How Warren Buffett, Other Billionaires Build a Tax-Free Retirement Fortune

Billionaires' retirement accounts "have morphed into supercharged investment vehicles subsidized by American taxpayers."

Warren Buffett had $20 million in his Roth account at the end of 2018. J. Countess/Getty Images

From Warren Buffett to Peter Thiel, America’s super wealthy have for decades been taking advantage of retirement plans designed for middle-class Americans and amassed millions—in some cases, billions—of tax-free dollars in their savings accounts.

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That’s the latest finding in ProPublica’s continuous investigation into how the nation’s richest of the rich avoid paying taxes. The new revelation, based on analyses of confidential Internal Revenue Service data, focused on one particular investment tool, the Roth IRA (individual retirement account), a type of savings account that allows salary earners to save away portions of their regular income and withdraw it tax-free after retirement. 

Designed for middle-class taxpayers, Roth IRAs have a limit, currently $6,000, on how much one can contribute every year. At the end of 2018, the average Roth account had $39,108. But that’s not the case for the superrich. By taking advantage of loopholes in Roth conversion laws and making shrewd investments using Roth money, whose capital gains are never taxed, “the accounts have morphed into supercharged investment vehicles subsidized by American taxpayers,” ProPublica reported.

At the end of 2018, Warren Buffett had $20.2 million in his Roth account, according to the report. His top lieutenant at Berkshire Hathaway, Ted Weschler, had $264.4 million in his Roth account. In an extreme example, Peter Thiel, the billionaire venture capitalist, had amassed $5 billion in his Roth by 2019 across 96 subaccounts.

Most of these people’s exponential gains came from investments. In Thiel’s case, he started his Roth account with shares in early-stage startups. In 1999, (when Americans could contribute no more than $2,000 per year to Roth IRAs), Thiel placed 1.7 million shares of PayPal, valued at $0.001 apiece, into his account. Within a year, the value of that stake jumped from less than $2,000 to $3.8 million.

Thiel later made similar early investments in Facebook and Palantir. Both companies enjoyed a meteoric rise in the years of Thiel’s holding.

Another strategy exploited by billionaires was Roth conversion. A new law in 2010 allowed the superrich to convert a traditional IRA to a tax-free Roth account with a one-time tax payment. Buffett converted $11.6 million that year, per ProPublica. His deputy, Weschler, converted a whopping $130 million.

In a written statement, Weschler said his Roth account relied on publicly traded investments and strategies available to all taxpayers, noting that he chose investments carefully, had “exceptional luck” and had nearly four decades for the account to grow.

Neither Buffett nor Thiel has commented about ProPublica’s findings yet.

In a statement announcing his 2021 charitable contribution last week, Buffett said his donations over the years had led to only about $.40 of tax savings per $1,000 given. “My wealth remains almost entirely deployed in tax-paying businesses that I own through my Berkshire stock holdings,” he said, “and Berkshire regularly reinvests earnings to further grow its output, employment and earnings.”

How Warren Buffett, Other Billionaires Build a Tax-Free Retirement Fortune