Page 32 - Investment Advisor - December 2021

NEWS of the YEAR

to avoid paying taxes. This is the perfect example of what I’ve long may owe, for example in the case of an early withdrawal or “Roth
called the tale of two tax codes.” stuffing,” which includes the practice of putting shares of early-
Thiel’s purchase of founders’ shares and hedge fund invest- stage companies into a Roth IRA at very low valuations.
ments within his Roth IRA might not have been a prohib- If that form isn’t filed — and it usually isn’t, Levine says —
ited transaction when initiated, but the way those shares then there is no statute of limitations, and there could be pen-
were valued could draw the attention of tax authorities, said alties on failure to pay a tax. Still, Levine doesn’t believe much
Buckingham Wealth Partners Chief Planning Officer Jeff will happen to Thiel and other wealthy investors who have
Levine, CPA and CFP. taken advantage of the Roth IRA.
“It wasn’t a prohibited transaction when he made the ini- Levine predicts that “these stories represent the greatest threat
tial purchase,” Levine told Investment Advisor at the time. to Roth IRAs,” because despite these products being “universally
“[However] I could see some potential prohibited transaction loved” by investors and politicians, anger at billionaires like Thiel
concerns when he had a liquidity event and may have used who find back doors might spur Congress into making changes.
some of that [Roth IRA] money to invest in his own hedge fund.” That said, the IRS hasn’t been clueless about these types of
He noted that “there is more to unpack there, and unfor- actions. In 2014, a report from the Government Accountability
tunately we don’t have all the details.” But “there are several Office stated that Congress initially created IRAs to “prevent
strong pieces of evidence that the shares [Thiel bought] were the tax-favored accumulation of unduly large balances. But
not valued properly,” Levine said. concerns have been raised about whether the tax incentives
The key evidence was a PayPal filing with the Securities encourage new or additional saving
and Exchange Commission stating that these shares were The GAO noted that “founders of companies who use IRAs
undervalued when Thiel bought them. He paid, according to to invest in nonpublicly traded shares of their newly formed
ProPublica, a fraction of one cent for each share. companies can realize many millions of dollars in tax-favored
“He bought significant amounts of the company for $1,700 gains on their investment if the company is successful.” In
when the company later said that it undervalued those shares and 2020, the GAO issued another report looking at high-risk IRA
sold them at less than fair market value, and then within weeks asset types associated with abusive tax schemes.
[PayPal was] bringing in large investments,” Levine explained. Levine predicts the hubbub around the ProPublica story will
The tax expert doubts that the Internal Revenue Service will go cause a greater workload for advisors who will need to answer
after Thiel because the agency has such limited resources. But if questions from clients about how they, too, could score a huge pay-
it did, it would focus on valuation issues, he said. “That’s a bigger out using a Roth IRA, particularly a self-directed one. He warns
issue than the initial investment in the IRA,” Levine explained. that clients should avoid investing IRA money in their own busi-
Although Thiel might claim the statute of limitations ran out nesses, as they could run into prohibited transaction concerns.
on any actions tied to this 22-year-old investment, Levine doesn’t “As a planner, we want people to take the right steps,” he
see that argument panning out. That’s because the IRS requires said. “[The ProPublica story] will spur questions, but we aren’t
Form 5329 to be filed by IRA owners to report penalty taxes they all Peter Thiels.”

Broker-Dealer/RIA News

lthough Charles Schwab’s $22 billion platforms and technology will survive
A acquisition of TD Ameritrade was the integration.
finalized in October 2020, the integration In February, Schwab CEO Walt
of TDA into Schwab’s operations extended Bettinger said during the firm’s Winter
into 2021 and still has a ways to go before Business Update webcast that his firm
it’s expected to be completed. remained upbeat about its ongoing inte-
In 2021, Schwab made additional job gration with TDA this year, but was
cuts at TDA, announced updates on the reviewing some of the decisions it’s made
timing of the completed integration and on that front as part of its efforts to
provided more details on what TDA improve client service.

30 INVESTMENT ADVISOR DECEMBER 2021 | ThinkAdvisor.com