2021-06-28_Analyzing_Peter_Thiels_5_Billion_Roth_IRA
00:00:00.000 | Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge,
00:00:03.520 | skills, insight, and encouragement you need to live a rich and meaningful life now while
00:00:07.860 | building a plan for financial freedom in 10 years or less.
00:00:11.120 | My name is Joshua Sheets.
00:00:12.180 | Today we're going to focus on the insight and the radical personal finance side of things,
00:00:18.340 | the radical side of things, while we discuss Peter Thiel's $5 billion Roth IRA.
00:00:26.340 | And I'm going to try to provide in today's show some insight into the recent article
00:00:30.600 | written about this Roth IRA so that you will see how Thiel allegedly has done this and
00:00:40.720 | how you can model what he has done in your own Roth IRA and in your own life.
00:00:48.700 | In today's show, I will be referencing an article published at ProPublica.org.
00:00:55.220 | The link is in today's show notes.
00:00:56.780 | The article came out on Friday and it is called "Lord of the Roths, How Tech Mogul Peter Thiel
00:01:03.940 | Turned a Retirement Account for the Middle Class into a $5 Billion Tax-Free Piggy Bank."
00:01:11.460 | It's a phenomenal article and it is quite interesting as fodder for us to look at, analyze,
00:01:19.060 | and learn from.
00:01:20.460 | Now ProPublica is in the process of publishing a series of tax articles.
00:01:25.500 | They have obtained a confidential data dump of IRS records from some of the wealthiest
00:01:32.180 | US American taxpayers and they are going through and analyzing that data and publishing articles
00:01:38.400 | about what these people are spending their money on, how much they're making, what's
00:01:41.700 | happening to their assets, etc.
00:01:44.560 | And while this particular article does not seem to lean heavily on that data, it's in
00:01:50.340 | the same line of things.
00:01:52.140 | And ProPublica is quite evidently advocating for changes in the system of taxation used
00:01:58.020 | in the United States of America.
00:01:59.620 | They're quite obviously advocating for increased taxes on the people who are rich in the US.
00:02:08.220 | And so that's obvious all through and through.
00:02:11.300 | I'll spend a short time talking about that, but not a lot.
00:02:17.420 | Because what's more interesting to me is to talk about what Teal has actually done and
00:02:22.500 | how you can do much the same thing.
00:02:26.420 | Because when you get down to it, whenever you have access to information about how someone
00:02:33.040 | else has been phenomenally successful, you can basically choose one of two approaches.
00:02:39.740 | Approach number one is to be mad at them for some reason about what they've done, why they've
00:02:46.220 | done it, and how unfair it is that they have done it.
00:02:48.880 | Or you can say, "Let me learn from what they have done and see how I can apply the same
00:02:53.340 | principles to what I'm doing."
00:02:57.340 | And especially in things like this, where you have private information that you don't
00:03:03.220 | generally have access to.
00:03:04.460 | If you'll just follow the clues, you can learn how to repeat, at least to some degree, what
00:03:10.700 | Teal has done with your own finances.
00:03:13.460 | I'm going to be skipping around extensively in this article, skipping massive portions.
00:03:18.060 | I would encourage you to read the whole article.
00:03:19.660 | It's quite interesting.
00:03:20.660 | I just need to respect, of course, their copyright and also respect your listening time.
00:03:26.740 | Let's begin with the subheading.
00:03:28.460 | Roth IRAs were intended to help average working Americans save, but IRS records show Teal
00:03:33.980 | and other ultra-wealthy investors have used them to amass vast, untaxed fortunes.
00:03:41.300 | Let's pause for a moment.
00:03:43.980 | One of the things that you'll see throughout this article is people simply recognizing
00:03:50.020 | that wealthy people are not second-class citizens to whom some special set of rules applies.
00:03:58.180 | I find it so funny that in tax arguments, people always say, "Oh, there's a tax code
00:04:03.100 | for the rich and a tax code for the poor."
00:04:06.080 | My answer is, "Absolutely not.
00:04:08.380 | There's one tax code and one set of tax rules."
00:04:12.540 | Now I do sometimes say there are two tax codes.
00:04:14.460 | There's a personal tax code and a business tax code because that's true, and you want
00:04:17.960 | to use the business tax code as much as you can, but there is no different tax code that
00:04:23.560 | applies to somebody who makes $100,000 a year that doesn't apply to somebody who makes $100
00:04:29.460 | million a year.
00:04:31.060 | There is no different tax code that applies to somebody with $10,000 of net wealth than
00:04:37.260 | to someone with $10 billion of net wealth.
00:04:40.940 | They are exactly the same.
00:04:44.180 | I point this out to you because you need to recognize that if you want to become wealthy,
00:04:50.500 | you've got one tax code to use, but you will need to learn to use it in the way that a
00:04:56.540 | wealthy person uses it.
00:04:59.540 | Again, what I find remarkable about this tax article and other tax articles that I have
00:05:06.140 | analyzed for you is there are virtually no allegations of impropriety.
00:05:13.960 | This article, I say virtually none, because in this article intimates that perhaps Thiel's
00:05:20.460 | valuation of PayPal stock was too aggressive.
00:05:23.340 | We'll get to that in a few minutes, but it doesn't say anything is illegal, and the idea
00:05:31.200 | that his valuation of PayPal stock was too aggressive, that's a matter to be settled
00:05:36.740 | between the IRS and Thiel, because again, as we'll discuss in a moment, this is a notoriously
00:05:43.420 | difficult area of finance to apply any kind of reasonable valuation to shares of a company
00:05:48.900 | that's not making much money, if money at all.
00:05:53.260 | What you need to learn from this is that what Thiel did and what other ultra-wealthy investors
00:06:00.180 | do to allow them to amass vast untaxed fortunes is to read the rules of the tax code, and/or
00:06:12.820 | what's more accurate, pay people who read the rules of the tax code and then give them
00:06:18.060 | advice.
00:06:22.300 | People who seek out good advice tend to make better decisions because they're fully informed.
00:06:32.440 | An average person hears about something called a Roth IRA and does nothing about it.
00:06:39.460 | An above average person hears about something called a Roth IRA, looks into it, and opens
00:06:45.800 | one but uses it in the traditional way.
00:06:49.840 | They go buy a Vanguard stock market index fund, stick it in their Roth IRA.
00:06:55.460 | A person who is genuinely committed to above average results hears about something called
00:07:03.900 | a Roth IRA, thinks about it, and considers how it could be useful for them and how they
00:07:11.080 | could arrange the circumstances of their life to use such an account.
00:07:16.140 | And then they recognize that you would be crazy in most circumstances to put something
00:07:21.940 | like an index fund, which is exceedingly tax efficient, into a Roth IRA when you could
00:07:28.860 | put something in that has mega upside potential, like a private company, and is also highly
00:07:36.620 | taxed like shares in a large private company, and you put that asset into a Roth IRA.
00:07:46.500 | Excellent people think about how they can manipulate their circumstances in order to
00:07:52.100 | take the best advantage of what they're doing, and thus they get above average results, or
00:07:58.500 | in Thiel's case, about a bazillion times above average results.
00:08:05.060 | The fact that Congress decided to create an account to help average working Americans
00:08:12.540 | save is utterly meaningless.
00:08:19.140 | The fact is they created a law, a set of rules, and any person who is bound by that law or
00:08:27.180 | those rules can choose to follow that law and those rules to their own benefit.
00:08:35.780 | And smart people educate themselves about the laws and the rules and think about how
00:08:39.960 | they can use them for their own benefit.
00:08:44.060 | Rich people are not second-class citizens who somehow don't have the same rights as
00:08:50.680 | you and I.
00:08:51.680 | This is what bothers me, because in the United States of America, where I sit right now,
00:08:55.860 | in the United States of America, we're generating massive conflict in society.
00:09:04.380 | We're pitting this group against that group, and one of the most popular groups to always
00:09:10.580 | pit people against is wealthy people.
00:09:15.100 | Why is it popular?
00:09:16.100 | Well, because in any society, you will always have 20% of the people who own 80% of the
00:09:21.420 | wealth.
00:09:22.420 | So, by definition, if you can get people inflamed by political passions, and if you can remove
00:09:31.420 | from those people any sense of principledness, meaning what's yours is yours, rather, let's
00:09:42.620 | get them, go and get them, because they have more than me.
00:09:44.740 | If you can eliminate that egalitarian sense of principle, that sense of ethic that treats
00:09:48.980 | each person as an individual being and says, "You can have what's yours if you've earned
00:09:53.940 | it fair and square, if you've followed the rules, et cetera," you can always get 80%
00:09:58.620 | of the people on your side against the 20%.
00:10:00.340 | That's why populism is so effective.
00:10:02.660 | And then you can narrow it down, right?
00:10:04.100 | Because the top 20% of the top 20%, meaning the top 4%, is always going to own 80% of
00:10:13.300 | the bottom 80% of the wealth.
00:10:14.740 | So, you wind up with the top 4% owning, what is that, 64% of the wealth.
00:10:19.940 | And then the top 20% of the top 20% of the top 20% will own the 80% of the 80% of the
00:10:24.660 | 80% of the wealth, et cetera, until you get this disparity where you have 0.1% of the
00:10:33.940 | people who own 50% of the wealth.
00:10:35.740 | That's how most societies work.
00:10:38.300 | And so that's the normal distribution of wealth.
00:10:40.700 | That's the normal distribution of income.
00:10:42.500 | That's the normal distribution of peas in a garden.
00:10:46.900 | And yet, if you will talk about that, you can get people on your side, and that's what's
00:10:50.700 | happening here.
00:10:53.940 | ProPublica is fanning the flames of populism by going against Peter Thiel, even though
00:10:59.260 | Peter Thiel has done nothing wrong, at least that they've reported on.
00:11:04.780 | Let's skip down to the core of the argument.
00:11:08.020 | Over the last 20 years, Thiel has quietly turned his Roth IRA, a humdrum retirement
00:11:12.860 | vehicle intended to spur Americans to save for their golden years, into a gargantuan
00:11:18.020 | tax-exempt piggy bank, confidential internal revenue service data shows.
00:11:23.220 | Using stock deals unavailable to most people, Thiel has taken a retirement account worth
00:11:26.940 | less than $2,000 in 1999 and spun it into a $5 billion windfall.
00:11:34.300 | Now, does it matter what a politician intends in a law?
00:11:43.780 | Does it matter that politicians intended that a Roth IRA would be a humdrum retirement vehicle
00:11:48.980 | intended to spur Americans to save for their golden years?
00:11:52.540 | Doesn't matter what they intend.
00:11:55.180 | What matters is what they write.
00:11:58.540 | What matters is the text of the document that spells out the rules.
00:12:04.300 | Now, either fortunately or unfortunately, I'm not sure, politicians are generally…
00:12:10.980 | I really want to say they're stupid, but they're not stupid.
00:12:19.340 | Politicians are generally a bit myopic, in the sense that they don't understand what's
00:12:25.860 | likely to happen if they put in place a rule.
00:12:32.580 | It's kind of like the best example is the classic cobra effect.
00:12:37.980 | As the story goes, there was a town in India where there were a lot of cobras.
00:12:45.460 | So somebody, a politician or a leader came in and said, "You know what?
00:12:50.060 | We've got way too many cobras here in this town.
00:12:52.900 | We should pass a law to get rid of all of these dangerous cobras.
00:12:56.220 | After all, there are too many cobras in the streets.
00:12:59.860 | So what we'll do is we will incentivize people to kill the cobras and bring them to
00:13:04.740 | us so that we can get rid of the cobras in the streets."
00:13:09.020 | So the politician passes the law and the people start bringing in cobras.
00:13:13.860 | But a few months later, there's just more and more cobras coming in all the time and
00:13:17.260 | they're trying to figure out, "How are these people getting…
00:13:18.900 | Where are they getting all these cobras?"
00:13:19.900 | And yet there's still tons of cobras out there.
00:13:21.700 | Well, lo and behold, when the government incentivized the people to bring in cobras, people recognized,
00:13:27.540 | "I can make a little bit of money."
00:13:29.300 | And so they went ahead and they started breeding cobras.
00:13:33.060 | And they started creating and manufacturing and breeding more cobras so that they could
00:13:36.580 | sell them and make more money.
00:13:38.180 | Well, then of course, the politicians recognized, "Well, that didn't work.
00:13:41.660 | We got to get rid of this.
00:13:42.660 | So we're going to stop the program of paying for the cobras."
00:13:46.040 | So they stopped paying for the cobras, which meant that all the people with lots of cobras
00:13:50.980 | that they had bred were left with a house full of cobras.
00:13:54.300 | So what do they do?
00:13:55.300 | Well, they dumped the cobras outside and now you wind up on the other side with far more
00:13:58.820 | cobras than you ever had in the first place.
00:14:02.500 | And this is often what happens with politicians.
00:14:05.540 | They have the very best of intentions, but they have a God complex that says, "I can
00:14:09.340 | solve this."
00:14:10.740 | And so they create something, but then on the other side of it, the results are not
00:14:14.620 | quite what was anticipated, which is why any kind of positive action, especially that's
00:14:19.620 | not driven by the market, is often quite dangerous.
00:14:24.140 | And then because you don't have a market system that can respond, rather you have a governmental
00:14:28.860 | system that's set in stone, you wind up with unanticipated results.
00:14:41.580 | Using stock deals unavailable to most people, Thiel has taken a retirement account worth
00:14:45.100 | less than $2,000 in 1999 and spun it into a $5 billion windfall.
00:14:52.100 | Now perhaps you, like me, look out for any way that you can figure out how to grow your
00:14:59.780 | money.
00:15:00.780 | And when someone comes along and makes a statement, like someone has taken a retirement account
00:15:04.460 | worth less than $2,000 in 1999 and spun it into a $5 billion windfall, your ears perk
00:15:09.900 | up and you say, "How on earth did they do that?
00:15:11.860 | And just how much of a rate of return is that?"
00:15:14.060 | So I did the math.
00:15:15.420 | If you're interested, if you have a $5 billion future value and a $2,000 present value, you
00:15:21.780 | put in 22 years, 22 periods in between, with no additional payments and you solve for your
00:15:28.260 | rate of return, the answer is 95.35% annual rate of return.
00:15:35.380 | If you can put $2,000 into an account, grow it at 95.35% every year for 22 years, you
00:15:45.300 | too can turn $2,000 into $5 billion, which is absolutely utterly remarkable.
00:15:52.340 | To those who say you can't beat the market, you ought to identify what Peter Thiel did.
00:15:59.100 | Now here's of course what he did.
00:16:00.100 | Of course I used a little slight of word there, slight of mouth when I said you can't beat
00:16:03.980 | the market.
00:16:04.980 | He invested in private company, which is why, forgive me, I suffer tremendous confirmation
00:16:10.740 | bias reading this article, but this is why I point out to you again and again and again
00:16:15.500 | that your best investments are generally going to be in things that you know and/or things
00:16:19.420 | that you're involved in.
00:16:21.140 | How did Thiel get a 95% rate of return?
00:16:24.660 | Well, the answer is PayPal that he was involved in, Facebook that he was connected to, and
00:16:32.820 | his hedge fund that he built that was investing in things that he knew, and he made a tremendous
00:16:40.020 | growth rate in his portfolio.
00:16:44.580 | Notice also, however, that he did this, this tremendous growth rate with a relatively small
00:16:51.660 | amount of money.
00:16:52.660 | As we continue through the article, I'll go through the timeline with you.
00:16:55.300 | What's most important about the timeline is simply that he could not repeat this today
00:17:00.540 | with a $5 billion portfolio because now he's got too much money that there aren't enough
00:17:05.220 | opportunities for him to continue this 95%, but he hit things just in this magically correct
00:17:11.460 | way.
00:17:15.460 | They go on to talk about that the average Roth IRA is worth $39,108.
00:17:20.260 | That's meaningless.
00:17:21.980 | Whenever anyone uses the word average, by the way, you need to immediately ask yourself
00:17:25.700 | whether that's a mean calculation or a median calculation, and you never know, but you can
00:17:32.460 | have a, in that $39,000 number, it's probably a mean calculation.
00:17:38.300 | You've got the guy with $2,000 that he stuck in years ago, and you got Peter Thiel with
00:17:42.020 | $5 billion, but we don't know if that's a mean number or a median number.
00:17:47.660 | But it is spectacular, the opportunities that exist for him.
00:17:52.980 | Here's what they say.
00:17:53.980 | To put that into perspective, here's how much the average Roth was worth at the end of 2018,
00:17:58.820 | $39,108.
00:18:00.420 | And here's how much $5 billion is.
00:18:02.920 | If every one of the 2.3 million people in Houston, Texas were to deposit $2,000 into
00:18:09.940 | a bank today, those accounts still wouldn't equal what Thiel has in his Roth IRA.
00:18:15.820 | What's more, as long as Thiel waits to withdraw his money until April 2027, when he is six
00:18:21.080 | months shy of his 60th birthday, he will never have to pay a penny of tax on those billions.
00:18:31.500 | ProPublica has obtained a trove of IRS tax return data on thousands of the country's
00:18:35.180 | wealthiest people covering more than 15 years.
00:18:38.020 | This data provides, for the first time, an inside look at the financial lives of the
00:18:41.220 | richest Americans, those whose stratospheric fortunes put them among history's wealthiest
00:18:45.940 | individuals.
00:18:47.180 | What this secret information reveals is that while most Americans are dutifully paying
00:18:51.260 | taxes, chipping in their part to fund the military, highways, and safety net programs,
00:18:56.180 | the country's richest citizens are finding ways to sidestep the tax system.
00:19:00.380 | Now here's what angers me, and forgive me, I'm going to let myself go for just a moment.
00:19:07.700 | The average American is absolutely not dutifully paying taxes, chipping in his or her part
00:19:15.440 | to fund the military, highways, and safety net programs, if by that you mean not contributing
00:19:24.460 | to a Roth IRA.
00:19:27.060 | Because the reality, as an experienced financial planner, is this.
00:19:31.440 | The average American is dutifully putting as much money into his or her Roth IRA every
00:19:37.540 | year as he or she can, in addition to as much money into his or her 401k every year as he
00:19:44.640 | or she can.
00:19:45.740 | Which is far worse, because every contribution dollar that goes into a 401k or a traditional
00:19:52.100 | IRA is a dollar that is completely free from any tax money that is being used to fund the
00:19:58.860 | military, highways, and safety net programs.
00:20:01.560 | While every dollar that goes into a Roth IRA every single year is a dollar that has been
00:20:06.620 | taxed to contribute to the military, highways, and safety net programs.
00:20:12.700 | So the statement is just flat out stupid on its face, because average Americans are the
00:20:18.080 | ones contributing to Roth IRAs.
00:20:21.200 | Wealthy people cannot generally contribute to Roth IRAs because they make too much money.
00:20:26.320 | They make more than the contribution limits, thus they cannot contribute to a Roth IRA.
00:20:30.960 | The most they could hope to do is a so-called backdoor Roth IRA, and for the average wealthy
00:20:36.560 | person it's just not worth hassling with.
00:20:40.640 | Unless you have the ability to make a massive rate of return by early stage startup investing,
00:20:48.000 | something like that, it's just not worth hassling about, generally speaking.
00:20:54.720 | Now to finish their sentence, the country's richest citizens are finding ways to sidestep
00:20:59.560 | the tax system.
00:21:01.520 | Which is absolute baloney, because the country's richest citizens are finding ways to work
00:21:07.740 | within the tax system so that they can pay lower taxes.
00:21:14.920 | Rich people generally do not evade their taxes.
00:21:18.080 | It's poor people who make money in tips and side work and don't report the income who
00:21:24.240 | evade their taxes.
00:21:26.520 | The country's richest citizens are simply trying to get good tax advice from professionals
00:21:32.440 | who will read the law and follow it.
00:21:36.920 | One of the most surprising of these techniques involves the Roth IRA, which limits most people
00:21:41.460 | to contributing just $6,000 each year.
00:21:45.620 | Then they go on.
00:21:46.620 | I'll just read it.
00:21:47.620 | The late Senator William Roth Jr., a Delaware Republican, pushed through a law establishing
00:21:51.620 | the Roth IRA in 1997 to allow "hard-working middle-class Americans to stow money away
00:21:57.020 | tax-free for retirement."
00:21:59.220 | The Clinton administration didn't want to give a fat tax break to wealthy people who
00:22:03.140 | were likely to save anyway, so it blocked Americans making more than $110,000 per year
00:22:10.300 | from using them and capped annual contributions back then at $2,000.
00:22:15.620 | Yet from the start, a small number of entrepreneurs, like Thiel, made an end run around the rules.
00:22:23.220 | Listen to this.
00:22:24.220 | Does this sound like an end run?
00:22:26.020 | Open a Roth with $2,000 or less.
00:22:29.120 | Get a sweetheart deal to buy a stake in a startup that has a good chance of one day
00:22:33.160 | exploding in value.
00:22:35.080 | Pay just fractions of a penny per share, a price low enough to buy huge numbers of shares.
00:22:40.360 | Watch as all the gains on that stock, no matter how giant, are shielded from taxes forever,
00:22:45.000 | as long as the IRA remains untouched until age 59 ½.
00:22:49.180 | Then use the proceeds still inside the Roth to make other investments.
00:22:55.040 | Is there an end run around the rules?
00:22:58.820 | If there is one, it is exclusively this concept of their use of the word "sweetheart deal"
00:23:07.200 | to buy a stake in a startup.
00:23:11.560 | The intimation with the term "sweetheart deal" is it's an inside deal.
00:23:17.480 | It's your ability to go in and say, "Hey, this is really worth millions of dollars,
00:23:21.120 | but we'll give it to you for mere thousands."
00:23:24.280 | Do sweetheart deals exist?
00:23:26.480 | In my experience, probably not much.
00:23:29.760 | What does exist is a community of people who talk about those deals, a community of people
00:23:35.360 | who are willing and ready to put money into those deals, who are actively investing in
00:23:40.480 | early stage businesses.
00:23:44.360 | Many of us have been offered the true sweetheart deals.
00:23:47.680 | I have.
00:23:48.680 | You have a friend of yours that starts a company, is working day and night to try to do it,
00:23:54.920 | quits his job, trying to get this company going, says, "Man, I really need $40,000.
00:24:00.200 | What do you need it for?
00:24:01.200 | I need it so I can pay my rent so I can keep building my company."
00:24:04.480 | That's the truth.
00:24:06.160 | The guy who gives him a check for 40 grand in exchange for 300,000 shares of his company
00:24:12.880 | valued at half of a cent per share or a tenth of a ... whatever, I didn't do the math.
00:24:19.400 | That's the guy who gets a sweetheart deal.
00:24:22.040 | There's massive risk of failure with that.
00:24:25.800 | This same organization, ProPublica, is the same kind of organization that will be quick
00:24:29.900 | to run articles about how businesses fail and how risky it is to start a business, etc.
00:24:36.560 | It goes on.
00:24:37.560 | Let's continue.
00:24:38.560 | Next paragraph.
00:24:39.560 | About a decade after the creation of the Roth, Congress made it even easier to turn the accounts
00:24:43.040 | into mammoth tax shelters.
00:24:44.840 | It allowed everyone, including the very richest Americans, to take money they'd stowed in
00:24:49.640 | less favorable traditional retirement accounts and, after paying a one-time tax, shift them
00:24:55.420 | to a Roth where their money could grow unchecked by Uncle Sam, a Bermuda-style tax haven right
00:25:01.100 | here in the United States.
00:25:03.680 | Why do you think Congress passed that law?
00:25:07.760 | Why do you think Congress made it easier for people with retirement accounts to pay the
00:25:14.000 | tax now and convert the accounts into Roths?
00:25:18.800 | The obvious answer is we don't know, unless you're in Congress and you were involved in
00:25:22.320 | talking to all the different Congress critters that you could.
00:25:25.500 | We don't know.
00:25:27.720 | I think Congress did that because they needed tax money.
00:25:31.520 | They're looking down at these retirement accounts and they're saying, "These retirement accounts
00:25:34.920 | aren't going to be taxed for years down the road.
00:25:38.120 | Our budgets are a mess.
00:25:39.200 | We need tax money.
00:25:40.200 | If we allow people to go ahead and convert their accounts now and we take away the income
00:25:44.880 | limits, they'll pay us taxes now when we need it and we can always change the rules later
00:25:48.760 | and tax them down the road."
00:25:50.520 | That's why I think they've done it.
00:25:54.400 | But wealthy people sit down and they try to figure out, "You know what?
00:26:01.760 | What could we apply for?
00:26:04.080 | What could we do?
00:26:05.300 | Should we pay the tax now or save it for later?"
00:26:08.400 | And they recognize, many of them, that the United States government is headed in a very
00:26:13.480 | bad direction fiscally and they say, "You know what?
00:26:16.440 | I think taxes are going to go up.
00:26:18.120 | I'll go ahead and pay the tax now when I know the number because I think it'll probably
00:26:23.880 | be higher later and I don't know what that later number would be."
00:26:28.040 | So they pay the tax now.
00:26:32.280 | Who's at fault?
00:26:34.760 | Congress changed the law.
00:26:36.920 | Rich people just read it and followed it.
00:26:42.560 | By the way, in the next paragraph we find a little bit of information about this series,
00:26:46.800 | which is quite interesting.
00:26:48.440 | I had not understood in the first article how much data ProPublica was given with the
00:26:57.800 | data dump from the IRS.
00:27:00.080 | But early in the article you notice they said, "We had thousands of tax returns."
00:27:03.520 | Here, they say this, "To identify those who have amassed fortunes in retirement accounts,
00:27:09.200 | ProPublica scoured the tax return data of the ultra-wealthy for IRA accounts valued
00:27:13.680 | at more than $20 million."
00:27:16.200 | I don't know how many they have.
00:27:17.200 | They go on to talk about Warren Buffett.
00:27:19.000 | Sorry, Ted Weschler, a deputy of Buffett, has $264 million in his Roth.
00:27:23.880 | Hedge fund manager Randall Smith has $252 million in his.
00:27:27.800 | Buffett evidently has a Roth IRA with $20.2 million in it.
00:27:32.720 | Robert Mercer, $31.5 million in it.
00:27:36.400 | It's insane that they have this data, but they do and so we can have those numbers.
00:27:42.000 | I don't understand how it adds for them to put this data out of random people.
00:27:50.960 | And now here I am repeating it on a podcast of how much money they have in their retirement
00:27:54.400 | accounts, but that's the path that they have chosen to take.
00:27:59.920 | So let's talk about how he actually did this, which is the most interesting thing.
00:28:03.520 | How did Thiel do it?
00:28:06.200 | Well, here's how.
00:28:09.320 | Until in 1999, Thiel was running a small hedge fund and he was working at...
00:28:16.160 | Well, let me read it.
00:28:18.920 | One day in early 1999, a deputy of Thiel's at the company that would become PayPal walked
00:28:23.720 | into the San Francisco office of Pensco Pension Services.
00:28:27.600 | It could have been an uneventful appointment.
00:28:29.560 | Instead, it changed Thiel's life.
00:28:32.120 | Thiel, a Stanford Law graduate, ran a small hedge fund and hadn't yet joined the ranks
00:28:37.340 | of the ultra wealthy.
00:28:39.120 | But he had outsized ambitions for his months-old tech venture, where he served as both chairman
00:28:44.320 | and CEO.
00:28:45.680 | He envisioned his company creating "a new world currency free from all government control."
00:28:52.080 | Influenced by libertarian Ayn Rand and Tolkien's fantasy trilogy, Thiel, then in his early
00:28:56.560 | 30s, carried himself like a contrarian philosopher king.
00:29:00.480 | A few years earlier, he had co-authored a Jeremy ad against multiculturalism that accused
00:29:05.120 | the administration of then-president Bill Clinton of waging class warfare.
00:29:09.560 | Taxing the rich seems to have become an end in itself, he and his co-author wrote.
00:29:15.800 | Pensco was a small firm that allowed its customers to put nearly any investment they wanted into
00:29:19.880 | a tax-advantaged retirement account.
00:29:22.280 | Thiel was about to become Pensco's whale.
00:29:26.320 | By the way, there's the intimation there that that's somehow illegal.
00:29:30.120 | There's lots of companies that do it.
00:29:32.480 | Illegally, you can put almost any investment that you want to into an IRA.
00:29:38.000 | There are only a few prohibited investments, such as life insurance, personally owned property
00:29:43.240 | that you're actively using and benefiting from, and a couple others.
00:29:47.200 | But outside of those, you can put almost any investment into an IRA.
00:29:53.800 | In an interview with ProPublica, Pensco founder Tom Anderson recalled how Thiel and other
00:29:58.200 | PayPal executives had wanted to put startup shares of the company into traditional IRAs.
00:30:03.240 | Anderson dangled something sweeter.
00:30:04.880 | "I said, 'If you really think this is going to be big, you know, you might want
00:30:09.520 | to consider this new Roth,'" recalled Anderson, who is now retired.
00:30:12.880 | "If the investment ballooned," he remembered saying, "you're not going to pay tax on
00:30:17.120 | it when you take it out.
00:30:18.600 | It's a no-brainer."
00:30:20.320 | The math was compelling.
00:30:21.640 | Thiel wouldn't get a tax break up front, but he'd avoid an immense tax bill later
00:30:25.360 | on if the investment surged in value.
00:30:28.320 | They immediately grasped that, Anderson said, and they did it.
00:30:32.280 | So once again, let's put this into context.
00:30:35.160 | Here you have a group of smart business guys, hungry, aggressive smart business guys.
00:30:40.680 | They want to change the world and they say, "We think we have an idea for how to do
00:30:44.760 | it."
00:30:45.760 | So they're trying to figure out how do we profit from this?
00:30:47.520 | What do we do?
00:30:48.720 | And the idea, of course, is, well, we want to save on taxes because the taxes are a major,
00:30:54.880 | major cost to us.
00:30:57.680 | So we have this IRA.
00:30:58.680 | But look, Congress just passed a new tax incentive called a Roth IRA.
00:31:04.600 | And the tax incentive that Congress has passed works like this.
00:31:09.920 | If you put, if you earn money and you pay taxes now, and you can put some money, up
00:31:15.880 | to $2,000 in a year, into this account, and then by putting this amount of money into
00:31:21.720 | this account, you now have the ability to take the money out later, after age 59 and
00:31:27.000 | a half, tax free.
00:31:29.920 | That's what they argued.
00:31:32.080 | So you have somebody who reads what Congress says, goes and tells their clients, serving
00:31:37.920 | their clients, says, "Look, if you've got something that's going to blow up in value,
00:31:41.480 | this is what you should do."
00:31:43.280 | And they grasped that.
00:31:44.280 | Now listen, quote, "What happened next deprived the U.S. government of untold millions in
00:31:49.960 | tax revenue, perhaps billions."
00:31:55.720 | Thiel used his new Roth IRA to purchase shares of his startup.
00:32:00.680 | In 1999, single taxpayers were only allowed to contribute to a Roth if they made less
00:32:05.920 | than $110,000.
00:32:08.520 | Like many startups, PayPal offered its top executives low initial salaries and large
00:32:14.200 | stock grants.
00:32:15.960 | Thiel's income that year was $73,263, the IRS records show.
00:32:24.320 | Now is there anything wrong with a guy making $73,000?
00:32:32.400 | I don't know what he was making before that.
00:32:34.000 | Of course, I don't have his tax records to know, but I'm not aware of him ever making
00:32:38.000 | much money.
00:32:39.000 | New Stanford Law graduate, making $73,000.
00:32:41.640 | Is there anything wrong with a guy putting $2,000 into a Roth IRA?
00:32:48.280 | Nothing at all, right?
00:32:49.280 | Just following the rules.
00:32:50.280 | Congress created this tax incentive.
00:32:51.720 | After all, Congress creates this account because they want people to save for their golden
00:32:55.360 | years.
00:32:56.360 | Here's this guy who's a young, fresh college graduate, probably has a bunch of student
00:32:59.560 | loan debt or something, and he says, "I'm going to put some money aside for retirement."
00:33:03.440 | Nothing wrong.
00:33:05.400 | Now what's the next paragraph?
00:33:07.600 | "Thiel also had an advantage over most Americans with IRAs, who typically used them to purchase
00:33:15.880 | publicly traded stocks, bonds, mutual funds, and certificates of deposit."
00:33:26.720 | Since Thiel used his Roth to buy shares of a private company, the value wasn't set on
00:33:31.320 | a public stock exchange.
00:33:35.760 | What this shows is that typical people are broke because typical people take the typical
00:33:41.720 | advice to invest in publicly traded stocks, bonds, mutual funds, and certificates of deposit.
00:33:48.140 | You would be crazy to put a lot of those things into a Roth IRA, unless you just didn't have
00:33:55.720 | anything better to put in a Roth IRA, because a lot of those things were already tax efficient.
00:34:03.080 | Now you could put your bonds in a Roth IRA, you could put your mutual funds in a Roth
00:34:08.000 | IRA, but a lot of times stocks and whatnot are tax efficient already.
00:34:12.960 | Their capital gains property.
00:34:15.560 | What you look for whenever you have something is to say, "How can I maximize this?"
00:34:20.000 | That's what you should look for.
00:34:21.400 | You should look for and say, "Okay, here's a set of rules.
00:34:23.880 | How can I maximize these rules?
00:34:25.440 | How can I play these to my advantage?"
00:34:28.760 | The answer is you want to put in highly undervalued assets that could grow massively in value.
00:34:37.560 | Some real estate investors will do this.
00:34:39.040 | There are a lot of real estate investors who have a lot of money in their IRAs, but you
00:34:42.040 | don't just go out and put a standard house in it.
00:34:45.300 | You invest in something highly speculative because you can't get much money into the
00:34:49.240 | account because of the contribution limits, and you want something that's going to really
00:34:52.960 | win to maximize your tax-free deferral, your tax-free gains.
00:34:58.880 | Now here's where we get into the idea of what ProPublica thinks Thiel may have done wrong.
00:35:06.480 | Let me read what they say and then we'll talk about it.
00:35:09.320 | Since Thiel used his Roth to buy shares of a private company, the value wasn't set on
00:35:14.040 | a public stock exchange.
00:35:16.080 | Although the details of such purchases are not usually public, Thiel's financial assistant
00:35:21.360 | later disclosed them in a letter included in the Entrepreneur's Application for Residency
00:35:25.520 | in New Zealand.
00:35:26.520 | "Mr. Thiel purchased his founder's shares in PayPal through his Roth IRA during PayPal's
00:35:32.000 | formation."
00:35:33.000 | While SEC filings describing that time don't mention Thiel's Roth, they show that he bought
00:35:39.520 | his first slice of the company in January 1999.
00:35:43.960 | Thiel paid $0.001 per share, yes, just a tenth of a penny, for 1.7 million shares.
00:35:53.040 | At that price, he was able to buy a large stake for just $1,700.
00:35:59.440 | In 1999, $2,000 was the maximum amount you could put into a Roth in a year.
00:36:05.840 | Thiel's unusual stock purchase risked running afoul of rules designed to prevent IRAs from
00:36:11.280 | becoming illegal tax shelters.
00:36:13.680 | Investors aren't allowed to buy assets for less than their true value through an IRA.
00:36:18.200 | The practice is sometimes known as "stuffing" because it gets around the strict limits imposed
00:36:22.680 | by Congress on how much money can be put in a Roth.
00:36:27.360 | PayPal later disclosed details about the early history of the company in an SEC filing before
00:36:31.920 | its initial public offering.
00:36:33.640 | The filing reveals that Thiel's founder's shares were among those the company sold to
00:36:37.760 | employees at "below fair value."
00:36:43.160 | Victor Fleischer, a tax law professor at the University of California, Irvine, who has
00:36:46.840 | written about the valuation of founders' shares, read the PayPal filings at ProPublica's
00:36:51.640 | request.
00:36:52.640 | Buying startup shares at a discounted $0.001 price with a Roth, he asserts, would be indefensible.
00:36:58.280 | "That's a huge scandal," Fleischer said, adding, "How greedy can you get?"
00:37:04.000 | Warren Baker, a Seattle tax attorney who specializes in IRAs, said he would advise clients who
00:37:09.480 | are top executives working at a startup not to purchase founders' shares with a Roth
00:37:14.000 | to avoid accusations by the IRS that they got a special deal and undervalued the shares.
00:37:19.320 | Baker was speaking generally, not about Thiel.
00:37:22.160 | "I would be concerned about the fact that you can't support the valuation number as
00:37:26.440 | being reasonable," he said.
00:37:28.760 | And it goes on and it talks about how they had bought more shares and there was other
00:37:32.800 | people buying shares, etc.
00:37:34.880 | Now the intimation, it's not an allegation, but the intimation here is that Thiel did
00:37:40.960 | something wrong by buying these shares in his Roth IRA at this discounted price.
00:37:48.680 | And I don't know if he did or if he did not.
00:37:52.080 | All I have here is the article with their two expert people that they interviewed.
00:37:57.560 | What I do know is early stage companies, small companies, private companies are vanishingly
00:38:08.440 | difficult to value.
00:38:13.200 | Pretty much you make it up, but you try to make it up in some way that makes sense.
00:38:18.520 | I have a company, one of my companies.
00:38:21.400 | This company is worthless, but I have one million shares in this company.
00:38:29.160 | The company has no assets.
00:38:31.320 | The business is not yet going.
00:38:34.020 | It's worthless.
00:38:35.520 | It's worth less than one-tenth of a dollar of a share.
00:38:40.720 | And so the argument goes back and you have to say PayPal was actually worth a lot more
00:38:46.360 | and everybody knew it.
00:38:48.600 | Now without question, you could argue that successfully now because in hindsight, you
00:38:57.960 | could argue that successfully if you say, well, Thiel thought the company was worth
00:39:02.800 | a lot more than $0.001 per share.
00:39:07.240 | Thiel thought the company was worth a lot more.
00:39:09.760 | Without question, he did.
00:39:11.320 | That was why he was excited about it.
00:39:12.880 | That was why he was working in it.
00:39:15.240 | But here's what's so wacky.
00:39:18.240 | The market may or may not have thought it was worth more.
00:39:23.840 | Other investors had the opportunity to invest and they passed.
00:39:28.440 | We don't actually know what Thiel thought about it.
00:39:31.440 | We don't actually know what it was worth.
00:39:34.480 | It was worth as much as what someone was willing to pay and Thiel was willing to pay that price
00:39:40.320 | and the company thought it was worth it for them to sell that amount of shares to Thiel
00:39:44.520 | at that price because these people are committed to it.
00:39:49.800 | Could there be a legal opinion here?
00:39:52.000 | I'm sure there could be and they could fight it out in court.
00:39:55.920 | So if Thiel is alleged to have done something wrong, the government could sue him.
00:40:00.600 | I can't remember what the rules would be at this point in terms of the statutes of limitations
00:40:04.840 | on the tax returns and everything like that.
00:40:06.560 | I don't know how that would work out.
00:40:08.400 | But the proper place for that is in a court.
00:40:11.800 | In the court of public opinion, we don't have enough information to pass a judgment.
00:40:15.920 | I'm very open to the idea that Thiel engaged in some kind of stuffing strategy, that he
00:40:22.320 | got a sweetheart deal.
00:40:23.800 | That's very possible.
00:40:26.100 | You and I would do exactly the same thing if we could.
00:40:30.600 | I'm also very possible that Thiel saw something that he thought was good.
00:40:35.100 | No court, no jury would ever find that he did anything wrong and it turns out that it
00:40:41.200 | just worked out.
00:40:42.200 | Probably with a lot of work for him and at the right time in the market.
00:40:45.360 | There were probably a lot of other people who put shares of their small private companies
00:40:51.600 | into their Roth IRAs.
00:40:54.320 | Their companies went bust in 1999, 2000, 2001 and they're worth nothing.
00:41:00.760 | So it only works out if you're successful.
00:41:03.340 | So it's possible that he did something.
00:41:06.680 | But having done this stuff for a long time, there is a wide range of defensible numbers
00:41:12.680 | that you put on things like valuations.
00:41:15.960 | There is no law that says you can't use the thing that is the most advantageous for you.
00:41:21.720 | You can't use, if the IRS gives you four different ways of valuation, you can work them through
00:41:26.240 | and then you can choose the one that's most advantageous for you.
00:41:30.200 | So it would be my guess that a court case would actually find that nothing wrong was
00:41:35.800 | done.
00:41:36.800 | I don't know that, just guessing.
00:41:38.920 | Because there's no reason to do something that's actually wrong in this situation.
00:41:43.960 | There's no reason to do something that's actually illegal.
00:41:46.640 | You're just simply choosing the thing that you think is going to be best for you.
00:41:49.920 | Now I would defer to Mr. Fleischer, the tax law professor, and Mr. Baker, the Seattle
00:41:55.080 | tax attorney.
00:41:56.640 | They certainly have good points to say.
00:42:01.440 | But I doubt that either of those men has Thiel's brain, in the sense that Thiel is somebody
00:42:07.720 | who is willing to take the risk.
00:42:09.320 | You have one guy who's a legal professor at a university.
00:42:14.240 | That means, I don't know anything about his career, I'm judging, I'm stereotyping, but
00:42:18.760 | generally he's not someone who would even understand the concept of risk, of entrepreneurial
00:42:22.680 | risk.
00:42:23.680 | He's looking for a safe government job.
00:42:24.920 | And you get the other guy who's a tax lawyer.
00:42:27.200 | Again, we don't know anything about him, but an entrepreneur would look at it differently.
00:42:31.520 | If I were in Thiel's shoes, sitting at the table talking to a tax advisor, I would say
00:42:36.080 | to him, "Listen, I need to know what the law says."
00:42:41.120 | The advisor would say, "Well, here's what the law says.
00:42:43.180 | You have to put them in at a fair market value."
00:42:44.880 | And then I would respond, and I would say, "Well, how do we know what a fair market value
00:42:48.720 | is?"
00:42:49.720 | "Well, here's what we understand, here's what we know, here's what we don't know."
00:42:53.160 | Okay.
00:42:54.160 | Now, once that's done, I'm going to look at it and say, "What are the risks?
00:42:58.720 | What are the risks of my not doing it?"
00:43:02.680 | Meaning, what are the risks if I choose this valuation versus the other valuation?
00:43:08.600 | And in these scenarios, the risk is basically that the transaction is disallowed and that
00:43:13.680 | tax is imposed.
00:43:16.680 | Well, if I'm following the law, right, there's no risk of my committing tax fraud, for which
00:43:22.600 | there would be jail time.
00:43:25.440 | I'm following the law.
00:43:28.280 | I'm choosing a valuation estimate that is favorable to me, that's most favorable to
00:43:33.600 | me.
00:43:35.200 | If I get sued about this, I have to defend it in tax court, and if I lose, what'll happen
00:43:40.280 | is I'll have to pay the tax.
00:43:42.240 | But if I don't choose this, and I don't put the money in the shares of Maratha, I have
00:43:46.440 | to pay the tax.
00:43:48.120 | So there's just no reason for me not to take the risk as long as I would not be anywhere
00:43:53.400 | near the realm of fraud.
00:43:57.720 | That's the key.
00:43:58.720 | You can't be anywhere near the realm of fraud.
00:44:00.440 | You need to have records and data that says, "Here's what I think the company is worth.
00:44:06.200 | Here's my argumentation for that.
00:44:08.640 | So here are the number of shares that I want to have."
00:44:11.000 | That's my understanding of it as a non-attorney.
00:44:15.360 | That's how we as human beings deal with risk.
00:44:18.080 | You're dealing with risk at all times, and you're looking at it and you're saying, "I
00:44:23.440 | see something more in it."
00:44:24.720 | In every single financial transaction, every voluntary transaction, both people will walk
00:44:31.880 | away feeling like they got the better end of the deal, or they'll return the product
00:44:37.560 | or be unhappy.
00:44:38.560 | But in every happy transaction, which is the vast majority of them, both people feel like
00:44:41.640 | they walk away winning.
00:44:43.840 | If you go to work today and you get a paycheck on Friday, at the end of the week on Friday,
00:44:50.600 | you're going to walk away feeling like you got the better end of the deal versus your
00:44:56.080 | boss because you got a paycheck and your boss got 40 hours of your time.
00:45:03.000 | On the other hand, your boss is going to go away feeling like he got the better end of
00:45:07.600 | the deal because he got 40 hours of your time and he only had to give you a paycheck.
00:45:15.760 | Every transaction works that way.
00:45:18.680 | In a scenario like Teal here and the company, Teal walked away from this transaction feeling
00:45:27.520 | like he got the better end of the deal.
00:45:30.640 | And PayPal, the company, walked away feeling like they got the better end of the deal by
00:45:34.860 | selling him the shares that the valuation put there.
00:45:37.960 | There's really no other way to figure out a valuation other than what two independent
00:45:44.600 | people arrive at in the marketplace without coercion.
00:45:49.200 | We arrive at a deal and that deal is going to result in both of us walking away.
00:45:53.440 | There's no more exact science than that.
00:45:56.200 | You'll have one person walk up to a $50 steak and say, "This steak is a deal.
00:46:00.800 | I'm taking it."
00:46:01.800 | You'll have another person that walks up and says, "I don't want it."
00:46:03.800 | The guy who's selling the $50 steak, the only way he figures out his price is based upon
00:46:07.960 | him going away feeling like he won.
00:46:09.840 | I hope the point's clear.
00:46:11.040 | I feel like I'm not communicating it well enough.
00:46:13.280 | But in a free market scenario, the only way you can figure out a number on this is based
00:46:19.700 | upon the parties involved.
00:46:21.960 | And the only tool that a tax authority can impose to say the number is fair or not fair
00:46:27.720 | is here's our approved methods of valuation and then what does the market say?
00:46:34.080 | So while I'm open to the idea that Thiel committed something wrong, I would say he certainly
00:46:38.720 | didn't commit fraud.
00:46:41.040 | And if he did take a liberal valuation, he did what everyone else does when they value
00:46:49.860 | a company.
00:46:51.080 | He did what everyone else does when they value a house for sale.
00:46:54.440 | He did what everyone else.
00:46:55.440 | You look at the marketplace, you choose the number, and you say, "Here's how I got there.
00:46:59.120 | I can argue this in front of a judge.
00:47:00.800 | I'm ready to go."
00:47:02.640 | Now let's continue with the story and move faster.
00:47:04.360 | After 1999, Thiel would never again contribute money to his Roth tax record show.
00:47:09.180 | He didn't need to.
00:47:10.180 | In just a year's time, the value of his Roth jumped from 1,660...
00:47:14.560 | Excuse me.
00:47:15.560 | Let me come back for a moment.
00:47:18.480 | I want you to follow the numbers.
00:47:20.640 | Thiel contributed $1,700 to buy the shares of PayPal.
00:47:27.200 | Then the company goes through a round of valuation and they start selling funds to other investors,
00:47:34.720 | etc.
00:47:35.720 | That, in just a month's time, the company sold a slice of itself to investors for $500,000.
00:47:41.080 | That June and August, another $4.5 million poured in from the venture fund arm of telecom
00:47:45.640 | giant Nokia and other investors, those records show.
00:47:49.000 | The dot-com boom was in full swing.
00:47:51.200 | Going on.
00:47:52.200 | When it came time to...
00:47:53.200 | I should read it for fairness.
00:47:54.480 | "We're definitely on to something big," Thiel told employees in late 1999, predicting that
00:47:58.600 | PayPal would become "the Microsoft of payments," according to The PayPal Wars, a book by a
00:48:04.280 | former employee recounting those heady early years.
00:48:07.760 | But when it came time for Pensco, the custodian of Thiel's Roth, to report the value of the
00:48:12.320 | account at the close of 1999, none of the investor enthusiasm was apparent.
00:48:17.680 | Pensco told the IRS that Thiel's Roth was worth just $1,664 at the end of 1999, tax
00:48:25.160 | records show.
00:48:28.000 | In an interview, Anderson said Pensco relied on the companies whose shares were in a Roth
00:48:32.080 | to say what they were worth.
00:48:33.560 | He didn't know how PayPal came up with its market value, but he said Thiel's purchase
00:48:36.960 | of those shares was "very legitimate."
00:48:40.040 | From then on, nothing would stop Thiel's Roth.
00:48:42.160 | In a Silicon Valley equivalent of Tolkien alchemy, his Roth would transform those PayPal
00:48:47.000 | shares into a tax-free fortune, one that would be safer than all the gems, gold, and
00:48:52.920 | silver in the Dragon Smogs Mountain.
00:48:57.040 | Once again, we come to a situation, "All right, well how did the custodian do something
00:49:02.280 | wrong?"
00:49:03.280 | In this case, I would say, "No, the custodian didn't do anything wrong."
00:49:05.640 | This is, as I understand, standard practice.
00:49:07.960 | When you have a private company like this, even a private company that is engaging in
00:49:13.360 | early-stage financing, the valuation is completely made up out of thin air.
00:49:19.960 | Every single one of those early investors thought the company was a multi-billion dollar
00:49:24.280 | company.
00:49:25.280 | That was why they were investing.
00:49:26.480 | But on paper, their valuations are not multi-billions.
00:49:30.200 | That's why they're investing early.
00:49:31.520 | They're trying to get in early.
00:49:34.360 | There's no public market for the shares.
00:49:36.320 | There's no ability for you to see what the market is trading those things for.
00:49:42.600 | There's just no way to know.
00:49:45.080 | For every argument in favor of a certain valuation, there's an argument against.
00:49:51.000 | Imagine it like this.
00:49:52.000 | I'm going to ask you a question.
00:49:54.120 | What do you believe is the proper value of Dogecoin today?
00:50:04.080 | What do you personally believe is the proper value that should be placed on Dogecoin?
00:50:12.520 | The vast majority of people would say nothing.
00:50:15.720 | It's worthless.
00:50:17.640 | That's why the vast majority of people don't own the coin.
00:50:22.120 | It's worthless.
00:50:24.720 | But there are a whole lot of people that say it's worth a lot.
00:50:29.080 | And then there are many, many more people that say, "I'm not sure.
00:50:32.400 | It's worth something."
00:50:33.400 | Now, Dogecoin is much easier for us to value than PayPal shares would have been in those
00:50:42.120 | days because with Dogecoin, we have a public market.
00:50:47.120 | With PayPal, and again, maybe I'm wrong on something because I didn't go through and
00:50:51.020 | read 18 books on PayPal like I would love to do before expressing my opinion publicly,
00:50:55.920 | but 80% chance I'm right.
00:50:59.480 | Dogecoin is easier to value honestly than PayPal would have been in those days because
00:51:04.540 | you have an entirely made up artificial thing, just like a cryptocurrency, totally made up
00:51:09.920 | thing and you have an early stage of the world where the world is changing and nobody knows
00:51:15.320 | what's going to happen.
00:51:16.680 | Plus, unlike Dogecoin, with PayPal, you have to input all kinds of risk of user error and
00:51:23.400 | management error and people just messing everything up.
00:51:26.400 | Dogecoin, you don't have that.
00:51:28.400 | You just have a straight up commodity crypto that people can play around with and take
00:51:32.680 | bets on.
00:51:34.400 | With PayPal, you don't have that.
00:51:35.960 | You have a company that people can mess up and drive into bankruptcy.
00:51:39.500 | So it's far riskier.
00:51:41.240 | Now with 20 years of hindsight, it will look like the answer was guaranteed.
00:51:48.280 | But if you think that, just tell me where you think Dogecoin is going to be 20 years
00:51:51.560 | from now.
00:51:52.560 | Then we'll go back in 20 years and listen to whether you were right or wrong, what the
00:51:56.280 | utility and the value of a Dogecoin is and measured in US dollars.
00:52:01.680 | All of this is unknown.
00:52:03.760 | By the way, we would also have to go back and do inflation calculations and all those
00:52:08.320 | numbers in the early PayPal calculations.
00:52:15.160 | Now here's what's remarkable.
00:52:18.280 | This is my favorite part of the story, of how Thiel used his Roth IRA to go from a fairly
00:52:26.440 | ordinary Roth IRA to an extraordinary Roth IRA.
00:52:33.400 | First, after 1999, Thiel would never again contribute money to his Roth tax record show.
00:52:39.000 | Why not by the way?
00:52:40.000 | Well, because he would have made too much money and he wouldn't have been able to.
00:52:43.120 | If Thiel could have contributed money to his Roth, he would have.
00:52:46.240 | But unfortunately, after that point in time, his company started to be successful and thus
00:52:50.880 | his income would have gone over the contribution limits and he would not be allowed to legally
00:52:55.400 | contribute money.
00:52:56.480 | Until later, they changed the rules allowing for the backdoor Roth, but by then he would
00:52:59.520 | have had so much money in his Roth that it really didn't matter and an extra $5,000
00:53:03.200 | was immaterial.
00:53:05.040 | After 1999, Thiel would never again contribute money to his Roth tax record show.
00:53:08.920 | He didn't need to.
00:53:10.080 | In just a year's time, the value of his Roth jumped from $1,664 to $3.8 million, a
00:53:18.600 | 227,490% increase.
00:53:21.440 | Joshua's commentary, amazing, absolutely staggering.
00:53:26.960 | I want to point your attention to the fact that being involved in your own business,
00:53:31.480 | especially a business that is scalable and has massive potential, is probably your highest
00:53:37.440 | opportunity for wealth, period.
00:53:40.480 | The vast majority of people won't be able to do it, but for the few who can, that's
00:53:47.080 | where your biggest wealth is going to come from because the people who become wealthy
00:53:52.280 | are those who earn high incomes or who start businesses.
00:53:56.520 | And if you're thoughtful and intelligent about the kind of business that you start and you
00:54:00.000 | choose something that at least has the potential for scalability, you can sometimes have dramatic
00:54:08.040 | results.
00:54:09.880 | He didn't need to.
00:54:10.880 | In just a year's time, the value of his Roth jumped from $1,664 to $3.8 million.
00:54:14.960 | I don't know how that's valued, a 227,000% increase.
00:54:19.520 | Then in 2002, eBay purchased PayPal.
00:54:22.260 | That same year, Thiel sold the shares still inside his Roth, his financial assistant later
00:54:27.960 | told New Zealand officials.
00:54:29.800 | The tax-free proceeds poured into his account.
00:54:33.280 | By the end of 2002, Thiel's Roth was worth $28.5 million.
00:54:39.160 | Tax records show.
00:54:40.960 | If he had held his shares outside of the Roth in a normal investment account, Thiel would
00:54:45.760 | have owed the IRS 20% of his gains and owed another 9% to California tax authorities.
00:54:51.240 | Because the shares were in a Roth, he had no tax bill when he sold them, saving him
00:54:56.040 | millions.
00:54:57.600 | Suddenly, Thiel had an advantage few investors could claim, his own personal investment bank
00:55:04.080 | that wasn't subject to taxation.
00:55:06.640 | He could now use the cash inside the Roth to buy and sell nearly any investment he wanted.
00:55:12.040 | Thiel used the millions in proceeds from his PayPal windfall to invest in other Silicon
00:55:16.920 | Valley startups, as well as his own hedge fund, according to his financial assistant's
00:55:21.560 | memo.
00:55:22.560 | Once again, Thiel's Roth scooped up startup shares at bargain basement prices.
00:55:26.880 | They go on, they talk about Palantir, his investment in Palantir.
00:55:31.760 | In 2004, Thiel met Mark Zuckerberg, a Harvard undergraduate.
00:55:35.720 | Thiel invested $500,000, Facebook's first large outside infusion of cash.
00:55:41.420 | Those Facebook shares ended up, where else, in Thiel's Roth IRA.
00:55:48.440 | And he goes on and continues to grow.
00:55:50.520 | Okay, so they talk more about the details.
00:55:54.640 | So at this point in time, we see that it's just growing and from there, he's got so much
00:56:01.200 | value in there.
00:56:04.320 | Now they do cover a section, which I'm going to skip for now.
00:56:06.920 | They cover a section on the mega backdoor Roth, etc.
00:56:11.320 | Talk about the Romney IRA and go on.
00:56:12.880 | You should read it.
00:56:14.240 | But we'll close this out with the last couple of paragraphs.
00:56:19.120 | Having a modest 6% annual return and no withdrawals, his tax-free golden egg could be worth about
00:56:25.680 | $263 billion in 2087, when Thiel plans to celebrate his 120th birthday.
00:56:33.880 | That's larger than the current gross domestic product of New Zealand, his adopted homeland.
00:56:39.280 | There is good news and bad news, Thiel told the Washington Post when asked about living
00:56:42.740 | more than a century.
00:56:44.080 | The bad news is, if you don't believe in the good news, you're not saving enough for retirement
00:56:48.060 | and likely to spend much of your old age in poverty.
00:56:51.000 | The financial planning, Thiel said, takes on a very different character.
00:56:55.440 | Now I love this because it talks about Thiel's stuff of life extension, which I think is
00:56:59.700 | really fun and interesting as well.
00:57:03.280 | First of all, I hope that Thiel doesn't stop and start taking garbage 6% annual returns.
00:57:10.080 | I hope that he continues to use his business acumen, his investment prowess, and I hope
00:57:15.280 | that his account is worth a lot bigger than $263 billion.
00:57:20.400 | I hope he does.
00:57:23.400 | However, it's going to create problems for us, you and me, who may or may not yet have
00:57:30.640 | $263 billion.
00:57:33.680 | Because it's hard to imagine a government like the United States sticking with its rules
00:57:40.680 | when somebody has been this successful.
00:57:43.360 | And they will change the rules.
00:57:45.360 | You always think about the Rinaldo rule in Italy, where they changed the entire tax code
00:57:51.120 | so that Rinaldo would come and play soccer there and they could have a maximum tax of
00:57:54.600 | 100,000 euros.
00:57:55.600 | It's hard.
00:57:56.600 | I mean, a country will change everything if there's someone that's high profile enough.
00:57:59.840 | And so there's no question this article is going to be influential around the world and
00:58:05.880 | influential in the US-American political and financial conversations.
00:58:12.080 | So here are the points that I would like you to make sure that you notice.
00:58:15.000 | Number one, notice that there's nothing that Thiel did that you and I couldn't choose to
00:58:22.760 | do.
00:58:23.820 | You and I could choose to work in high-risk areas for our career.
00:58:29.160 | You and I could choose to work in the market where the change is exciting.
00:58:32.440 | If you go back to 1999, what you see at that time was that tech people in those days, they
00:58:38.320 | knew there was something new and fresh happening.
00:58:42.320 | And there was opportunity all around because there was a fundamental transformation.
00:58:46.800 | I see the same thing happening right now in the financial space with cryptocurrencies,
00:58:51.240 | with DeFi, etc.
00:58:53.320 | There's innovation happening.
00:58:54.520 | There's change.
00:58:55.620 | People smell the fact that we could change everything.
00:58:59.300 | This entire system that has been around for centuries, we could change everything.
00:59:04.760 | And if I were looking for opportunity, I'd look for where are things changing because
00:59:09.920 | where things are changing, there's opportunity.
00:59:12.600 | There's opportunity to go and sell shovels to gold miners.
00:59:16.200 | When you see a bunch of people going somewhere, pay clue into that and pay attention.
00:59:20.880 | Thiel did that, right?
00:59:22.560 | In California at the right time, looking for opportunities.
00:59:26.560 | There are opportunities for people who solve big problems.
00:59:30.000 | Thiel solved a big problem.
00:59:31.440 | He tackled a big problem, the transfer of money.
00:59:34.240 | He had big dreams.
00:59:36.000 | The fact that he was approaching those dreams with libertarian ideals doesn't mean that
00:59:40.680 | his dreams were any different.
00:59:42.200 | It just means that he wanted to solve a big problem.
00:59:45.240 | And he solved a big problem.
00:59:47.560 | To this day, you and I use PayPal, right?
00:59:49.880 | We use PayPal.
00:59:50.880 | Even though there's lots of competition, we still use PayPal.
00:59:53.600 | And PayPal transformed the marketplace in a powerful way.
00:59:57.960 | So he was where the action was and he was willing to take the risk.
01:00:03.040 | Now what is it that equipped him to take the risk?
01:00:06.200 | I don't know.
01:00:07.200 | I haven't read Thiel's book actually.
01:00:09.620 | But I would say one of the things that equipped Thiel to take the risk was that he was able
01:00:14.280 | to do it.
01:00:15.280 | And so maybe he came from a very wealthy family.
01:00:18.600 | Maybe his parents paid for all of his college bills.
01:00:22.040 | Maybe he had everything that he needed.
01:00:24.920 | I don't know.
01:00:25.920 | I actually don't know.
01:00:26.920 | Maybe he came from nothing.
01:00:27.920 | Maybe he just kept his expenses low.
01:00:30.040 | All that doesn't matter.
01:00:31.120 | My answer is you've got to be prepared to take the risk.
01:00:33.360 | So how do you do it?
01:00:34.360 | Well, you become skilled and say, "I'm going for opportunity.
01:00:38.240 | So can I be good at keeping my expenses low?
01:00:41.360 | Can I be good at going for where I can really build something big?
01:00:45.400 | Can I make sure that I set myself up in such a way that I can survive to go after something?"
01:00:54.920 | If you need $1,700 to pay a car payment so you don't get your car repossessed, that may
01:01:00.880 | be the $1,700 that you could have put into your Roth IRA to buy shares of the company
01:01:06.360 | that you're excited about.
01:01:08.280 | So keep your expenses low.
01:01:09.840 | Keep your flexibility high so you can go where the opportunity is.
01:01:13.400 | Now along the way, take good advice.
01:01:15.600 | Take good counsel.
01:01:17.240 | Think and talk to people and take the advice of experts because if you talk to the experts,
01:01:22.000 | the experts can help you to figure out how to do things smartly, to talk about how to
01:01:27.260 | structure things.
01:01:28.720 | There are a lot of people in this listening audience who have started a company or been
01:01:31.900 | involved in a company and never went and sat down with a tax expert, never went and sat
01:01:36.140 | down with an IRA person and said, "Could I put this in my IRA?"
01:01:39.740 | Your first question should be, "Could I put my company in my IRA?
01:01:43.720 | After all, I don't want to leave the United States and move to Bermuda or to Dubai just
01:01:48.000 | so I can have zero tax.
01:01:49.780 | Could I put my company in my IRA?"
01:01:52.260 | The answer is maybe yes, maybe no.
01:01:54.760 | But you should ask the questions and be looking for those things as Thiel did.
01:01:59.740 | So those are things that you can do.
01:02:01.660 | Be involved in the inside.
01:02:04.040 | Always try to find the community people who are involved in it.
01:02:06.900 | In a couple of weeks, I'll be in Malta, ideally.
01:02:10.740 | I'll be in Portugal.
01:02:11.740 | I'll be in Malta in a couple of weeks.
01:02:14.220 | I'm going there and looking into what's happening on the ground.
01:02:17.940 | I want to know what's happening with the cryptocurrency space.
01:02:20.860 | Now, it's less promised, seems less promising now than it did a few years ago, but the island
01:02:25.280 | of Malta in the Mediterranean was trying to position itself as the cryptocurrency island.
01:02:30.580 | You should pay attention to things like that and say, "Where am I going?"
01:02:33.740 | Silicon Valley might work well for a lot of people, but I don't know that Silicon Valley
01:02:37.460 | is the place right now.
01:02:39.700 | But I hopefully will be in Dubai later this year.
01:02:43.100 | I think Dubai has a lot going for it.
01:02:44.580 | If I were in the finance space, I'm much more interested in spending time in Dubai than
01:02:49.820 | I am in New York City at this point, although there's still plenty of opportunity in New
01:02:54.540 | York City.
01:02:55.700 | So look for where you think opportunity is and put yourself in the way of it and then
01:03:00.060 | just be smart about what you're doing because you can model what Teal did.
01:03:04.380 | You may not wind up with $5 billion in your Roth IRA.
01:03:09.140 | You may not.
01:03:10.140 | Which by the way, this 263 thing bothers me because like let me tell you why it bothers
01:03:17.980 | me.
01:03:18.980 | I forget.
01:03:19.980 | I interrupt myself just to do this.
01:03:20.980 | This bothers me so much.
01:03:21.980 | It's the same thing like these worthless – they have these worthless – these completely
01:03:27.820 | and utterly worthless things about, "Well, if every person in Houston, Texas, all 2.3
01:03:34.100 | million people put $2,000 in a bank, it still wouldn't be worth $5 billion."
01:03:38.140 | Okay.
01:03:39.140 | What does that matter?
01:03:40.140 | Our human brain doesn't capture big numbers.
01:03:42.220 | So here it says, "Assuming a modest 6% annual return and no withdrawals, his tax-free golden
01:03:47.000 | egg could be worth about $263 billion in 2087 when Teal plans to celebrate his 120th birthday."
01:03:53.700 | All right.
01:03:54.700 | So I have a new baby.
01:03:55.700 | So let's say that I put in – I pay my baby to model for my business and I put in
01:04:00.300 | $2,000 into his Roth IRA.
01:04:03.100 | By the way, I'm not saying new baby.
01:04:05.700 | My baby is two years old now.
01:04:08.540 | But I put $2,000 into his Roth IRA and let's assume that because of life extension, Teal
01:04:13.940 | thinks he's going to live to 120, but I think that by then we're going to live to
01:04:17.820 | 180.
01:04:18.900 | So if we start with 180 years and we just earned – I think 6% is a little bit too
01:04:24.180 | high but maybe he can only earn 5% on his investments.
01:04:27.780 | Then in 180 years, then my son could have $13 million in 180 years.
01:04:37.980 | By the way, it actually kind of disproves my point because it shows how spectacular
01:04:41.300 | it is.
01:04:42.300 | But you know what?
01:04:43.300 | I'm going to start my business and so he's going to start with – this year he's going
01:04:46.540 | to have a million dollars.
01:04:47.540 | Give me better math.
01:04:48.540 | He's going to put a million dollars in his account today and then in 180 years he'll
01:04:52.980 | have 6.5 – what is this, trillions?
01:04:55.060 | I can't read my numbers.
01:04:56.740 | So the point is that – what is $263 billion?
01:05:00.740 | It just doesn't know.
01:05:02.180 | I'm not mad at them.
01:05:03.380 | But the point is that these numbers – let's extrapolate out the national debt.
01:05:07.220 | Let's extrapolate out the value of the dollar.
01:05:08.780 | We don't know.
01:05:09.780 | We're all guessing on the future.
01:05:11.860 | We don't have any idea on any of these things.
01:05:15.860 | That wasn't quite the spectacular show ending that I anticipated.
01:05:18.460 | I just wanted to say to you that it's a remarkable article but you can do it too.
01:05:26.240 | You can do this too.
01:05:28.320 | You can use the exact same valuation rules that Thiel used.
01:05:34.180 | You can go ahead and if you're wealthy, you can take a discount on a family – you
01:05:38.380 | can create a family business to move the shares of your business into.
01:05:41.820 | You can discount them for being privately controlled and for having a non-liquid market.
01:05:47.900 | You can then put those shares into an irrevocable trust held in a tax-free jurisdiction and
01:05:52.620 | those shares can grow over time completely tax-free.
01:05:55.880 | You can do the same thing.
01:05:56.880 | You can take the same discounts, etc.
01:05:59.440 | You can use the world's financial systems to you.
01:06:01.540 | So use it.
01:06:03.100 | I don't imagine there's anybody here who's going to get mad at Thiel for doing it.
01:06:06.220 | My point is you need to do the same things that Thiel did.
01:06:09.220 | Why did Thiel become a New Zealand resident and later citizen?
01:06:12.620 | Because he saw the writing on the wall and he said, "I need to have some options."
01:06:17.100 | A guy like Thiel could always show up in New Zealand on an airplane but by having a citizenship
01:06:22.960 | in New Zealand, he puts himself in the position where he could renounce his US citizenship
01:06:27.780 | if he needed to or if he wanted to.
01:06:30.700 | Now there's a good chance that he won't ever have to because he's been smart about
01:06:33.940 | putting his money in his Roth IRA.
01:06:36.020 | By the way, if he renounced his US citizenship, his Roth IRA would still be his legally.
01:06:42.700 | But think about how this works.
01:06:43.940 | Why did he do citizenship planning?
01:06:45.860 | Well, because if he ever needed to renounce his US citizenship, he controls the money
01:06:52.020 | in the accounts.
01:06:53.020 | It's all self-directed.
01:06:54.020 | So he controls the account.
01:06:56.220 | If the US government changed the tax rules on him and all of a sudden tried to take $2
01:07:00.620 | billion of his $5 billion, he would renounce his citizenship and he would say, "I'm
01:07:05.380 | not giving you a dime."
01:07:06.980 | And what could the US government do?
01:07:08.500 | Well, they could come after him but he would put in place, especially now with this, he
01:07:12.820 | would put in place publicity.
01:07:14.020 | He's followed every single rule that they put in place and they're the ones that change
01:07:18.580 | things.
01:07:19.580 | Now could they hunt him down like they hunted down John McAfee who died this last week?
01:07:25.620 | Another story that I haven't covered yet.
01:07:28.260 | They could hunt him down.
01:07:29.260 | Right?
01:07:30.260 | But the point is that with a New Zealand citizenship, he has protection.
01:07:33.460 | And in this case, Thiel has not broken any laws whereas McAfee clearly broke the law.
01:07:38.860 | According to his own testimony, he broke the law.
01:07:41.700 | Now the law, should it be changed?
01:07:43.060 | Doesn't matter.
01:07:44.060 | Thiel hasn't broken the law.
01:07:45.060 | Thiel followed every single rule that the US government put in place.
01:07:49.580 | And so he has citizenship insurance by being a New Zealand citizen.
01:07:53.460 | If he needed to leave, he controls the full $5 billion in assets.
01:07:57.660 | It's not situated in the United States or at least not most of it's not.
01:08:00.700 | It's situated, his firm is controlling, so he has 92 sub-accounts now with his Roth IRA.
01:08:07.100 | They control the assets all around the world.
01:08:09.100 | He can retitle them if he needs to.
01:08:12.220 | New Zealand doesn't have capital gains taxes in and of itself, so he won't have a tax problem
01:08:15.860 | in New Zealand.
01:08:16.860 | He solved his problem.
01:08:17.860 | Right?
01:08:18.860 | And you can do the same thing.
01:08:20.060 | That's my point.
01:08:21.140 | He solved his problems.
01:08:22.460 | You can do the same thing too.
01:08:23.540 | He followed the rules.
01:08:24.740 | You can follow the rules and yet you can have above average results.
01:08:29.060 | That's it for today's show.
01:08:31.900 | Thank you so much for listening.
01:08:33.140 | I am still traveling this week.
01:08:35.440 | Still picking some things.
01:08:36.620 | Been family vacation, family reunion and whatnot with my family in the United States.
01:08:40.900 | And so I haven't had some new stuff to launch to you yet.
01:08:44.180 | Hopefully within the next few weeks I will be situated.
01:08:46.780 | We'll be in Europe this summer and I'll be able to share some more things with you.
01:08:50.460 | I also apologize I haven't been able to schedule as many meetups as I want to do.
01:08:54.260 | I just haven't been able to make it work.
01:08:56.420 | But as soon as I can schedule more meetups and more events with you, I will do it.
01:09:00.900 | Just reach the end of my capacity.
01:09:03.420 | Talk with you very soon.