--:-- Sean Rameswaram: Support for this show comes from ServiceNow. AI is only as powerful as the platform it's built into, don't you know? That's why it's no surprise that more than 85% of the Fortune 500 use the ServiceNow AI platform.
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--:-- Sean Rameswaram: I've never met an AI agent. Learn how ServiceNow puts AI to work for people at servicenow.com.
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--:-- Sean Rameswaram: This summer, the investigative news outfit ProPublica published a series of bombshell reports on the state of the American tax system. Are you paying more in taxes than the world's richest men, Jeff Bezos and Elon Musk? Surprise, surprise, you just might be.
--:-- Justin Elliott: Reporters there got a hold of a trove of tax records for thousands of the wealthiest and ultra-wealthiest people in the country. Elon Musk, Jeff Bezos, Warren Buffett. The big takeaway? The wealthiest Americans, proportionally speaking, are often paying far, far less in taxes than your average American worker.
--:-- Sean Rameswaram: Liberal donor George Soros, former New York mayor Michael Bloomberg, billionaire investor Carl Icahn also paid nothing in federal income tax in certain years over the past couple of decades.
--:-- Justin Elliott: People are cynical about taxes and the wealthy, but I don't think that people really understood that you could be a multi-billionaire and actually pay zero recently.
--:-- Sean Rameswaram: Now, if you've experienced American capitalism, this might not be the most surprising news. But what is surprising is how some wealthy Americans are avoiding taxes, not with offshore shell companies or fancy Swiss bank accounts, but with the very retirement account that your dad's been bothering you to set up for about six years now, the Roth IRA.
--:-- Justin Elliott: Pick your metaphor like it's a special tax-free bucket. It's an umbrella wrapper. You know, you can think of it as kind of like an escape hatch.
--:-- Sean Rameswaram: Justin Elliott, reporter at ProPublica. And we found that this kind of mundane retirement account, the Roth IRA, that many of us actually have ourselves, has been exploited by millionaires and billionaires to create these large tax-free fortunes in a way that really was never intended by Congress when they created the Roth IRA.
--:-- Justin Elliott: We're going to get to how this all works in a minute, but we'll start with the story of one particular member of the uber wealthy, a tech investor named Peter Thiel.
--:-- Sean Rameswaram: Peter Thiel was a guy who went to Stanford, graduated in the late 80s, then went to Stanford Law School, had a couple short stints working at a white shoe law firm and in finance. But he was kicking around Silicon Valley and got involved in the startup scene in the late 90s.
--:-- Justin Elliott: And he and several other guys started the company that would become PayPal. You know, when we came up with PayPal combining email with money, you know, that was a secret. It was not an easy thing to figure out. No one else in the world had figured it out. But it was, you know, far from impossible to do.
--:-- Sean Rameswaram: And, you know, once we came up with the idea, we thought, wow, it's amazing no one's thought of this yet. We have to really execute fast before anyone catches up.
--:-- Justin Elliott: So he became very rich from that by the early 2000s after PayPal was sold to eBay in 2002. And then he became kind of like the Peter Thiel we know today, if you know him, which is he's a prominent venture capitalist in Silicon Valley.
--:-- Sean Rameswaram: He was sort of launched to the ranks of billionaires by his investments in Facebook. And now he runs a venture capital fund and, you know, invests in scores and scores of tech companies.
--:-- Justin Elliott: And what did you uncover about his fortune. The key moment in Thiel's early history really came in January of 1999. He and several other guys had started this company that would become PayPal.
--:-- Sean Rameswaram: And in January of 99, Thiel bought what are sometimes called founder shares of the company. So these are typically cheaply priced shares of the company. He got almost two million shares. But this wasn't a totally normal transaction because he didn't buy them for his own account in the normal way that you buy stock. He actually bought them through his Roth IRA.
--:-- Justin Elliott: His Roth IRA. Right. So a lot of sort of white collar workers have these. I have one that's very modestly sized. And basically the idea is you put some money in this special account and whatever happens in that account, you don't have to pay taxes on it. Tax-free earnings and distribution. As long as you wait to take the money out until retirement.
--:-- Sean Rameswaram: So open a Fidelity Roth IRA today. It's named after Senator William Roth, who was a Republican senator from Delaware.
--:-- Justin Elliott: And, you know, we went back and looked at what he was saying at the time when Congress passed this in the late 90s. And he did say explicitly that this was designed to incentivize savings by sort of ordinary middle-class Americans.
--:-- Sean Rameswaram: We also provide relief to hardworking middle-class Americans by enhancing the individual retirement account. Congress and the Clinton administration, which was running things at the time, did impose some limits that were designed to kind of keep the rich out.
--:-- Justin Elliott: And one of those limits was very strict limits on how much money you could put into the account. And so back in 1999, when Thiel opened his Roth, the limit was just $2,000.
--:-- Sean Rameswaram: It will be a blessing to countless Americans as they prepare for the future. And beyond helping individual families, these expanded IRAs will promote investment, capital formation, and economic growth.
--:-- Justin Elliott: Okay. What no one predicted, at least as far as we could tell from looking at the record, is that people like Peter Thiel would take an amount of money that was below that $2,000 contribution cap and use it to buy just huge volumes of shares of private companies that didn necessarily have a clear value.
--:-- Sean Rameswaram: So there PayPal when Thiel was starting the company obviously was not traded on a normal stock exchange where there's an agreed upon market value. And so the company itself is actually setting the value on its own shares at that period.
--:-- Justin Elliott: So when Thiel bought his over a million shares of PayPal in 1999, they were actually priced at just a tenth of a penny each. So that's how he was able to get so many shares into this Roth account, even though you only had up to $2,000 to play with.
--:-- Sean Rameswaram: So Thiel buys a tremendous number of shares, each for this tiny price, which keeps him under the $2,000 cap. And I think I can guess what happens next, but tell me anyway.
--:-- Justin Elliott: What happened was those shares quite quickly ballooned in value. And because that ballooning happened within this special Roth IRA wrapper, when Peter Thiel sold his PayPal shares a few years later in 2002, he didn't owe any taxes.
--:-- Sean Rameswaram: And so, you know, if you or I bought a stock that went up in value and then we turned around and sold it, we owe the federal government usually 20 percent of our gains. In Peter Thiel's case, he didn't have to pay that 20 percent.
--:-- Justin Elliott: And 20 percent was millions and millions of dollars. So he got to keep an extra several million dollars and then reinvest it.
--:-- Sean Rameswaram: And then the story of Peter Thiel's life as a Silicon Valley investor ever since then is that most of his investments have been done inside of this tax-free Roth IRA wrapper.
--:-- Justin Elliott: So he basically has repeated the cycle that he did with PayPal back in the late 90s again and again with companies like Facebook, Palantir, and others.
--:-- Sean Rameswaram: And every time one of those investments soars in value and then he exits it, he sells, he doesn't owe taxes.
--:-- Justin Elliott: So not only are you saving the money that would have to go to the government, which is nice, but every time you're ending up with a larger pool of money to reinvest. So you get much, much richer, much more quickly.
--:-- Sean Rameswaram: Do we have any idea how much money Peter Thiel has made in this fashion?
--:-- Justin Elliott: Yeah, we know that his Roth IRA account started as being worth less than $2,000 back in 1999. And 20 years later, in 2019, it was worth $5 billion. $5 billion.
--:-- Sean Rameswaram: That's right. And we looked at a lot of these Roth IRAs, and Peter Thiel's was by far the largest one that we could find. And likely the largest one in the country, or if not, then, you know, in the top 10.
--:-- Justin Elliott: So he's made something like $5 billion through his inarguably very smart investments in tech companies, but he's made that money through his Roth IRA account and moved money around tax-free the whole way, like across the board.
--:-- Sean Rameswaram: He's just never going to pay taxes on any of these investments. Is that right?
--:-- Justin Elliott: Yep, that's right.
--:-- Sean Rameswaram: So, I mean, yeah, he has this advantage that, you know, very, very few other investors have.
--:-- Justin Elliott: Because if you're a venture capitalist in Silicon Valley, obviously you're making bets on companies and you're hoping that you're making good bets and that the companies go up in value. And then if the company goes up and at a certain point you want to sell and sort of cash out, basically, you do have this large tax bill. It's called capital gains tax.
--:-- Sean Rameswaram: You pay at the federal level 20 percent. You might pay another 5, 10 percent at state level.
--:-- Justin Elliott: But when Peter Thiel makes one of these investments through his Roth IRA, which again, including his very early investment in Facebook.
--:-- Sean Rameswaram: Which is like depicted in the movie The Social Network, right?
--:-- Justin Elliott: We took a look at everything and congratulations. We're going to start you off with a $500,000 investment. Maurice is going to.
--:-- Sean Rameswaram: That's right. I've actually weirdly still never seen it.
--:-- Justin Elliott: But as I understand it, Peter Thiel is depicted in that film. Literally, there's a scene where he's like cutting a check for Facebook.
--:-- Sean Rameswaram: And I guess we can assume that that check is being cut out of his Roth IRA account or something.
--:-- Justin Elliott: Yeah, well, what we know is from, and this sort of came out in a subsequent court filing that one of my co-reporters on the story found, is that his Facebook shares, yes, were inside his Roth account.
--:-- Sean Rameswaram: So when he sold those shares, he got to keep all of the gains.
--:-- Justin Elliott: Whereas if this had been done sort of through a normal account, or the way that you and I might be buying and selling stock, you're going to have a hefty tax bill at the end.
--:-- Sean Rameswaram: So this has been just an incredibly, almost unimaginably valuable thing for him to have.
--:-- Justin Elliott: And we don't have the precise number for exactly how much he has saved in taxes because you'd have to know every single sale he made and we don't have that kind of comprehensive information.
--:-- Sean Rameswaram: But we do know that he has saved just a fortune in taxes and been able to take those savings and reinvest them in tech companies and other ways.
--:-- Justin Elliott: And that has made him much, much, much richer.
--:-- Sean Rameswaram: It sounds like Peter Thiel doesn't only have maybe one of the biggest Roth IRA accounts in the world, but also maybe one of the most complicated.
--:-- Justin Elliott: This does not sound like, oh, you know, I bought 100 Tootsie Roll shares this weekend. Hope it works well.
--:-- Sean Rameswaram: Right, exactly. I mean, this Roth account, which started as a single account, not only has grown sort of in size to $5 billion, but he actually has it broken up as of 2019 into 96 sort of sub-accounts within the master Roth.
--:-- Justin Elliott: And one of the other interesting things that happened is a couple years ago in 2018, he moved his Roth IRA to a special what they call family trust company staffed by several lawyers that had worked for Thiel hedge funds.
--:-- Sean Rameswaram: And this trust company is called Rivendell Trust Company.
--:-- Justin Elliott: Welcome to Rivendell, Frodo Baggins. Peter Thiel is a Lord of the Rings superfan he's named a lot of his companies after things in the Lord of the Rings like Palantir for example is a term from Lord of the Rings and Rivendell it turns out if anyone's seen the movies is a valley in the books where elves live and it's kind of like a sanctuary but Rivendell you know we thought was a sort of striking name for this trust company that now is the custodian of his Roth because, you know, the Roth is basically a sanctuary from the tax system and the government confiscating what you own.
--:-- Sean Rameswaram: And Rivendell in Tolkien is a sanctuary from the forces of darkness.
--:-- Justin Elliott: My precious Ross
--:-- Sean Rameswaram: Speaking of forces of darkness is this a manipulation Is this how Roth IRAs were designed to be used Or is this a gross abuse of what's meant to be a, you know, opportunity for middle, upper middle class people?
--:-- Justin Elliott: I don't know. Whether it's an abuse, I think, is an open question.
--:-- Sean Rameswaram: I think what we can say for sure is that Thiel and a bunch of other ultra-wealthy people have sort of hijacked this retirement account that was originally intended by Congress to be a vehicle for, just like it sort of says on the tin, retirement.
--:-- Justin Elliott: Quick break.
--:-- Sean Rameswaram: And the $5 billion question, is this illegal?
--:-- Justin Elliott: I'm Sean Ramos-Firm. It's Today Explained.
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--:-- Justin Elliott: Built Rewards says it lets you earn points on your rent. By paying rent through Built, they say you can earn flexible points that can be redeemed toward hundreds of hotels and airlines, perhaps a future rent payment, your next Lyft ride, and so much more.
--:-- Sean Rameswaram: Your home isn't just where you sleep. It's your community and Bilt wants you to go out and do things in the community. You can eat at your favorite local restaurants, then earn more points. You can get VIP treatment at certain fitness studios. You can enjoy exclusive experiences just for Bilt members every month.
--:-- Justin Elliott: When you're ready to travel, they say Bilt points can be converted to miles or hotel points all around the world. You can earn points on rent and around your neighborhood wherever you call home by joining Bilt.com slash explained.
--:-- Sean Rameswaram: That's J-O-I-N-B-I-L-T dot com slash explained.
--:-- Justin Elliott: Let's be honest. Are you happy with your job? Like, really happy?
--:-- Sean Rameswaram: The unfortunate fact is that a huge number of people can't say yes to that. Far too many of us are stuck in a job we've outgrown, or one we never wanted in the first place. But still, we stick it out.
--:-- Justin Elliott: And we give reasons like, what if the next move is even worse? I've already put years into this place.
--:-- Sean Rameswaram: And maybe the most common one, isn't everyone kind of miserable at work?
--:-- Justin Elliott: But there's a difference between reasons for staying and excuses for not leaving. It's time to get unstuck. It's time for strawberry.me.
--:-- Sean Rameswaram: They match you with a certified career coach who helps you go from where you are to where you actually want to be.
--:-- Justin Elliott: Your coach helps you get clear on your goals, create a plan, build your confidence, and keeps you accountable along the way.
--:-- Sean Rameswaram: So don't leave your career to chance. Take action and own your future with a professional coach in your corner.
--:-- Justin Elliott: Go to strawberry.me slash unstuck to claim a special offer. That's strawberry.me slash unstuck.
--:-- Sean Rameswaram: Master's my friend you don't have any friends nobody likes you okay so justin we were talking about your investigation into how the tech billionaire Peter Thiel has used a Roth IRA to avoid taxes on billions of dollars worth of investments and it sounds like he didn't do anything strictly illegal
--:-- Justin Elliott: We talked to a bunch of tax lawyers and asked them precisely that question. And what they told us is there's several rules that you can't break. And one of them is that when you're using one of these IRA accounts to make an investment, you can't pay less than the real value for that investment.
--:-- Sean Rameswaram: And the concept is pretty simple. Like if you only have $2,000 to play with, You can't just take that $2,000 and buy something that's actually worth, let's say, $50,000 and put that into your Roth.
--:-- Justin Elliott: If you do that, you're basically blowing up the contribution cap that Congress imposed.
--:-- Sean Rameswaram: Right. We don't have all the information here, but one thing that we found that is potentially relevant is that PayPal later disclosed in some SEC filings that the founder shares that Peter Thiel bought in the company for a tenth of a penny each were actually sold at below fair value.
--:-- Justin Elliott: That's the phrase they use in the SEC filings. And we showed that to some lawyers who specialize in this kind of thing, and they said, basically, that's a big red flag, and you can't buy shares with an IRA for below fair value.
--:-- Sean Rameswaram: It could be a sort of illegal way of getting around the $2,000 contribution cap.
--:-- Justin Elliott: Now, again, we don't have the full universe of information here. We basically laid out what we knew, and we asked Peter Thiel's spokesman about this in detail, and they didn't respond to our questions.
--:-- Sean Rameswaram: Who decides whether, you know, a tenth of a cent is fair value or not? Whether that was just a lie to sneak an investment into a Roth IRA?
--:-- Justin Elliott: So the company itself at that stage, which parenthetically Peter Thiel was CEO and chairman of, so it wasn't like he was an unrelated party. But the company itself is setting the sale value at that point.
--:-- Sean Rameswaram: The other question is, well, who's actually supposed to be enforcing these rules? And the answer is the IRS.
--:-- Justin Elliott: But our reporting found that the IRS for years has been doing exceedingly little to enforce rules on these IRA accounts.
--:-- Sean Rameswaram: And, you know, we spoke to lawyers in this industry who said that the IRS has just been kind of missing in action in this whole area.
--:-- Justin Elliott: And there's, you know, there's reasons for that that also have to do with Congress cutting the budget of the agency and that sort of thing.
--:-- Sean Rameswaram: The IRS is deteriorating after eight years of government budget cuts. The lack of funding reportedly left the agency understaffed and operating with outdated equipment.
--:-- Justin Elliott: You know, it's very hard to know from the outside whether the IRS looked at this and if they did look at it, what the outcome is, because these things are private.
--:-- Sean Rameswaram: But that's sort of still an open question. And that implies that a lot of people might be doing this kind of thing?
--:-- Justin Elliott: Yeah, well what we found and also what congressional investigators have found previously is that Peter Thiel is certainly not alone in using this strategy of buying private company stock with no generally agreed upon market value with one of these tax advantaged IRA accounts
--:-- Sean Rameswaram: People may remember sort of ancient history at this point, but a decade ago when Mitt Romney was running for president as the Republican nominee, it came out that he had an IRA worth in the tens of millions.
--:-- Justin Elliott: And at the time, people were quite shocked by that. To go from $450,000 and turn it into $102 million, as Romney claims he did, is an increase of 227 times.
--:-- Sean Rameswaram: The question is, how did this happen? Not Mitt. Yeah, Mitt. Say it ain't so, Mitt. Right.
--:-- Justin Elliott: And it came out, the Wall Street Journal looked into it. And this was, to some extent, speculation, but the Wall Street Journal had good reporting. suggesting that it was sort of a similar situation to Thiel, that Mitt Romney, in his days in private equity, basically Mitt Romney's other private equity guys had been buying very low-priced shares that did not have a public market value with their IRA accounts.
--:-- Sean Rameswaram: And that's sort of the key with your IRA. You want to get in assets that are worth very, very, very little So you can kind of sneak it in under the contribution cap.
--:-- Justin Elliott: And then if all goes right, the value explodes in short order. And suddenly you have all this special money to play with.
--:-- Sean Rameswaram: So what are we left to assume? That a lot of wealthy people are sort of manipulating the system the same way Peter Thiel was or is?
--:-- Justin Elliott: Well, you know, it's hard to get a sense of numbers. But the records that we have show that there are a considerable number of ultra-wealthy people, including billionaires, that have tens of millions, in some cases hundreds of millions, in these IRA accounts.
--:-- Sean Rameswaram: I mean, actually, even Warren Buffett, you know, of Berkshire Hathaway, one of the richest people on the planet, has a Roth IRA that was worth, I believe, over $20 million as of a few years ago, which obviously looks pretty small compared to Peter Thiel, but is still quite considerable and way beyond anything that Congress ever expected when they created these.
--:-- Justin Elliott: There's other sort of paths to getting a very large Roth account. There's this sort of Thelian path, and then there's some other paths. But certainly wealthy people and ultra wealthy people have seized on these special tax free accounts.
--:-- Sean Rameswaram: And it's for these people, these accounts really don't have anything to do with retirement. Like Warren Buffett's going to be fine in his retirement if he ever retires.
--:-- Justin Elliott: The reason he has, you know, over $20 million in a Roth account, presumably, is that it's nice to have a special account where you don't have to pay income taxes. Because Warren Buffett can't afford to pay income taxes. Right.
--:-- Sean Rameswaram: I mean, he has called for higher tax rates in certain respects.
--:-- Justin Elliott: We did go to him to ask about his Roth account for the story, and they didn't respond to our questions.
--:-- Sean Rameswaram: But actually, there's another guy at Berkshire Hathaway named Ted Weschler. He's somewhat less of a household name, but he's quite well known in the business world.
--:-- Justin Elliott: He has a Roth account that's worth over $250 million as of a few years ago.
--:-- Sean Rameswaram: And he actually gave us a lengthy statement that we published in which he said, like, look, Although I have been an enormous beneficiary of the IRA mechanism, I personally do not feel the tax shield afforded me by my IRA is necessarily good tax policy.
--:-- Justin Elliott: To this end, I'm openly supportive of modifying the benefit afforded to retirement accounts once they exceed a certain threshold. So I'm taking advantage of this system because it benefits my bottom line. But yeah, they should change the system. Yeah, pretty much.
--:-- Sean Rameswaram: I mean, that's what he said, which, you know, we thought was quite interesting and candid.
--:-- Justin Elliott: That's a familiar argument. I think I heard the former president make it a couple of times. The laws of the nation. Now, if you want to change the laws, you've been there a long time, change the laws. But I take advantage of the laws of the nation because I'm running a company.
--:-- Sean Rameswaram: My obligation right now is to do well for myself, my family, my employees. If the government knows that there's this loophole that can help the ultra-rich avoid paying taxes to the government, why is the government letting that slide?
--:-- Justin Elliott: Yeah, well, I mean, the history of retirement tax policy is somewhat complicated, but there's actually some people now in Congress, most prominently Ron Wyden, who's the senator from Oregon and actually the chair of the Senate Finance Committee, which is the job that Senator Roth, the namesake of these accounts, used to have.
--:-- Sean Rameswaram: Wyden has come out after our story was published and said that we should reform these things. He actually previously had a proposal that he's revisiting now to just put a cap on the tax benefits.
--:-- Justin Elliott: And basically, this proposal would cap the tax benefits in an IRA account at $5 million.
--:-- Sean Rameswaram: So, of course, you know, it's totally unclear whether that will go anywhere and whether there's support for that. more broadly in Congress, but there are these reform proposals floating around.
--:-- Justin Elliott: Reform proposals are floating around, and meanwhile, billionaires like Peter Thiel and Warren Buffett, and even Mitt Romney, who's a billionaire, I believe, right? Unclear, actually. He's richer than us. He's a wealthy guy.
--:-- Sean Rameswaram: So people inside and outside our government, namely the ultra-rich in the meantime, get to stay ultra-rich and pay proportionally less in taxes in a lot of cases, as ProPublica has reported, than average working-class people, right?
--:-- Justin Elliott: Yeah, that's right.
--:-- Sean Rameswaram: And, you know, there's sort of a lot of moving parts there, but in large part that flows from the tax code that Congress itself has written.
--:-- Justin Elliott: Justin Elliott is a reporter at ProPublica. The piece that inspired our episode today is called Lord of the Roths, how tech mogul Peter Thiel turned a retirement account for the middle class into a $5 billion tax-free piggy bank.
--:-- Sean Rameswaram: We reached out to Peter Thiel's people about this reporting. His people did not reach back.
--:-- Justin Elliott: ProPublica's story is part of a much bigger series they're doing based on the tax records of some of the wealthiest people in the country. You can find it all over at ProPublica.org.
--:-- Sean Rameswaram: Thank you.
