wealthiest individuals. He made his money as an early investor in tech companies, founding and investing in firms like PayPal and Facebook in the early days of the internet.
Stocks like this are not available to most investors, either legally or practically. Legally, ordinary investors cannot freely trade private stock. You must be an accredited investor in order to buy and sell these assets, a law intended to protect investors from predatory, confusing or opaque investments. Investors can get accredited if they meet certain criteria, such as a $1 million net worth, meet the recurring $200,000 annual salary threshold, or have certain financial certifications.
Practically, ordinary investors typically don’t have access to these opportunities either. The average person does not have access to brand-new startups and tech founders seeking investment. However, Thiel did. Thiel has long been one of the largest investors and founders in the tech world. Among his largest firms are PayPal, Palantir Technologies, Facebook (in which Thiel was one of the original investors) and the Founders Fund (through which Thiel has been an early investor in many successful tech companies).
This is how Thiel’s Roth IRA became so valuable.
Thiel has a self-directed account, which means he manages the portfolio’s investments. Over the years, he has used his Roth IRA to invest in many early-stage startups, most notably when he used it to hold early shares in PayPal. This has allowed Thiel’s portfolio to generate the kind of explosive growth associated with successful tech startups, and Thiel then used those profits to fund future investments. His Roth IRA has held assets such as Facebook, Airbnb, Palantir and SpaceX at various times, typically all purchased in the early days of any given company when the stocks sold for very little. Thanks to the tax-free nature of Roth IRA growth, assets can be sold and purchased within the account without any taxes eroding the value.
Thiel’s Roth portfolio also benefitted from the tech equity explosion of the late 2010s.
Starting around 2017, and often linked with that year’s high-end tax cut, tech stocks across the market began to “hockey stick.” This market began to surge, with many companies doubling or tripling their value in just a few years’ time. According to ProPublica, Thiel’s portfolio leapt by roughly $3 billion between around 2016 and 2019, reflecting the growth of the tech industry in that era.
When it comes to Peter Thiel’s Roth IRA, the secret is that there’s no secret. Thiel grew his Roth IRA in much the same way as anybody else. He invested in his portfolio and used the money to buy shares of stock that he thought would do well. The difference is just that Thiel had access to both information and assets that the average investor does not, which allowed him to invest early in companies that would later grow exponentially in value.
He used his Roth IRA to do it because, like most people, he gets a lot of benefit from tax-free investing. Remember, everyone’s investing story is different depending on their circumstances, goals and risk tolerance. Consider speaking with a financial advisor to develop a personalized plan for your goals.
A Roth IRA is a form of tax-advantaged retirement account.
With a Roth portfolio, you fund your investments entirely with after-tax money. This means that you either use contributions from earned income on which you have paid income taxes, or you convert money from a pre-tax account and pay income taxes on the amount moved.
Money in a Roth IRA grows entirely tax-free. You also pay no taxes on this account when you withdraw money later on in retirement.
Contributions to a Roth IRA are capped at no more than $7,000 per year ($8,000 with catch-up contributions for individuals over 50). This is a cumulative limit that applies to all IRA accounts. So, for example, if you contribute $3,000 to a traditional IRA in 2024, you could contribute up to $4,000 to a Roth IRA that same year. These limits are adjusted each year to account for inflation, and were originally set at $2,000 when the Roth program was started in the late 1990s and Thiel opened an account. There is no limit on how much money you can convert from a qualifying pre-tax account into a Roth IRA.
All of this makes Roth accounts a tradeoff.
The taxes you pay up front leave you with less capital to invest today, which can mean significant opportunity cost in the long run. For example, say you earn $1,000 and pay 15% tax rate on it. With a Roth IRA, you would have $850 left to invest after taxes. With a traditional IRA or a 401(k), you wouldn’t pay those taxes and could invest the entire $1,000.
Over 30 years, at the market’s average 11% rate of return, the Roth IRA’s $850 would be worth $19,458. The Traditional IRA’s $1,000 would grow to $22,892. But then, the gains would be taxed at your income tax rate when you go to make a withdrawal. Whether the tradeoff is worth it will likely depend on your tax rate now and your tax rate in retirement.
However, untaxed withdrawals maximize the value of your portfolio and its gains. When your money has enough time to grow in the Roth account, you can save far more on withdrawal taxes than you paid up front, since you will (ideally) withdraw far more than you invested. For example, say your portfolio has enough time to grow from $100 to $1,000. You would pay taxes on the initial $100 investment, and pay no taxes on the $900 withdrawal. If we assume a consistent 15% tax rate, that would be a $15 tax bill in exchange for a $135 savings.
Or, in Peter Thiel’s case, you might pay taxes on $2,000 and withdraw $5 billion completely tax-free.
Peter Thiel built a massive amount of wealth in the same account many Americans use for retirement savings: the Roth IRA. While he was able to get exposure to private investments in that account, he still could only contribute several thousand dollars per year and managed to build it into billions, tax-free.
Thiel’s portfolio does raise a mechanical question. He holds what’s called a self-directed IRA, meaning that he makes his own investment decisions on which assets to buy and sell. How, exactly, do you do that?
A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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