How billionaires abuse Roth IRAs

The Individual Retirement Account is a financial device in the US that was supposedly meant to encourage ordinary people to save for their old age. You could put up to a certain amount each year into the account and that amount could be deducted from your income, thus reducing your taxes. The money in the account would then grow tax-free as long as you did not take it out until the age of 59 ½. The idea was that you would let it grow until you needed it in your retirement. When you withdrew it then as needed, you would likely be in a lower tax bracket since you were not earning income.

That was the basic idea of the IRA. But then another wrinkle was introduced in 1997 and that was the so-called Roth IRA that was like the regular IRA except that the initial deposit into the account was not tax-deductible. But the offsetting benefit was that the money in the account was not taxable when you withdrew it at age 59 ½. Because these plans were supposedly meant for ordinary people, there was a limit to how much you could put into the account each year, with the original cap being S2,000, though that limit increased with time. If you started contributing early in life, the tax free growth could provide you with a little nest egg. In 2018, the average amount in a Roth IRA was $39,000.

But ProPublica says, based on the tax documents that they got, that wealthy people have exploited a loophole to enable their Roth accounts to grow into billions of dollars. They give the example of Peter Thiel and others.

Yet, from the start, a small number of entrepreneurs, like Thiel, made an end run around the rules: 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.

About a decade after the creation of the Roth, Congress made it even easier to turn the accounts into mammoth tax shelters. It allowed everyone — including the very richest Americans — to take money they’d stowed in less favorable traditional retirement accounts and, after paying a one-time tax, shift them to a Roth where their money could grow unchecked by Uncle Sam — a Bermuda-style tax haven right here in the U.S.

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.

So can you or I do the same thing and make billions? Don’t be silly. These kinds of shenanigans are only open to the wealthy to enable them to become more wealthy.

Thiel was able to launch his Roth into the stratosphere through a complicated strategy involving the purchase of nonpublic stock at bargain prices — the kind of deal most people can’t access. Experts say it risked running afoul of rules designed to prevent IRAs from becoming illegal tax shelters. (Thiel’s spokesman didn’t respond to questions.)

Here’s an explainer of how the .001% use retirement accounts as tax-free piggy banks.

As is often the case, following the ProPublica report, some members of congress are now seeking to to close these loopholes. But at the same time, Republicans in congress are fighting tooth and nail to prevent the IRS from getting more resources to go after these tax shelters.

One question is whether the original drafters of the Roth IRA legislation were aware that they were enabling this loophole that would allow wealthy people to avoid taxes. Though I cannot prove it, my feeling is definitely yes. This kind of thing happens far too often to be ‘mistakes’. Also these ‘mistakes’ always seem to go in just one direction, to favor the wealthy. The people who draft these laws are not simpletons. They are also supported by very wealthy people whose lobbyists often have a say in the drafting process.

The fix is always in.


  1. says

    It doesn’t matter if it was a Roth, or some other mechanism. Rich people have armies of accountants who specialize in finding ways around taxes. The ultimate way, of course, is to get your favorite shill in office and have them legislate you a big, fat, tax cut. So, Roth IRA or tax-free trust fund, they’re going to cheat if they can, and they’ll always find a way.

    By the way, there are some wealthy people who just smile and pay their taxes fully. Because, if I wrote the IRS a check for $400,000 it means I made $1.2mn and that’s not a bad year at all.

  2. flex says

    @ Marcus,

    That’s one definition I have of rich. When a person has enough income to hire an expert full-time to manage their money, they are rich.

  3. Ravi Venkataraman says

    We have something similar to a Roth IRA in Canada, called a TFSA (Tax Free Savings Account). Contributions are limited to $6,000 per year currently. Like the Roth, contributions are not tax deductible, and the earnings grow tax free. The difference is that you can’t invest in just about anything. If you buy equities (stocks or bonds) they must be traded in a public exchange, an acceptable list of which is provided. Even OTC (Over The Counter) stock exchanges are not allowed. This prevents the type of cheating that the wealthy would like to do. Like the TFSA, our regular retirement savings accounts have strict limits on the types of investments you can purchase in that account, preventing misuse by the wealthy.

  4. xohjoh2n says

    Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value.

    The UK ISA (Individual Savings Account), while not specifically a retirement vehicle (you can withdraw money any time you like, you just can’t pay it back in without using more of your annual allowance), probably avoids that particular pitfall: all contents of the account must be either cash in Pounds Sterling, or stocks or funds -- foreign are allowed, but they must be actively trading on a registered exchange.)

    (Hmm. I don’t know if the SIPP (Self Invested Personal Pension) has a similar rule, it looks like the set of allowed securities is larger. But UK pensions also have a maximum annual allowance which applies to yearly contributions, and a maximum lifetime allowance which applies to the total fund *value* not contributions, amounts above which are subject to an immediate 55% tax when you start drawing from it.)

  5. jrkrideau says

    @ 3 Ravi Venkataraman
    The real question is Post-Harper does RevCan have the resources and expertise to audit them.

  6. Ravi Venkataraman says

    @35 jrkrideau, I believe it is the responsibility of the broker (your bank/Questrade/…) to ensure that funds are not invested in the wrong securities, but I could be wrong.

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