Commenting on an article published by ProPublica titled “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,” Matt Levine, the clever writer behind Bloomberg’s Money Stuff observed that what ProPublica criticized for tax deferral (with far more aggressive language) was also not a bad trade.
Here is an argument that, if you are a young person who has just founded a potentially world-changing startup, instead of just giving yourself shares in that startup for free, you should buy them for a nominal price inside a Roth IRA. If you just give yourself the shares free and clear, and your startup does change the world and the shares end up being worth billions of dollars, one day you will sell them and pay capital-gains taxes on your billions of dollars of gains. 1 On the other hand, the way a Roth individual retirement account works under U.S. tax law is that you put money into it out of your after-tax earnings, and then when you are older you can withdraw the money — including any gains — tax-free. So if you buy your founder’s shares for $1,000 in a Roth IRA when you’re young, and then their value grows to, say, $5 billion, you can sell them after you turn 59 and a half and pay no taxes on the gains. Good trade!