Suppose you're a consultant and your one-person consulting company is owned by your Roth IRA. You could deliberately draw a very small taxable salary, so that most of your work goes towards increasing the company's untaxed value in your IRA.
You're basically making your earnings tax free.
Obviously, your Roth IRA's company employing you at below market rate isn't a fair, arms length transaction.
As I understand it, you can't own a company that you(or a relative) own a controlling interest in with your IRA. I can see the sense in this because if own 20% the person(people) who own the other 80% have an incentive to make sure I'm not playing any kind of games with the finances.
In the case of Thiel, it seems like he took $2000 and made a moonshot investment in Paypal. At that point his investment could have just as easily went to $0 as it was to hit $5 billion. He took the risk, why shouldn't he have gotten the reward?
And he should get the reward, minus capital gains tax.
This country provided an environment for that investment to turn into five billion. He couldn't have done the same thing in Somalia, or Vietnam, or Greece. Why shouldn't it reap its share?
Nearly everyone else pays their fair share of taxes.
I can understand adding legislation that would tax distributions on Roth IRA's for billionaires. Thiel would be fine if he had to pay taxes on that windfall.
I just think that it is a mischaracterization that he isn't paying his fair share of taxes. To me, it doesn't seem like he did anything wrong. He took advantage of a system that is accessible to everyone.
an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10 percent or more of the yearly wages of an employer) of a person described in subparagraph (C), (D), (E), or (G) https://uscode.house.gov/view.xhtml?hl=false&edition=1994&re...
Being the CEO clearly qualifies. That said, the statute of limitations means you can often get away with things if they go unreported for long enough. It may be he’s currently in the clear.
> In 2011, Thiel caught the attention of the IRS. The agency launched an audit, tax records show. The records don’t spell out what the IRS was looking at or if it involved Thiel’s Roth. Whatever the case, the audit was closed years later and Thiel didn’t owe any more taxes, tax records show.
What I find most interesting in regards to this is that by the time there was any reportable gain (2002 sale), and thus any reason it would even be looked at, the 3 year statute of limitations would be up on the initial prohibited transaction. Which is... interesting.
It seems the whole point of these Roth IRA is so people don't have to pay their fair share of taxes. I'd blame the government for creating that.
It is completely legal to own a company and pay yourself below market rate, or even not at all. In fact, it is how many small business work.
In your example, the company still has to pay corporate tax, even though it is owned by the IRA.
The only tax advantage to your consulting scheme would come at the time you sold it to someone else, or liquidated it.