Stories about the rich and famous and their wealth tend to get our attention and grab headlines. One recent story that has grabbed a lot of attention in the financial world is that Peter Thiel managed to amass $5 billion into a ROTH IRA.
While there’s very little chance for the mainstream investor to amass such a fortune into a ROTH IRA, investors may still want to take note as to why this is making headlines in the first place.
Why would someone want so much money in a ROTH in the first place, and why is everyone talking about it?
Money pulled out of a ROTH IRA post-retirement age is fully tax-free. For simplicity’s sake, let’s say that in retirement, the 5 billion dollars is growing at 5% per year and taking the same amount out of the account annually as a distribution. That’s $250 million dollars a year in tax-free income to Mr. Thiel.
In context, that same dollar amount withdrawn annually from a pre-tax IRA would be at roughly 37%, which equates to over $92 million dollars in taxes annually. So, by having the money in the ROTH IRA as opposed to a pre-tax IRA, he’s saving about $92 million a year in taxes. I’d take that deal all day every day.
SO WHAT CAN WE LEARN FROM THIS?
1 – THE POWER OF THE ROTH IRA AS A RETIREMENT VEHICLE.
I have always looked at the ROTH IRA and often equate it to a gift from the IRS that should be taken advantage of. I say a “gift” because not everyone has access to contributing to a ROTH IRA. There are income phase-outs associated with the ROTH IRA although some (most) retirement plans will have ROTH options. There are also other means of getting assets into ROTH accounts.
There is some consideration to be taken for investors later in their career as to tax rates vs. contributing to ROTH IRA, and tax brackets vs. the ability to make up for having paid taxes up front. Regardless, the ROTH option is not to be ignored.
2 – FOR MOST INVESTORS, THE ROTH IRA SHOULD BE GROWTH-ORIENTED AND BE POSITIONED FOR AGGRESSIVE GROWTH VS. OTHER ACCOUNTS.
The ROTH IRA is usually the account that will remain intact the longest and be drawn down on later in retirement as it continues to grow, and distributed from, tax-free.
3 – START SOONER RATHER THAN LATER.
While chances are that most of us will not amass a billion dollars (much less $5 billion) in a ROTH IRA, that doesn’t mean that attempts shouldn’t be made to amass as much as possible into a ROTH IRA. Compound returns are an incredibly powerful force and time invested is a major part of the equation. In a perfect world, investors should consider starting as early as possible, and investing the maximum amount every year into ROTH IRA in order to attempt to accumulate as much as possible into it.
Sometimes working with bigger numbers makes concepts that seem somewhat foreign a lot easier to understand. I have no doubt that Mr. Thiel was very calculated in amassing such a fortune in his ROTH IRA. While the likelihood of most investors doing the same thing is slim, that doesn’t mean that on a smaller scale, the concepts at play shouldn’t be taken advantage of.