The Hidden Secret of the Self-Directed IRA

What if you could retire on $2,000?

Even better, what if you could retire to a multi-million dollar estate with a 10-car garage full of Lambos on $2,000, and still have money leftover?

That’s what PayPal co-founder and investing whiz Peter Thiel gets to do just six years from now. (Although you’re more likely to catch him pulling up in his other other Benz than a Lambo—the Frankfurt-born tech billionaire apparently prefers German engineering.) 

Back in 1999, he started a retirement account with less than $2,000. It now sits $5 billion large, and when he turns 59½, he’ll get to cash it out tax-free. His zero-filled secret sauce? A self-directed IRA.

Here’s what you need to know about self-directed IRAs and how you can build your own.

You’ve probably heard about investing for retirement in the context of your employer’s 401(k). These alphabet soup standards also include Individual Retirement Accounts (IRAs), which are investment accounts for the long game that help you save money on taxes.

With a traditional IRA, you can deposit income before it’s taxed but when you retire and want to access that money, you’ll pay taxes on withdrawals. With a Roth IRA, it’s the reverse. You deposit money that’s already been taxed, but when it’s time to cash out, you get to make withdrawals tax-free.

When you put your money into a regular IRA, your bank or investment firm will typically put that money into traditional stocks and bonds. These are considered safe long-term investments. While they offer solid, consistent returns, they’re probably not going to tack another six zeros onto your net worth.

For that, you’ll need a self-directed IRA.

If you start a regular Roth IRA at age 22 and always max it out—you can put up to $6,000 a year into an IRA, which is just $500 per month—you’ll be a millionaire before you turn 60.

Not bad at all, but it’s also not $5 billion.

The self-directed IRA is the DIY version of a regular IRA, and it lets you invest your retirement funds in just about anything you think will be profitable. See an opportunity to invest in the next Uber? Go for it. Want to try your hand at real estate? Game on. Think Nicaraguan farmland is about to explode in value? Snatch it up. Thiel went with startups.

Investing in startups can be risky, but if you find a unicorn (think Facebook, Airbnb, Uber...and PayPal), the rewards are practically infinite. These privately-owned companies don’t sell stocks publicly, but you can invest in them with a self-directed IRA.

This is exactly how Peter Thiel turned the price of a Peloton into a cool $5 billion. Here’s the timeline:

• 1999: Thiel invests less than $1,664 in PayPal. At the time, you could probably buy PayPal stock for mere pennies, meaning Thiel’s two Gs likely got him tens (or hundreds) of thousands of shares.
• 2002: PayPal goes public. Its stock is priced at $13 per share. Peter Thiel likely kept all this profit in his IRA, reinvesting it for profits on profits. His account now holds $20-something million.
• 2011: Thiel’s self-directed IRA finally hits a billi.
• 2017: The account hits $2 billion. PayPal stock sells for about $45 per share. 
• 2021: One share of stock in PayPal is now worth about $300. Thiel’s account is five Bs deep.
• 2027: Peter Thiel turns 59½. He can start withdrawing money from his self-directed IRA without paying any taxes.

And here’s the real magic trick that has Thiel pulling zeros out from behind his ear: while there are limits on how much you can contribute, (to keep billionaires from getting off tax-free), you can take any profits you accumulate and reinvest them. Plus, it’s possible to roll over funds from other retirement accounts into your self-directed IRA without incurring penalty fees. If you make the right moves, contribution limits become irrelevant. The money practically grows itself.

If you make the wrong moves, though, you could lose it all. Not something you want to do with your retirement money.

This is why it’s important to spread your money across multiple types of investments. You can keep a solid chunk of change in a traditional retirement account while siphoning off a portion of your savings to be invested in alternative assets like startups, real estate, or even art and vintage cars.

For example, investing app Rally buys up everything from rare 1950s Porsche Speedsters to the autographed hardwood floor from Kobe Bryant’s farewell game and lets you buy shares in them. Their experts wait for these extraordinary items to go up in value and then sell at the best time, doling out the profits to investors like you.

With Roofstock, you can buy an entire house for as little as $20,000 and start earning rental income all from your smartphone. Their target returns of 13.55% are well above average stock market returns, and you get to become a homeowner without all the work.

If you want to follow in Thiel’s footsteps, you can invest in startups with MicroVentures for as little as $100. Their past investment opportunities have included Airbnb, Lyft, Snapchat, and Spotify.