Lazy Man and Money

Thiel’s Scandalous Roth IRA and What You Can Learn From It

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A few weeks ago, ProPublica dropped another tax bombshell. If you missed the first one* a couple of weeks ago, they published a bunch of the wealthiest Americans’ tax details when it was sent to them. They were able to show how the ultra-wealthy are able to avoid taxes.

It was a fantastic read and it might just change Congress’s tax policies going forward.

ProPublica is back this time with an exposé of Peter Thiel’s Roth IRA. It’s a little bit different in that this article focuses on one person’s Roth IRA (for the most part).

What makes Peter Thiel’s Roth IRA so amazing is that it is estimated to be worth $5 billion dollars… and he’ll never have to pay taxes on it. I’ve been investing socking money away in my Roth IRA for a couple of decades now and it’s doing well, but without any other income streams, it might be just enough to supplement Social Security in retirement. For years, the maximum was $2,000. Even if that compounds for decades, it’s hard to expect that to provide enough income to retire on.

So how did Thiel get a Roth IRA worth $5 billion dollars while contributing under the maximum of $2,000? According to ProPublica’s information, “Thiel paid $0.001 per [PayPal] share — yes, just a tenth of a penny — for 1.7 million shares. At that price, he was able to buy a large stake for just $1,700.”

Of course, today PayPal is worth a lot more money, so nearly two million shares are worth a lot of money as well. Thiel is also a Silicon Valley insider, so he can invest these gains in other Silicon Valley start-ups. Some have surely failed, but some have become home runs.

So what’s so scandalous? I see two things that are scandalous:

  1. As founder of the company, he could price the shares unreasonably low – which appears to be a tax violation**. The ProPublica article points out that soon after the transaction there were multimillion dollar investments in place. So theoretically, the shares should have been worth maybe $0.25 (pure speculation on my part for sake of example), meaning that he would have “only” been able to buy 8,000 shares with $2,000… quite a big difference than 1.7 million shares. If those 8000 shares became worth $100, he’d have only $800,000 a far cry from $5,000,000,000.
  2. If Thiel didn’t have the Roth IRA tax shelter (or used it how it was meant to be used) the taxes he would have paid on his investment gains could have funded critical infrastructure for many, many Americans.

I like to give people credit for beating the system. However, it’s hard when it looks like “beating the system” appears to be illegal tax manipulation.

How Can You Be Like Thiel

The simple answer is you can’t. ProPublica has a video explaining why:

However, we can use the extreme Thiel case as a guide for what you could do with your own investments. He put in an extremely high-growth asset. Since most money in a Roth IRA is designed to stay there for a number of years, it makes sense to buy in your highest growth investments as well. Typically these would include investments in small companies. For example, I’ll be putting more of my stake of Vanguard Small-Cap ETF (Symbol: VB) in my Roth IRA. Since its 2004 inception, it has gained an average of 10.5% a year.

On the other end of the spectrum, I invest in Vanguard Total Bond Market ETF (Symbol: BND) as well. Since its 2007 inception, it has gained an average of ~4.1% a year.

Let’s see how the two investments strategies work in a Roth IRA vs. a taxable account. If Mary invests $6,000 in VB (and earns the historic 10.5% a year) in a Roth IRA (once and does nothing else), she’ll have $325,568 to withdraw tax-free. If Mary invests $6,000 in BND (and earns the historic 4.1% a year) in a Roth IRA (once and does nothing else), she’ll have $29,935 to withdraw tax-free.

Let’s assume that Mary is in a 25% tax bracket. Mary has $6,000 to invest in both a Roth and a taxable account and puts the high-growth in a Roth, she’ll have both amounts $325,568 and $22,451 ($29,935 after taxes) or nearly $350,000. If she switches where the assets are she’ll have $29,935 tax-free and $244,176 ($325,568 after taxes) or around $275,000. That’s a loss of $75,000 or nearly 20% by simply managing your assets in the most advantageous places.

You might say that this is an extreme example, since it’s 40 years in the future. However, keep in mind that this is a one-time Roth IRA investment, most people will invest many years of their life. It should also be noted that inflation isn’t factored here. However, it would hurt both investments equally, so the example still has integrity… it’s just that the $350,000 and $275,000 won’t buy as much in 2060.

You may want to be even riskier with your Roth IRA and pick satellite stocks. You won’t find a PayPal for a fraction of a cent, but I’ve been able to invest in SNAP and Pinterest and seen those shares grow 5x or 10x what I’ve paid. This is also why I invest my kids’ Roth IRAs in riskier, high-growth assets.

So what do you think? I realize this is largely two articles in one, but I hope it’s got you thinking. Please let me know those thoughts in the comments.

* I should clarify, “First one this year.” In 2019, ProPublica covered how taxes scam everyone, by purposely being complicated to keep the tax preparation industry profitable.

** I’m not a tax expert, so I’m relying on my best interpretation of the ProPublica article and common sense.

My Kids’ Roth IRAs

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Two years ago, my kids got a Roth IRA to jump-start their retirement savings. It was a little aggressive for a 5 and 6-year old, but I wanted to start them early. By starting now, they’ve got the most valuable thing on their side – time.

It can be difficult to get a kid a Roth IRA. On one hand, you have the IRS with the annoying rule that the kids have to have earned income to put into an IRA. On the other hand, you have pesky labor laws that limit the work a kid can do. It’s a shame that my baby modeling idea never took off. I also don’t see people lining up to purchase their wonderful Pokemon art creations.

Kid Roth IRAs with a Side Hustle

So how do they earn this money to comply with the IRS demands for funding a Roth IRA? I pay them to help with my dog sitting business on Rover.com. In non-COVID years, I can make around $15,000 a year, which is a nice side hustle while I’m freelancing from home and writing this blog.

Kids Roth IRA

I’ve been dog sitting for five and a half years now, so the kids have grown up with a couple of extra dogs around. They’ve become naturally curious about feeding dogs and they love to play fetch with them. We’ve taught them how to pick up the dog droppings, but that’s not something they like. Some of their peers do the chore for allowance. However, for the family dog sitting business, it’s a core aspect of the job.

Feeding dogs, playing with dogs, keeping the water bowl filled, and picking up after the dogs is most of the dog sitting job. These are all things that my kids can do. Occasionally I have to give them medicine, but that’s about the only thing that I need to do 100% myself. The IRS should have no issue with me subcontracting out some of the work to them. In fact, I did some math on what a professional pooper scooper company costs, and it seems like it could be a couple of thousand dollars a year for the number of dogs we have and how often they’d have to come. My kids aren’t professionals, but the service doesn’t fill the water bowls or play with the dogs, so I think it averages out.

[This article has been refreshed for 2021.]

Kid Roth IRAs: Powerful Stuff

Contributing to a Roth IRA at this age is very, very powerful. Money grows quite a bit nearly 60 years of compounding until they reach ages 65 and 66.

Before we get to my kids’ Roth IRA numbers, here’s a helpful CNBC look at kids and Roth IRAs in general. Who wouldn’t want 3.4 million in one of their accounts?



My kids won’t have 3.4 million any time soon. If they were to earn 7% interest over that long period of time, a single dollar would be nearly $58. So $1000 in a Roth IRA would be worth $58,000. Of course, at 3.5% inflation over that time, you’d need $7,878 to have the buying power of $1,000 today.

When you crunch those numbers, it gives them a real post-inflation gain of 7x their money. Theoretically, if they could earn the $6000 Roth IRA limit, they’d set themselves up with $42,000 in retirement. Of course, that would be an extreme amount of dog care and that wouldn’t be reasonable.

In addition to the Roth IRA, we pay them some real spending money. They saved up for a Nintendo Switch before the pandemic. That was really good timing, because they were hard to find last year.

I settled on paying the younger one $400 and the older $600. In the next year, the younger got $600 and the older got $750. Since he’s a year longer, it works out to be fair as he’ll have an extra year at the end. This year, I’ll go to $750 and $1000 for each. The dog sitting business is going well with everyone traveling now that they are vaccinated.

Here’s how my 8-year-old’s Roth IRA grew to $1891.99:

Kid Roth IRA

Here’s how my 7-year-old’s Roth IRA grew to $1368.73:

Kid Roth IRA

The 8-year-old would have an inflation-adjusted amount of $13,443.70 in his nest egg at age 65. My 7-year-old would have to settle for “only” $10,066.02. I haven’t contributed to their accounts yet this year since dog sitting income got started late with COVID. These projections will go up once that happens.

Investing in My Kids’ Roth IRA

I normally believe in investing in only index funds for them. However, they always have some money left over. With VTI trading at $222, I buy a couple of shares with $600 and have over $150 leftover. I can buy some other index funds but sometimes I look for some satellite stocks. The theory is that you have core holdings and then little satellite holdings to explore. That’s why it’s also called “Core” and “Explore.”

Core – I’ve decided that the core of their portfolio should be the Vanguard Total Stock Market ETF (symbol VTI). Last year, I bought as much I could and then used the rest of the money (less than $160) to explore. This year I did the same. One child got the high-dividend ETF, symbol HDV, that I’ve been touting lately.

Explore – Last year, I explored with Exxon and Ford stocks. I liked that they paid high dividends. I had an idea that I could show how reinvesting the dividends grows. It all sounded good until COVID happened. Ford eliminated its dividend completely. This year, I explored by buying more Exxon (dollar-cost averaging) while it was still paying a big dividend. I also explored by buying all three cruise lines (Carnival, Royal Caribbean, and Norwegian) with at least a share of each. It turns out that those stocks all performed well. Ford’s stock is up nearly 100% as they look to an electric car future. The cruise lines are up 100% as it seems like cruises will be possible soon. Even Exxon has benefitted from rising oil prices.

I don’t have a plan on how to invest their money this year, beyond buying VTI as a core holding. Perhaps we’ll put money into VEU and VWO which focus more on international investing. It might also be time to sell the satellite stocks and put the money into these more traditional indexes.

Because the account is with Fidelity, the no-cost commissions make it easy to diversify by buying a share here and there.

The Future of My Kids’ Roth IRA

In the next few years, I’m hoping they can participate in some of my blogging work. (The older has helped a little bit with my MoneyTime Review. Perhaps later this year or next year, I’ll introduce a bi-weekly kids article. I’ll interview them and get their perspective on what money-related thoughts they have. I’ll then explore how we are parenting their use of money. This is just a seed of an idea. I need to think a little more about how this would work. Of course, I’d pay them for their time and insight, which would be earned income.

After that maybe they can do babysitting or lifeguard work. There will be more opportunities for them to earn money as they get older. While all this is nice, their core “job” now is to get good grades in school.

Is it Okay NOT to Save for Retirement?

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That’s the question I’ve been asking myself many times over the last couple of weeks. For a number of readers that might be a strange question to ask. After all, not all people can afford to save money for retirement. And they certainly can’t be doing it all the time.

For me it’s different. I’ve maxing out my Roth IRA since it was invented. I also maxed out my 401k from all my post-college jobs for years. It was around $10,000 in 1998 then so it may not sound as impressive as it would be today. In the world of flat wages, it’s much harder to max out 401Ks now.

I moved from a standard software engineering career to blogging and side hustles in 2007. I got burned out with the long hours, the changing technology, and I just wanted to spend more time with family. The drop in income made it more difficult to fund retirement accounts, but I was still able to put some money aside.

My wife has been saving in her TSP (the government’s 401k plan) since she started working around 2000. As a pharmacist, she could afford to max out her retirement accounts too.

After so many years of maxing out retirement accounts and an incredible 10-year market run, we have saved up a great retirement nest egg – at least great compared to the average 43 year old person. It’s been a powerful habit that has contributed tremendously to our net worth. We currently have about 45% of it there, and another 45% in real estate (our own home and 3 rental properties) that will be mortgage-free around 2027.

There’s just one problem…

… we often live paycheck to paycheck.

We have some emergency funds, but not a lot. I can usually reach into a business account and shift around some money when we have a rental property renovation. Sometimes we use the HELOC on our home for an expense. We pay that debt back monthly. Obviously this isn’t financially ideal. It would be better if we just used cash on hand.

However, between saving for retirement, four 15-year fixed mortgages, and private school for two kids our “expenses” are high. I put expenses in quotes because saving (for retirement or anything else) is not your typical expense.

Those savings aren’t there when we look at how much cash we have available to use at the end of the month. It’s great for our net worth bottom line. In the case of TSPs and 401ks, that retirement money hasn’t been taxed. One exercise that I need to do (and maybe you do as well) is figure out how much money a 401k is really worth when you start to pay taxes on it upon withdrawal.

Our Retirement Future Looks Bright

When I last published our comprehensive retirement income plan in 2015, it looked like we might have around $200,000 a year in income.

My wife’s military pension forms a strong percentage of that. However, we also have the rental properties, the retirement accounts, Social Security (which will still be around in some form), and income from websites. Since then we’ve added dog sitting and a private equity investment with a high cash yield.

I intend to publish a new update this year, and my expectation is that it will be around $250,000. At the same time, we’ll have a paid off mortgage, and (relatively) cheap military health insurance. We even have my wife’s GI Bill that helps us save less for college. When we look at our future expenses they are relatively small.

We realize we are fortunate in all these areas. It took a lot of planning, but luck always plays a role in the execution.

A Little YOLO Can Be a Good Thing

As you can tell, we’re flying a little too close to the sun in our lives now. Some of it is because we’ve gotten a little “spendy” with restaurants and children STEM toys (my shopping addiction). The rest of it is the funding for the future. I don’t know if there’s such a thing as over-funding the future. However, we aren’t striking that balance.

The strong market performance in 2019 gave us more returns than we would have expected in three years. It seems like the right time to slow down on the future and build up some cash for today.

Early Retirement with a Roth IRA Conversion Ladder

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early retirement

I’ve mentioned in passing a few times in the last couple of months, but I’m crushing on Retire by 40. Joe does a tremendous job of covering early retirement and staying on track of the topic. I’m envious that he’s able to do that… a large part of me wants to blog about the TV show Best Time Ever with Neil Patrick Harris last night.

I’m going to resist that temptation and write about something equally fun… Roth IRA Conversion Ladders!

What’s that? I don’t blame you for asking. I hadn’t heard of them either. You’d think in years of reading Kiplingers and Money magazine it would come up multiple times. Maybe I just missed it.

The idea with Roth IRA Conversion Ladders is that you can minimize taxes if you are retiring early. I should note that this makes sense if you have a limited income. That “limit” isn’t that low though.

Let’s pretend that you’ve been reading Lazy Man and Money for years. You’ve read, “Maximize out your 401k plan!” a thousand times. If you took that advice over a lot of years, you may have hundreds of thousands of dollars in there. (I hope you do.)

The “problem” is that you saved that money tax-free and now you have to pay taxes on it. I put “problem” in quotes, because many people would be envious of the situation of paying taxes on a large sum of money.

If you are retiring early, you typically can’t withdraw money from your 401K or traditional IRA without penalties. You are also going to pay taxes on it of whatever your current tax bracket is. It’s not a particularly good plan.

However, if you are planning to retire early, you can convert the money to a Roth IRA. When you do, you’ll pay taxes of your current tax bracket, but then be able to withdraw it tax-free in the future. If your income is low in early retirement, which it likely would be since you aren’t working, you’ll be in a low tax bracket. If you are married and filing jointly, this could be about 15% if your income (and the conversion) is under $74,900.

The idea is to convert some money while in this low tax bracket. You can do this for years while you are in a low tax bracket. You can’t take the money out of the converted Roth IRA for 5 years, but after that you avoid withdrawal penalties.

I’m still learning about this strategy myself. I suggest reading the articles on Retire by 40 and Root of Good, which go into it in more details. Root of Good has a particularly thorough breakdown.

How does this factor into our potential early retirement? I’m not sure. Between the wife’s potential military pension, our investment properties, and my side businesses, we may have too much income to make it work. At the same time, we might be able to limit the income of our investment properties by improving them and I’m sure I could offset income of the businesses by investing in growth that will hopefully pay off in the future.

I’m not quite sure how it shake out down the road, but it’s comforting to know that there’s a tool like this available if it is helpful.

Pay Off Your Mortgage From Your Roth IRA?

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Last week I wrote about the hidden emergency fund in your Roth IRA. In case you didn’t read that article, a huge takeaway was that you can take out contributions (not earnings) out of your Roth IRA penalty-free at any age.

In writing that article, I thought about how much accessible money I might have in my Roth IRA. I’ve been maxing it out for about 15-20 years. That’s a big chunk of change. Without adding it up, I’d estimate it is around $50,000 (some years the maximum contribution was $2000). What if I took all that money out to pay off my mortgage?

Personally, I’d never such a thing and here’s why. The math of the average returns in the stock market (7-8%) is more valuable to me than saving 3.5%, especially when the interest on that is tax-deductible. I’ll go with the math every time and twice on Sunday.

However, there are others who aren’t as focused on the math. Some people, such as those who follow finance “guru” Dave Ramsey hate debt and try to eliminate it as soon as possible. A mortgage is debt. I consider it good debt, but some of these people are against all debt. I understand their thinking, being free of debt can be huge psychologically. It can eliminate stress and that’s a good thing.

This left me wondering, has anyone ever considered making this move? On some level, it makes sense to eliminate your mortgage for peace of mind. You won’t need as big a retirement if you’ve eliminated your biggest expense, right? While all this is true, I’ll still go with the numbers and take the 7-8% compounding over many years vs. the 3.5% (minus the tax deduction) compounding over the same time.

I have to think someone has said, “I’m done with debt. I’m going to raid my Roth IRA and get this debt out of my life.” If you are that person, I’d love to talk to you. I think it’s an interesting option for debt-haters and I’ve seen it discussed.

On the other hand, what about the reverse situation? What if you had home equity and did a cash-out refinance or home equity line of credit (HELOC) for the sole purpose of investing the money to earn a higher percentage. As an entrepreneur, I have access to solo 401Ks and SEP-IRAs, but I often don’t max them out. Why? Because I need the cash to live on. Also, it can be tough to max them out because these types of accounts have higher limits.

Getting money out of your home to invest sounds risky, but it truly is the opposite of pulling money out of your investment to pay off your house, right? So maybe it isn’t so crazy?

What do you think? Let me know in the comments.