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Crazy Roth IRA question
Posted on 8/18/24 at 6:42 pm
Posted on 8/18/24 at 6:42 pm
My knowledge of some aspects of Roth IRAs is limited so here’s the question/scenario.
A family member told me today that they are planning to put their business (a new business entity) into a Roth IRA to avoid paying taxes on any and all profits made by this business. To me this doesn’t seem possible. They are being advised that this is completely legal, and is a rarely used loophole in the laws that regulate Roth IRAs.
I know the story of Peter Theil and his use of a Roth IRA for tax exempt PayPal stock sales. I don’t think this is the same situation.
A google search didn’t result in a clear answer to this scenario. Is my family member being lied to? I can see this ending up with lawyers answering to tax evasion and fraud charges.
Thanks for your help MT.
A family member told me today that they are planning to put their business (a new business entity) into a Roth IRA to avoid paying taxes on any and all profits made by this business. To me this doesn’t seem possible. They are being advised that this is completely legal, and is a rarely used loophole in the laws that regulate Roth IRAs.
I know the story of Peter Theil and his use of a Roth IRA for tax exempt PayPal stock sales. I don’t think this is the same situation.
A google search didn’t result in a clear answer to this scenario. Is my family member being lied to? I can see this ending up with lawyers answering to tax evasion and fraud charges.
Thanks for your help MT.
4
Posted on 8/18/24 at 7:22 pm to Grinder
Ive seen an argument for it.
There was a shite ton of hoops that you had to go through and even then it seemed awfully risky if you were ever challenged.
You couldn’t be involved in the business at all besides writing checks. Not really sure how Theil got around that part.
I also don’t think you were allowed to own more than 50% of the company.
There was a shite ton of hoops that you had to go through and even then it seemed awfully risky if you were ever challenged.
You couldn’t be involved in the business at all besides writing checks. Not really sure how Theil got around that part.
I also don’t think you were allowed to own more than 50% of the company.
This post was edited on 8/18/24 at 7:35 pm
Posted on 8/18/24 at 7:33 pm to Weagle25
my understanding was that he put his stock options in his Roth...but I may be wrong
Posted on 8/18/24 at 7:37 pm to jlsufan
quote:
my understanding was that he put his stock options in his Roth...but I may be wrong
No when he founded Paypal, he put money in his Roth and purchased the initial shares of the company through his Roth. (That’s the easy part)
There are still a ton of regulations on what you’re allowed to buy inside of your Roth. So you have to work the company into a form that you’re able to buy it through your Roth and the IRS allows it.
That’s where you get into the complications and risk.
Posted on 8/18/24 at 8:10 pm to Weagle25
I had never heard that story. Hilarious and brilliant if he made it work.
Posted on 8/18/24 at 8:10 pm to Weagle25
I think he put the shares in before the company went public so they were valued at par value of $.01/share. When he did it the max contribution as $2k/yr.
Posted on 8/18/24 at 8:11 pm to lsuconnman
Peter Thiel's use of a Roth IRA to hold and grow his PayPal shares has attracted significant attention due to the immense tax advantages he gained through it. Here's a summary of what happened:
- **Early Investment**: In 1999, Peter Thiel, one of the co-founders of PayPal, bought 1.7 million shares of PayPal for just $0.001 per share, investing a total of about $1,700. However, he did this investment within a Roth IRA, a special type of retirement account where investment gains are not taxed, provided certain conditions are met.
- **Roth IRA Basics**: Typically, Roth IRAs are used by average investors to save for retirement, with annual contribution limits (which were lower back then, but currently are around $6,500 as of 2024). Investments inside the Roth IRA grow tax-free, and withdrawals during retirement are also tax-free.
- **Massive Growth**: When PayPal grew and was eventually sold to eBay in 2002 for $1.5 billion, the value of Thiel's shares skyrocketed. Because the shares were held in his Roth IRA, all the gains—reportedly growing to as much as $5 billion—are shielded from taxes.
- **Controversy**: The scale of Thiel's gains within his Roth IRA raised questions about whether such an account, designed for ordinary retirement savings, should be used in this way. Critics argue that this maneuver exploited the Roth IRA rules to achieve a massive tax shelter. Thiel, however, adhered to the legal limits and rules of the IRA at the time.
- **Public Scrutiny**: This situation was brought to light by a ProPublica report in 2021, which detailed how ultra-wealthy individuals like Thiel used Roth IRAs to accumulate vast sums tax-free. This has led to discussions about potential changes to tax laws to prevent such extensive use of retirement accounts by the wealthy.
In summary, Peter Thiel's use of a Roth IRA to buy PayPal shares turned a small initial investment into billions of dollars, all of which are protected from taxes, sparking debate over the intended purpose and fairness of Roth IRAs.
- **Early Investment**: In 1999, Peter Thiel, one of the co-founders of PayPal, bought 1.7 million shares of PayPal for just $0.001 per share, investing a total of about $1,700. However, he did this investment within a Roth IRA, a special type of retirement account where investment gains are not taxed, provided certain conditions are met.
- **Roth IRA Basics**: Typically, Roth IRAs are used by average investors to save for retirement, with annual contribution limits (which were lower back then, but currently are around $6,500 as of 2024). Investments inside the Roth IRA grow tax-free, and withdrawals during retirement are also tax-free.
- **Massive Growth**: When PayPal grew and was eventually sold to eBay in 2002 for $1.5 billion, the value of Thiel's shares skyrocketed. Because the shares were held in his Roth IRA, all the gains—reportedly growing to as much as $5 billion—are shielded from taxes.
- **Controversy**: The scale of Thiel's gains within his Roth IRA raised questions about whether such an account, designed for ordinary retirement savings, should be used in this way. Critics argue that this maneuver exploited the Roth IRA rules to achieve a massive tax shelter. Thiel, however, adhered to the legal limits and rules of the IRA at the time.
- **Public Scrutiny**: This situation was brought to light by a ProPublica report in 2021, which detailed how ultra-wealthy individuals like Thiel used Roth IRAs to accumulate vast sums tax-free. This has led to discussions about potential changes to tax laws to prevent such extensive use of retirement accounts by the wealthy.
In summary, Peter Thiel's use of a Roth IRA to buy PayPal shares turned a small initial investment into billions of dollars, all of which are protected from taxes, sparking debate over the intended purpose and fairness of Roth IRAs.
Posted on 8/19/24 at 7:02 am to Grinder
quote:
into a Roth IRA to avoid paying taxes on any and all profits made by this business. To me this doesn’t seem possible. They are being advised that this is completely legal, and is a rarely used loophole in the laws that regulate Roth IRAs
The profits of the business are going to be taxed either by:
1) the business is set up as a C Corp so the C Corp pays taxes on profits
2) the business is set up as a partnership and has UBTI, which means the profits will be taxed to the Roth IRA which will have to file a 990-T and pay tax at the corporate rate.
Now there may be tax savings on the eventual sale of the company, if you follow all the rules.
This is basically a variety of the ROBS.
Posted on 8/19/24 at 7:39 am to LSUFanHouston
Fairly certain Mitt Romney did something similar
Eta: yes he did
Eta: yes he did
This post was edited on 8/19/24 at 7:42 am
Posted on 8/19/24 at 7:59 am to Grinder
quote:
A family member told me today that they are planning to put their business (a new business entity) into a Roth IRA to avoid paying taxes on any and all profits made by this business. To me this doesn’t seem possible.
It isn’t, at least as far as how you presented it.
This post was edited on 8/19/24 at 8:08 am
Posted on 8/19/24 at 6:30 pm to Weagle25
quote:
No when he founded Paypal, he put money in his Roth and purchased the initial shares of the company through his Roth. (That’s the easy part)
yeah, that's what I said...your previous response was to the OT question about putting a company into a Roth, which is different...and you asked how Theil got around that...he didn't have to, he put his stock options in the Roth, not his company
Posted on 8/19/24 at 8:07 pm to Weagle25
Great information- i accidentally hit the downvote
Sorry
Sorry
Posted on 8/20/24 at 11:15 am to Costanza
quote:
Costanza
Nice ChatGPT summary
Posted on 8/20/24 at 12:46 pm to jlsufan
quote:
yeah, that's what I said...your previous response was to the OT question about putting a company into a Roth, which is different...and you asked how Theil got around that...he didn't have to, he put his stock options in the Roth, not his company
I’m not even sure what you’re trying to say. Putting the stock of a company inside the Roth is the same thing as putting the company inside the Roth.
Peter Theil is a cofounder of PayPal. He put his initial founding shares of PayPal in his Roth. These were not stock options.
I’m saying I don’t know how he skirted the rules around having shares of a company that you actively manage inside of his Roth (which is supposed to be disallowed).
Stock options is something that indicates you work for that company which is something you would be trying to avoid in this situation.
Posted on 8/20/24 at 12:47 pm to Downeast12
quote:
quote:Costanza Nice ChatGPT summary
Thank you kindly
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