Secrets of the largest tax-free investment account in the world.
How one retirement plan investor is only a few years away from cashing out billions of tax-free dollars just because he is using the right account.
Peter Thiel is most famous (to me) from his description in the movie The Social Network in 2010 where he was shown as the first large outside money to invest in Facebook. (This investment would have been in 2004 when the company was still private, and the deal was worth ~10% of the company.)
Those are great things for Peter, but we want to show you that you can construct the exact same strategy to create a large tax-free retirement account for yourself. We will use Peter and his amazing investment journey as an example:
1997 - The Roth IRA was created to allow Americans to save, tax-free for retirement. As the rules were written this was targeted towards the middle class and came with an income limit.
(Here is the link to our post around how to get around the income limits)
1999 - Funding the Roth IRA: it’s important to note that there are two time periods to monitor for your Roth IRA. The obvious one is you need to wait until 59.5 to withdraw for the benefit but the account also needs to be opened for more than 5 years. So, open it. Peter started with $1,700 and per Business Insider, never added additional funds to this investment.
Peter was the CEO of a tech startup that allowed him to buy shares of the company inside his Roth IRA (huge shoutout to Tom Anderson, founder of Pensco, who recommended this to him.)
2002 - Investing in Paypal: Peter went on to be a co-founder in a company called PayPal, which sold to eBay, and maybe you can guess who had their stock from the sale in the Roth IRA which allowed his investment to grow tax-free?
Let’s take a quick tax calculator break to see how much of a gain this account has experienced. Remember this is 2002, the account has now grown to $28.5M and he is two years away from investing in a startup technology company that will become Facebook. Having over 1,000,000% investment returns in your first few years is not likely to happen but we’re certainly rooting for you.
2004 - Investing $500,000 for ~10% of Facebook before it was publicly traded was one of the greatest investments he could make and helped his tax-free account reach these astronomical numbers.
2019 – Per ProPublica, the account has surpassed $5 Billion – the majority from tax-free earnings.
Tax Drag on Investments:
To make the math a little easier, we can agree that this account’s cost basis was basically nothing. His $1,700 contribution in 1999 to open the account does not even make a dent compared to how much he has saved in taxes.
Peter would have paid a minimum of 20% taxes based on the capital gains tax assumption. This does not include the taxes he would have paid on each transactional gain. As a result, each new investment had a higher starting value since taxes were not paid on the gain of the previous investment. The most conservative of calculations suggest that Mr. Anderson’s advice to open and fund this account has saved Peter over $1 Billion dollars. – Chris, will you send source or calc?
Diversifying your investment account types:
These stories of the uber-rich making investments that seem impossible are the ones that will go viral and make their rounds across the internet. It doesn’t mean that you can’t copy these same strategies and implement them wherever you are. The average Roth IRA is worth $39k. Remember we have clients that are using a Mega-Back Door Roth IRA Strategy and contributing more than that every year!
So, you do not need to start the next PayPal or find the next Facebook start-up to have this strategy work for you. Let’s make sure the next dollar you save and invest is optimized for tax efficiency so that your account can have every advantage possible.
What’s on your mind?
We’ll be sharing tidbits of wisdom like this with subscribers every two weeks, along with deeper dives for our clients every month or so.
What questions do you have that we can answer in future posts? Reply directly to this email and let me know.
Talk soon,
Chris
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Fortress Physicians by the Numbers
🏡 42 Physician Households as Clients
💰 $680,000 Avg Household Income
👩 Average Age 44
💸 $3.25 Million Net Worth
📈 29% Average Savings Rate