The Personal Finance Podcast - The $5 Billion Roth IRA and How You Can Use the Same Strategy (Self-Directed IRA)

Episode Date: July 7, 2021

61. The $5 Billion Roth IRA and How You Can Use the Same Strategy (Self-Directed IRA) Got questions? Ask me on Instagram Here. @mastermoneyco This is the fastest way to get a response from me.  Sponsors Thanks to Mint Mobile for Sponsoring the Show! Get your new wireless plan plus free shipping at mintmobile.com/pfp. Thanks to Policygenius for Sponsoring this episode of the podcast! Get your insurance quote at Policygenius.com  Thanks to our sponsor Manscaped (Manscaped.com) for sponsoring this episode of the podcast. Use code PFP20 at checkout for 20% off + Free Shipping! Thanks to Mini Cooper for Sponsoring the show! Check out the all-electric Cooper SE. Reserve yours at MINIUSA.com Want to Support the Show? Follow on Spotify or Follow and Leave a 5-Star Review on Apple Podcasts! Peter Thiel's book - Zero to One Peter Thiel Roth IRA Article Today We Discuss:  How Peter Thiel Built a $5 Billion Roth IRA. How can you learn from what he did?  How a self-directed IRA works.  Why this is a major wealth accelerator.  How to buy real estate in a Roth IRA. How to buy a business in a Roth IRA.  More Episodes You Will Love:  How much you need to save to retire  Why Understanding Your Savings Rate Will Change Your Life (and Allow You To Retire Early) The Roth IRA Millionaire  The 401(k) Millionaire  Check out all the Stuff I Recommend!  M1 Finance Open a Roth IRA Personal Capital Free Wealth Management + Budget App and Fee analyzer!  CIT BANK (Best Savings Account) Best Personal Finance Books  The Simple Path to Wealth - J L Collins  The Millionaire Next Door - Thomas Stanley I Will Teach You To Be Rich - Ramit Sethi  Rich Dad Poor Dad - Robert Kiyosaki ** Some links may be affiliate links and we earn a small commission at no extra cost to you. We only recommend products we truly believe in.  Check us out on social fam!  Twitter Dollar After Dollar Instagram www.thepersonalfinancepodcast.com www.dollarafterdollar.com Learn more about your ad choices. Visit megaphone.fm/adchoices

Local news is in decline across Canada, and this is bad news for all of us. With less local news, noise, rumors, and misinformation fill the void, and it gets harder to separate truth from fiction. That's why CBC News is putting more journalists in more places across Canada, reporting on the ground from where you live, telling the stories that matter to all of us, because local news is big news. Choose news, not noise.

CBC News. Okay, when I sell my business, I want the best tax and investment advice. I want to help my kids, and I want to give back to the community. Ooh, then it's the vacation of a lifetime. I wonder if my head of office has a forever setting. An IG Private Wealth advisor creates the clarity you need with plans that harmonize your business, your family, and your dreams. Get financial advice that puts you at the center.

Find your advisor at IG Private Wealth.com. On this episode of the personal finance podcast, we're going to talk about self-directed IRAs and how Peter Thiel got $5 billion into his Roth IRA. What's up, everybody, and welcome to the personal finance podcast. I'm your host, Andrew, founder of dollar after dollar.com. And today on the personal finance podcast, we're going to be talking about the power of the self-directed IRA and how Peter Thiel got $5 billion inside of his Roth IRA. If you have any questions about this episode, hit me up on Instagram at Dollar A-F-T-R-Dolar.

And follow us on Spotify, Apple Podcast, or whatever podcast player you love listening to this podcast to. And if you want to help out the show, leave a five-star rating and review on Apple Podcast. We truly appreciate you guys doing that. So today what I want to talk about is one of the most powerful tools that everybody has at their exposure when it comes to building wealth. And a lot of people don't know that this exists. And I'm going to be referencing an article that just came out from pro publica.com talking about how Peter Thiel amassed over $5 billion inside of his Roth IRA. Now, if you don't know what a Roth IRA is, we're going to talk about it in a second. And if you do know what a Roth IRA is, you're going to say, how in the world did somebody do that with those contribution limits?

Well, we'll talk all about that today in this episode. And if you don't know who Peter Thiel is, Peter Thiel is one of the biggest investors in Silicon Valley. So he is actually one of the original founders of PayPal, along with Elon Musk. He's also one of the biggest angel investors in Silicon Valley. And he has a fantastic book. If you've never read his book, it's called Zero to One. So if you're really interested in investing in startups or building companies, that's a great book to look at because it talks about how he invests in companies,

how he chooses the companies that he wants to invest in. But in addition, the biggest thing is how he produces company culture and how he evaluates things in life. And there's all different sorts of nuggets of information in that book. I'll leave a link to the book in the show notes as well. But there was an article that just came out talking about how Peter Thiel amassed his $5 billion. Now, ProPublica is obviously advocating that the rich need to be.

be taxed more. This article is trying to actually bash Peter Thiel for having $5 billion within his Roth IRA. And they're trying to insinuate that the rich have exposure to a ton of secrets that we don't have exposure to. So when you read articles like this, you can either get irrationally mad at the 1% or at the person who achieved this financial gain. That's number one. Or number two, you could take parts from what they did and learn from it. See, broke people do number one. Broke people get irrationally mad at the 1% when it really doesn't impact their lives at all. And wealthy people do number two.

Even if they don't completely agree with the billionaire or what the billionaire stands for, wealthy people try to learn from the actual systems that they implemented and what they did to get to that point. Even if you disagree with the methodology. So if you didn't read the article, let me sum this up for you really quick. And again, I'll leave a link to the show notes.

I encourage you to read the article. It's a fantastic article. I don't agree with the point. and the direction that they're going with it, but it's a fantastically written article and it's definitely worth reading. Let's see what we can learn from it. And today, that's what we're going to do.

We're going to talk about the points that we can learn from this article, and I'm going to teach you exactly how he did this. Because the rich don't have information that you don't have. There's only one tax code. The rich don't have information that we as normal folks don't have exposure to. They just know how to play the rules of the game.

And more accurately, they pay people to tell them how the rules of the game are played. They pay accountants. They pay financial advisors at the high level. They pay people who know how to play the game. And what I'm here to do, what the personal finance podcast intent is to do

is to teach everybody who is not part of the 1% how to play the game. That's what this podcast is here for, is to teach you how to build wealth, how to play this game that the 1% knows because I believe anybody can build wealth. And if you start to really truly build wealth, If you become a millionaire, you're joining the 1%.

And I believe anybody can become a millionaire, even if you make $30,000, $50,000 a year. You've heard our past episodes, we talk about how you can do this, how you can build real wealth. And that's what we're here for, is to teach you how to do what the 1% does so that you can use it in your life. Will you accumulate a Roth IRA of $5 billion? Most likely not. You'll see exactly why in a second on what he did. But will you be able to amass wealth? Absolutely. Will you be able to amass wealth that you can pass down for generations? Absolutely,

if you put into place things that we talk about in this podcast. And I'm just going to cut out all the technical jargon, all the extra crap that you don't need to know. I'll take you through each and every step. So will you make a billy from listening to this podcast? Probably not. But will you be able to build wealth with some of this information if you put it into practice and do the right things? It's possible. So if you're into that sort of thing, let's get into it. Okay, so if you don't know what a Roth IRA is, I encourage you to listen to our episode talking about extensively how to use your Roth IRA. But I'm going to explain in this episode what a Roth IRA is for those of you who don't know.

So Roth IRA is a retirement account. And Congress actually created the Roth IRA for the middle class. The middle class had an incentive to save because here's how it works. You contribute money that has been taxed, so your paycheck, you contribute money into your Roth IRA. your money grows tax-free, and then you can pull it out tax-free. So the beautiful thing about the Roth IRA, it's the opposite of a 401K. Where a 401K, you're not taxed on the money that you put in. It grows, and then you pull the money out, and you're taxed when you pull the money out.

So what I love about the Roth IRA is that it grows tax-free, and you can pull the money out tax-free. This is extremely powerful. So when people ask me, should I invest in my 401K first, or should I invest in my Roth IRA first, We always talk about how you want to get your 401k match first because it's free money, then go to your Roth IRA and max that bad boy out before you go back to your 401k. Because that tax-free growth is so incredibly powerful. And you're going to see exactly why here. And this is how we teach how to use your Roth IRA.

We say max out your Roth IRA every single year. What that means is you can put $6,000 a year inside your Roth IRA if you're under 50. If you're over 50, you could put $7,000 a year. in your Roth IRA at the time I'm recording this. So every year, this can change. And if it changes or goes up, it typically goes up every single year, then you'll see a difference there.

And then we talk about buying passive investments, things like index funds, dividend stocks, where you get 7 to 10% every single year historically. These are the types of things that I do in my personal Roth IRA. I do in my wife's Roth IRA. And if you do that,

if you gain 7% to 10% every single year within your investments, then over the course of time, in decades, you'll have hundreds of thousands of dollars, but over the course of multiple decades, 20, 30 years, depending on what you're investing in, you can get up to a million dollars

within that Roth IRA just by investing $6,000 a year. That's extremely powerful because you're putting a small amount of money in 500 bucks a month and you're going to have a million dollars by the time you retire. That's absolutely amazing. But the crazy thing is,

Peter Thiel has amassed $5 billion in an account that you can only fund $6,000. year at the time we're recording this. And at the time he started his Roth IRA, the maximum contribution was $2,000 a year in 1999. So how did he do this? There's three companies that he was heavily involved in. One is PayPal. He was one of the original founders. He was the CEO at the time it started. One is Facebook. He was a very early investor in Facebook. He invested in Facebook in 2004, really before it even took off. And then he also had a hedge fund. So in 1999, Peter Thiel,

allegedly, bought 1.7 million shares of PayPal for $1,700. So you can see how that evaluation is extremely cheap. But this was a startup at the time when he bought these shares that was a couple of months old. Nobody had any idea what was going to happen with PayPal. Now, they believed it could be big, but there's also a lot of people during that time, during the dot-com bubble, who bought 1.7 million shares for $1,700, and now they're worth nothing because those companies all went bust. So this is still a risk for someone to buy that much and put it in their Roth IRA. But the amazing thing is, the $1,700 was all he ever contributed to his Roth IRA. And in one year, that Roth IRA jumped to $3.6 million because of the success of PayPal. Then in 2002, eBay purchased

PayPal and Peter Thiel's Roth was worth about $28.5 million. So eBay comes in. They buy out PayPal because at the time they were both working simultaneous together and all your transactions on eBay were through PayPal so it made sense for eBay to buy PayPal and Peter Thiel cashed in on that. But like I said, your money in a Roth IRA grows tax free. So guess what happened? Peter Thiel has this big chunk of cash, $28.5 million that he doesn't have to pay taxes on because it was inside of his Roth IRA. Now this is where people get angry and this is where people get frustrated. This is a legal thing to do inside your Roth IRA. If every single year you're contributing to your Roth IRA,

you're also taking advantage of those tax benefits. So he saved money on those taxes. Next, in 2004, he invested the profits, the $28.5 million, into other companies. So he was an angel investor in a multitude of different companies, but in 2004, he put $500,000 into Facebook when it was first starting.

So as you can see now, Facebook is the fastest company to $1 trillion at the time of recording this. That is a massive growth plan. Because if you get into Facebook in the very early stages, that's what happened here. So he turned his Roth IRA in just a couple of years into $28.5 million. And then invested into Facebook a bunch of other startups as well and grew it to $5 billion. Let's be clear here.

He hit these assets literally at the perfect time. This was a time where stuff was growing so fast that in the blink of an eye, it changed his courses every single minute, especially with the dot-com boom. And he saw that tech was the next big industry. So he invested heavily into technology companies. And he was paid off because of that. Are you going to have $5 billion in your Roth like we just said? Probably not.

But can you replicate what he did here? Because you're probably wondering to yourself, how did he get shares of a private company inside his Roth IRA? Well, I'm going to show you exactly how you can do that as well and build true wealth inside your Roth IRA. Let's get into it. So lately, I've been noticing how fast things are changing at home. The kids are growing like crazy, clothes don't fit anymore, and routines are changing.

And it just hits you. Life is expanding. And when your life grows, your responsibility grows with it. That's something I've been thinking about more this spring, making sure the safety net we have in place actually matches the life that we're building. And that's where PolicyGenius comes in. PolicyGenius is an insurance company. They're an online marketplace that helps you compare life insurance quotes,

from some of the top insurers in America, all in one place for free. And their licensed team works for you, not the insurance companies. So they help you find the right coverage for your situation without all the guesswork. And they walk you through everything. Answer your questions, handle the paperwork, and help you get the coverage that actually fits your life today. And where it's going. So protect your family with a policy that grows with your life. With Policy Genius, you can see if you can find 20-year life insurance policies,

starting at just $276 a year for $1 million of coverage. Head to PolicyGenius.com to compare life insurance quotes from top companies and see how much you can save. That's policygenius.com. I remember when I needed to hire someone fast, but finding the right person quickly felt impossible. And if you've ever been there, you know how stressful this can be. That's where Indeed comes in. When it comes to hiring, Indeed is all you need. Instead of struggling to get your job post noticed, Indeed's sponsor jobs, help you stand out and hire faster.

Your post jumps up to the top of the page, making sure it reaches the right candidates. And it makes a huge difference. Sponsored jobs on Indeed get 45% more applications than non-sponsored ones. And there's no need to wait any longer. Speed up your hiring right now with Indeed. And listeners of this show will get a $75 sponsored job credit to get your jobs more visibility at Indeed.com slash personal finance.

Just go to Indeed.com slash personal finance. right now and support our show by saying you heard about Indeed on this podcast. Indeed.com slash personal finance. Terms and conditions apply. Hiring, Indeed is all you need. It's the family and friends event at Shoppers Drugmark. Get 20% off almost all regular priced merchandise. Two days only.

Tuesday, April 28th and Wednesday, April 29th. Open your PC optimum app to get your coupon. So you probably didn't know this, but you can actually put assets inside your Roth IRA. You don't have to just invest cash in. to stocks or bonds. And Peter Tio, Warren Buffett, all of these billionaires put stock in private companies that have the ability to grow 10 to 100 times inside of their Roth IRA. But this is available to anybody.

It's not just available to billionaires. You can do this. Your mom can do this. Your dad can do this. Your uncle Rico can do this. Anybody can do this. It's not just limited to rich and wealthy people. It's not limited to accredited investors or anything like that.

So understanding that you can do the same thing is the first step. because what a lot of people do is they just throw their hands up in the air and they say, ah, the billionaires have all this information I don't have or they have access to things that I don't have. That's absolutely not true in this situation. So how do he do this? The way you invest in assets, assets that are outside of the traditional stock bonds, mutual funds, index funds, those types of things, is you do it through what is called a self-directed IRA. Now, if you've never heard of a self-directed IRA, most people haven't. Why? Because the big finance companies, a lot of them just don't want you to know this because you're investing money off of their platform, they don't really want you to know about

this. But the beautiful thing about a self-directed IRA is you can invest in all different types of assets. There's so many different cool types of assets that you can invest in that are outside of the traditional stocks and bonds. And these are physical assets. So you can invest in things like real estate, for example. Now, I wouldn't put any traditional house inside of a self-directed IRA. There's a lot of men and women who are in real estate who have very large Roth IRA. The reason why is they're buying properties that have tremendous potential within their Roth IRAs. Now, you don't want to just put any traditional house in there, like I just said, because the limits on the contributions. What you want to put in there is maybe some sort of property that potentially could grow 10, 20, 30x.

Because if that happens, then you're going to have a massive Roth IRA and you're going to have the tax benefits surrounding it. Now, can you put single family houses inside of a Roth IRA and still build wealth? Absolutely. But it's going to take you some time for that to build up. But there's a bunch of different types of properties that you can buy within a self-directed IRA. And this is how I met some folks who actually use their self-directed IRA to do this. It's through real estate meetups and things like that. If you go to a lot of real estate meetups, you'll see what are called custodians or companies that have self-directed IRAs.

They'll come to those real estate meetups and talk through these situations. Another thing you can purchase his startups, just like what Peter Thiel did, where he bought PayPal. But you can buy all different types of startups within your self-directed IRA. You can buy small businesses, things like car washes, bars, plumbing companies, any small business that you can think of, you can fit into a self-directed IRA. You can buy undeveloped or raw land. If there's a piece of land that you like and you want to say rent it out for agriculture or farming and collect the cash flow, you can buy that within a self-directed IRA.

Promissory notes. We've talked about notes in the 21 ways to invest in real estate where if you're buying real estate notes and lending people money and they pay you as the bank, you can put those in a self-directed IRA. You can put tax liens in there. You can put gold or silver or other precious metals. You can actually buy in a self-directed IRA. You could buy cryptocurrency in a self-directed IRA. Water rights, mineral rights, oil and gas. And you can even buy things like livestock or commodities. There's so many things that you can put in a Roth IRA through a self-directed IRA. It's actually tremendously powerful. So if there's things that you really have a,

tremendous circle of competence. What I mean by that is you really know that industry well. Let's say you grew up as a farmer and you really know livestock and you know how to make money on livestock and you can make a tremendous amount of money on livestock, then maybe a self-directed IRA is perfect for you to start buying and selling livestock. Or if you're really into real estate notes and you know that you want to buy real estate notes as your long-term goal, then maybe that's something that you want to do through a self-directed IRA. Or if you want to buy a business, maybe you want to buy a startup of some sort or a traditional business. All of those would be perfect inside a self-directed IRA,

and you get the benefits of tax-free growth. That's the power here. Now, would I invest in these types of things if it wasn't inside my circle of competence? If it wasn't something that I knew really well, absolutely not. I would take the traditional approach and invest in index funds or stocks or bonds

or whatever I knew well. The reason why is you don't want to take risks inside your Roth IRA. You want to reduce the risks inside your Roth IRA because it's such a powerful account. And you don't want that account to go down to zero because you're investing in something you have no idea how to even operate. So the key here is to make sure that it's something you understand and that you have experience in. And if you're still learning about something, but you think it's something you may want to put into a self-directed IRA in the future, if I were you, what I would do is continuously invest in stocks or bonds the way we talk about it. And then as you learn more and you get comfortable outside the IRA and,

your Roth IRA starts to grow, then you could take advantage of it in that situation. Now, let's get into how to open a self-directed IRA. Now, opening a self-directed IRA isn't the same as just going online and just opening up a brokerage account. It's not the same situation. Self-directed IRA is required to utilize the services of actual third parties. So this is often called a custodian or a trustee. So what you have to do is you have to go find a custodian or trustee for the account. So that's what I was talking about. When I go to like real estate meetups and things like that,

custodians will actually come in and do talks to try to get more people to open a self-directed IRA through them. So you have to find a company who actually specializes in self-directed IRAs. Then what you're going to do is you're going to select the investments that you want to make. So when you select these investments, like we just talked about, it needs to be within your circle of competence. It needs to be something that you actually know the industry.

So if you're looking at buying, say, a bank inside of your Roth IRA, You need to actually have experience in banking and not just cold throwing money at a bank. Number three, then you're going to carry out your due diligence needed for that investment. So you're going to go through, make sure that the company or whatever you're buying has good financials or whatever else you're doing to make sure you're actually making the right investment. Then you're going to find a broker and purchase the investment. And so once you're going to purchase the investment, then number five is you're going to ask the custodian or trustee of the account to carry out the desired transaction.

So that's how you have to do it. You have to go to a company who actually special. specializes in self-directed IRAs. You can Google them, look at some of the best ones, see which ones may fit your specific experience because some of them are great for real estate, some of them are great for businesses, some of them are perfect for commodities

or whatever else you want to invest in. Now, what are some of the advantages of a self-directed IRA? There's way more flexibility in your investments, so you actually have control of your investments. There's built-in tax breaks for those types of investments. You have the opportunity to invest in things that line up with your passion. So if there's something that you're truly passionate about and you know the industry well,

you know it inside and out, and you're not comfortable with stocks or bonds because maybe you're just not comfortable investing in stocks. We have a fantastic opportunity here to still invest through a self-directed IRA. It also gives you the chance to diversify your self-directed IRA. Maybe you want it in half an index funds and half in a business. There's nothing wrong with that. And it gives you the opportunity to be able to do that instead of only buying specific securities. The last advantage is you have the opportunity or the option to invest in assets that may increase in value much more than the market would.

Because a lot of times if you buy a business and you have to work in that business and there's sweat equity within that business, those types of businesses, if they're already successful, can have a tremendous impact on your wealth because they can grow tremendously over time. What can we learn from what Peter Thiel did here? I have three big takeaways. The first one is to stay flexible. make sure you have some cash on hand because if opportunities like this arise once in a lifetime opportunities

then you need to be able to take advantage of it. Imagine if you had an opportunity to invest in PayPal for two grand and you didn't have the two grand on hand. Make sure you have some cash on hand. Maybe extend your emergency fund out a couple of months more than you think you need that because if you do that and you have the money available

to take advantage of opportunities and they're good opportunities then you could actually build tremendous wealth just off one opportunity. The second thing is, consult with experts. Because if you have an accountant that you trust and you learn the tax code, you can find loopholes like this. Because they're not loopholes. They're legal.

But it's something that you can do and take advantage of these wealth building opportunities. Every single year, I have a meeting with my accountant mid-year to talk about the new opportunities that I'm looking at. I'm about to buy a business in a month here. And I had a very long call with my accountant going through all the scenarios. because I want to take advantage of the knowledge that experts have built up over years who know way more than me about specific subjects. You want to talk about taxes? Don't ask me.

Ask my accountant because he's the one that gives me all the advice on my tax situation. So make sure you're consulting with people. Yes, it costs extra money. It's not fun spending money on experts, but at the same time, they're going to save your butt in many different situations. Every time I talk to them, I have something to take away from it. And it's been an awesome opportunity that I've built my personal knowledge in addition to actually utilizing that knowledge in the real world. And I've actually saved way more money than what the fees

cost to talk to them at an hourly rate. And then the last thing is to look for opportunities like this. See if you can find opportunities like this. What networks are in your area where there's startups if you're interested in startups? Or real estate, if you're interested in real estate. Where can you network with people to find opportunities like this where you can maybe partner up or go into deals together so that you can reduce the risk that way. Listen, I hope you guys learned about the power of self-directed IRAs today. If you have any questions about this episode, hit me up on Instagram at Dollar A-F-T-R-Dolar. And follow us on Spotify, Apple Podcasts, or whatever podcast player you love listening to this podcast to.

And if you want to help out the show, leave a five-star rating and review on Apple Podcast. Thank you guys so much for listening. I appreciate every single one of you. and we'll see you on the next episode. Thank you guys so much for listening. And if this is your first time listening, consider subscribing so you never miss an episode. And share this episode with a friend.

And don't forget to leave a rating and review on iTunes as well, because our goal is to bring as much value to you as possible. And we're trying to spread this message that money can buy freedom. That's what money is there to do, is to buy more freedom. So thank you again so much for listening, and I hope you have a great day. Rose in lasagna, medium power, 15 minutes. Sounds like Ojo time. Let's play.

Feel the fun with Play Ojo. The online casino with all the latest slot and live casino games. What you win is yours to keep with no wagering requirements, instant payouts, and no minimum withdraws. Hey, I just won. Woohoo. Feel the fun. Play Ojo. Honey, forget about the lasagna.

Let's celebrate. 19 plus Ontario only. Please play responsibly. Concern about your gambling or that of someone close to you. Call 1866-531-2600 or visit Connexontario.ca.