There are many avenues you can take to help you become wealthy. Some are just lucky and end up inheriting their wealth, while others take calculated risks on entrepreneurial ventures which turn out to be wildly successful. Although billionaire Peter Thiel did make sound investment decisions in technology startup ventures, most people do not realize much of his wealth was created simply by using a Roth IRA (Individual Retirement Account).
It has been recently revealed that Thiel’s Roth IRA currently has an unprecedented balance of around $5 billion.
How did this happen?
When the report about how much money Thiel had in his Roth IRA was released, many were left wondering how he accumulated such a large amount of money in his account. Actually, Thiel began by contributing just $2,000 to the account in 1999 which was the annual limit during that time. Thiel then used the funds in his Roth IRA to buy a $1,700 stake in PayPal Holdings – a company he founded.
Subsequently, PayPal has grown into a major global financial transactions provider causing the value of Thiel’s ownership shares in his Roth IRA to appreciate dramatically. Also, due to tax rules specific to the Roth IRA, Thiel will not be charged any taxes if he withdraws his money after he has reached retirement age.
Why was the Roth IRA created?
Lawmakers created the Roth IRA with the aim of providing incentives for people to save more in preparation for retirement. The new investment vehicle was named after one of the founding law’s co-sponsors, Delaware Senator William Roth. The Roth IRA’s specialized tax rules were designed for people looking to minimize their tax liabilities during their retirement years.
How does the Roth IRA work?
What makes the Roth IRA advantageous is it allows you to withdraw money during your retirement years without any tax liabilities on the amount withdrawn*. Alternatively, with traditional IRAs you would have to pay taxes upon the withdrawal of funds during retirement, but you will be able to deposit pre-tax money. Contributions to a Roth IRA, on the other hand, are taxed upfront.
Contribution limits for Roth IRAs
There are certain legal limits for how much you are allowed to contribute each year to your Roth IRA. The contribution limit is now $6,000 per year as of 2021. However, if you are over the age of 50 but under retirement age, $7,000 is your yearly contribution limit.
Also, if your income is above $140,000 annually you are prohibited from depositing funds into a Roth IRA based upon the existing law in 2021. Additionally, married couples are limited to $208,000 of contributions per year into a Roth IRA.
Should you open a Roth IRA?
You do not need to be as wealthy as Peter Thiel to benefit from a Roth IRA. On the other hand, a Roth IRA may or may not be right for you and your own personal financial goals and current circumstances. Let us help you determine if a Roth IRA makes sense for your situation.
Opinions expressed in this blog post are those of the author and not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The information has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. The material presented herein is not a recommendation of any kind. Raymond James Financial Services and its advisors do not offer legal or tax advice. You should discuss any tax or legal matters with the appropriate professional.
*A distribution from a Roth IRA is tax-free and penalty-free provided that the 5-year aging requirement has been satisfied and at least one of the following conditions is met: you reach age 59½, suffer a disability, make a qualified first-time home purchase, or die.