PayPal founder Peter Thiel used his power and connections to turn a near-$2,000 Roth IRA balance into $5 billion. According to a new report by ProPublica, which CNBC has not independently verified, the entrepreneur attained astronomical growth by investing in "stock deals unavailable to most people" and by utilizing a self-directed IRA that's only available through specialized custodians.
And as long as he waits until 2027, when he turns 59½, to withdraw the money, he won't have to pay taxes on his windfall.
While Thiel's example is extreme, regular investors can also see tax savings from using a Roth IRA to save for retirement. "You should always invest through a Roth IRA," expert Ed Slott, a CPA and founder of Ed Slott and Company, told Grow earlier this year. "To start building your retirement account from dollar one, tax-free, is the Holy Grail."
With traditional 401(k)s and IRAs, consumers generally get a tax break on the initial amount they contribute but ultimately pay taxes on any withdrawals they make in retirement. Roth accounts, on the other hand, don't deliver tax breaks for initial contributions — but can be withdrawn tax-free once an investor reaches retirement age.
That's a great deal for those who invest early, as their money can grow tax-free for years or even decades, thanks to compound interest.
Video by Courtney Stith
The 2021 contribution limit for IRAs is $6,000, and how much you can contribute to a Roth IRA depends on how much you earn. The maximum allowable contribution begins to phase out for single filers making $125,000 or more this year, and married couples earning at least $198,000. Direct contributions phase out completely for single filers earning more than $140,000 and married couples earning more than $208,000.
High-earners who can't contribute directly to a Roth can still convert assets in a traditional IRA or 401(k). They'll pay taxes on the converted funds, but the money can then grow and be eventually withdrawn tax-free.
More from Grow:
- Consumer prices jump the most since 2008: How inflation can affect your money
- ‘You should always invest in a Roth IRA,’ says accountant: It’s the ‘Holy Grail’ of retirement accounts
- The average 401(k) balance hit $81,000 during 2020: How investors' habits changed during Covid