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I am always on the hunt for new and interesting ways to grow my money. After years of being in debt and not being able to grow my savings account or start a retirement fund, I am invested in playing catchup with my personal finances.
Which is why, whenever I come across a story about how the rich are getting richer, I pay attention.
Last week, I read about how billionaire entrepreneur Peter Thiel, cofounder of PayPal, found a way to grow his Roth IRA retirement account from less than $2,000 in 1999 to $5 billion by the end of 2019. According to ProPublica, Thiel has never added a dollar to his account since his first investment more than two decades ago. When he reaches age 59 1/2, he’ll be able to withdraw as much cash as he likes without paying a cent in tax, thanks to the tax advantages offered by a Roth IRA.
How Peter Thiel grew his mammoth Roth IRA
I wondered: Let’s say a person has around $2,000 in their retirement fund right now. Would they be able to reach the same balance as Thiel? How was he even able to amass that much money in his Roth IRA when the contribution limit for these accounts is $6,000 a year in 2021 (or $7,000 for people 50 and older), with additional restrictions for higher income brackets?
To reach his gargantuan balance, ProPublica reports that Thiel bought 1.7 million “founder’s shares” of PayPal in 1999 for $0.001 per share (a total of $1,700) within his Roth — an investment opportunity the average person will almost certainly never have. The value of those stocks skyrocketed, and he was able to use the proceeds from those investments — still inside the Roth IRA — to make other, similar investments in startup companies selling shares for peanuts.
So how can we, everyday people, do something similar even if we’re not the founder of the next billion-dollar company?
How the average investor can apply Thiel’s strategy
The short answer is, we can’t. Not exactly, anyway. Most Americans who invest in Roth IRAs will never be able to buy shares in tiny, privately held startup companies for fractions of a penny, like Thiel did. The vast majority of us are shopping the open market and investing in ETFs, index funds, mutual funds, and individual, publicly traded companies.
But there may be something we can take away from Thiel’s story. Scott Caufield, a financial advisor and CPA, says that for the average person to achieve significant growth in a Roth IRA, you’d have to concentrate your Roth into a single security that you believe has massive growth potential. While this is a risky strategy (and shouldn’t be attempted with money you can’t afford to lose and should be part of an overall balanced portfolio), a concentrated single stock position is one of the most common ways fortunes are made.
“For instance, if you were an early believer in Amazon and put $10,000 into a Roth IRA in Amazon shares at an adjusted price of $1.50 at their IPO, your Roth would be worth nearly $23 million today without any further contributions,” says Caufield.
This does mean risk, Caufield says, since the issue of course is that it is nearly impossible for anyone, let alone the average person, to predict the massive winners of the future.
“For every success story like Amazon there are hundreds more failures,” he says.
A backdoor Roth IRA is another way to grow Roth assets
While that strategy might not be doable for everyone, another strategy that many wealthy individuals have used to grow their assets tax-free is something known as a “backdoor Roth IRA.”
“The backdoor Roth IRA is a well-used and perfectly legal strategy for households with income too high to make Roth IRA contributions,” says financial advisor Greg McBride. “You make a contribution to a traditional IRA, which will not be tax-deductible because of household income, and then shortly thereafter convert to a Roth IRA. The only tax obligation is for any investment gains since the traditional IRA contribution was made, as the contributions were already made with nondeductible, after-tax dollars.”
If you don’t have an IRA but have a Roth 401(k), McBride says it’s a good path to growing tax-free Roth assets.
“Another way to get assets into a Roth IRA would be to make Roth 401(k) contributions through your employer-sponsored plan, if offered. Upon separation, though some employers do permit in-service rollovers, you would roll over the Roth portion of your 401(k) balance into a Roth IRA,” says McBride.
A big benefit of this strategy, and having the cash in a Roth IRA, is that you are growing an asset that’s tax-free upon retirement.
Financial planner Larry Gatz says that once the money is inside the Roth IRA, you’re able to invest in just about whatever you’d like, with your investments growing tax-free forever.
“In addition to tax-free income for you during retirement, there’s a few other benefits. In retirement, distributions from a Roth IRA do not count as income, thus keeping your Medicare premiums low and Social Security taxes as low as possible,” Gatz says. “Plus, the funds in a Roth IRA are tax-free, meaning that even if taxes increase in the future, it will not impact those Roth IRA dollars.”