How Does $1,700 Become $5 Billion, Tax‑Free?

In 1999, a thirty-one-year-old startup founder opened the humblest account in American finance, the Roth IRA, the retirement account Congress had invented the year before for waiters, teachers, and anyone else of modest income, and he put about seventeen hundred dollars in it.

He qualified for the account the same way a waiter would: his salary that year was $73,263, under the $110,000 income limit. The deposit limit was $2,000. But instead of a mutual fund, he used his deposit to buy 1.7 million founder's shares of his own startup, priced at a tenth of a penny each. The startup was called PayPal. The founder was Peter Thiel.

It didn't start well. By the end of 1999, the account was worth $1,664. He was down.

Then eBay bought PayPal. By the end of 2002, the account held $28.5 million. Thiel rolled the proceeds into early shares of Facebook and Palantir, without ever moving a dollar outside the wrapper. By the end of 2019, the last year the leaked IRS data covers, that seventeen-hundred-dollar deposit had grown to roughly $5 billion. And because it all sits inside a Roth, the rule is simple: after age 59½, every withdrawal is taxed at exactly zero. Thiel reaches that age in April 2027. Months from now, five billion dollars becomes spendable, and the IRS's share of it is nothing, forever.

For scale: the average Roth IRA in America holds about $39,108. At today's $7,500 annual limit, an ordinary saver would need to max out his contributions for more than 600,000 years to deposit what Thiel's account grew to. And he isn't alone in there. Congress's own data counts more than 28,000 Americans holding IRAs above $5 million, and 497 holding above $25 million, averaging over $150 million each. Inside the waiter's account.

Here's the part to sit with. When ProPublica published the leaked files in 2021, nobody went to jail. Nothing was found to be illegal. Congress drafted bills to cap the giant accounts; none passed. As of this morning, the play is as legal as it was in 1999. Thiel didn't get away with something. He read something. A book that's been public his whole life, and yours.

Last week we read the rulebook: two games, two staircases, the rate on effort climbing while the rate on patience stays low. This week is about the second book. Because if the tax code were only a bill, it would need one sentence: send this percent. Instead it runs to thousands of pages, and almost none of them are the bill. They're the deals.

Nearly every one of those pages says some version of the same thing: if you do this, you owe less. Buy a building, owe less. Fund a startup, owe less. Give shares away, owe less. Hold instead of sell, owe less. Washington's own bookkeepers publish an annual catalog of these deals and what each one costs the Treasury; the official term is "tax expenditures." Congress writes them on purpose, because the code isn't just how the government collects. It's how the government steers. It charges a premium on the things it merely tolerates and hands discounts for the things it wants more of.

Which means there are two completely different professions hiding under the words "tax guy." One is tax preparation: you bring last year's documents in April, and a decent man with a decent software package records what already happened. The other is tax planning: the year gets designed in advance, in January, in October, before a single form exists. The wealthy employ the second profession. Most working men have only ever met the first, and most of the preparers serving wage earners have never once run the plays you're about to read, because their clients never had the pieces on the board.

Tax prep records the year you already had. Tax planning designs the year that hasn't happened yet.

Strip away the jargon and the whole book condenses to six plays. Six moves, run over and over, at every scale from a family office to a family kitchen table. Here's the board.

Play one: earn in the right form. The first play is the one from last week's staircases, sharpened into a habit: the wealthy never take a dollar in an expensive form when a cheap form exists. The purest version belongs to the fund managers. A hedge fund manager's cut of his clients' profits, the famous "carried interest," rides the capital-gains staircase at a top rate near 24 percent instead of the wage staircase's 41, saving him about $1,700 in tax on every $10,000 of pay. Congress has publicly threatened to end that arrangement for twenty years, most recently in the big 2025 tax law. It survived, again, untouched.

But the deepest earn play is written for founders. It's called qualified small business stock, and it says: start a company, hold your original shares five years, and your first $15 million of gain is federally taxed at zero. Not deferred. Zero. The 2025 law raised that cap from $10 million and widened the door. And the truly wealthy multiply it: the cap applies per taxpayer, and a trust counts as its own taxpayer, so founders gift shares into trusts for each family member and stack exclusion on exclusion. The move is so routine that Silicon Valley's lawyers have a nickname for it, first reported by the New York Times: "peanut-buttering." The founder of Roblox reportedly spread his exclusion across his wife, four children, and relatives, roughly a dozen times over.

Play two: own what the code pays you to own. The government wants buildings built and businesses equipped, so the code makes ownership a deduction machine. The engine is depreciation: on paper, the IRS assumes your rental property is slowly crumbling to worthlessness over 27.5 years, and lets you deduct the "loss" every year, even while the building gains value in the real world. The wealthy push it much further. An engineering firm performs a cost segregation study, walking the property and moving carpets, fixtures, and parking lots into faster lanes, and the 2025 law restored 100 percent bonus depreciation, permanently, letting those pieces deduct entirely in year one. A $1 million building can now produce roughly $200,000 to $350,000 of first-year deductions: a paper loss, harvested from an asset that's rising in value, aimed at real income. It's also why the private jet is famously "free" the year it's bought: a $10 million aircraft used mostly for business can be written off in full, year one. Jet brokers reported the market reheating within weeks of the law's signing.

Play three: grow it inside a wrapper. You already met this play. It's the cold open. A wrapper is a legal container where the tax rules agree not to look: money inside grows without gains ever becoming taxable events. The working man's wrapper is the Roth and the 401k. Thiel's genius was simply running a founder's assets through the waiter's wrapper at maximum violence. The billionaire's bespoke version is called private placement life insurance: a hedge-fund portfolio dressed in an insurance policy's paperwork. Gains inside are untaxed. The owner can borrow against it, tax-free, while alive. At death it pays out to heirs income-tax-free. A Senate probe put it plainly in its 2024 report title: a tax shelter "masquerading as insurance," holding at least $40 billion for only a few thousand families, with an average policy near $13 million by the committee's data. A bill to shut it down was introduced this spring. It has zero cosponsors.

The waiter and the billionaire run the same play. One of them was told it exists.

Play four: give without giving. Start with the cleanest trick in the charity chapter. Donate cash and you deduct the cash. But donate stock you've held over a year, and something better happens: you deduct the full market value, and the capital gain inside it is never taxed. Not by you, not by the charity, not by anyone. The gain simply exits the universe. From there the machinery scales up. A donor-advised fund hands you the full deduction today while the money sits invested under your direction, with no legal deadline, ever, to reach a working charity; American DAFs now hold about $326 billion. A charitable remainder trust runs the play in reverse: donate the asset, collect an income stream from it for the rest of your life, take a deduction up front. And the family foundation must pay out just 5 percent a year, a figure that can include the salaries it legally pays to family members. None of this means the giving is fake; enormous real charity flows through these pipes. It means the code pays the giver twice, and the wealthy make sure it does.

Play five: die like a professional. On paper, America has a 40 percent estate tax. In practice, out of roughly 2.8 million Americans who die in a year, fewer than 4,000 estates pay it. Fewer than two deaths in a thousand. The exemption, $15 million per person under the 2025 law, does some of that work. The playbook does the rest, and its cornerstone is a rule most working men have never heard named: the stepped-up basis. When you die, your assets' cost basis resets to their value that day, and every dollar of unrealized lifetime gain is wiped from the income tax, permanently. Watch it work:

Longtime readers will recognize the shape: this is the landing pad of Buy, Borrow, Die. Never sell, borrow against the stack to live, and now you know what the dying actually does: it runs the eraser. For the estate tax that remains, the wealthy deploy trusts, and the story of the best one deserves telling. In the late 1990s, Audrey Walton, sister-in-law of Wal-Mart's founder, ran about $200 million of stock through a maneuver called a GRAT: park assets in a short trust, take back their full value as an annuity, and let everything the assets earn above a government hurdle rate slip to your heirs, gift-tax-free. She set the taxable gift at zero dollars. The IRS challenged her. In 2000, the Tax Court sided with Walton, unanimously, and the IRS rewrote its own regulations to conform. The maneuver has been called the Walton GRAT ever since. The loophole is literally named after the family that beat the government with it. And if the trust's assets fall instead of rise? It quietly dissolves, and you simply try again. Heads the family wins, tails they reshuffle.

How routine is it now? Casino magnate Sheldon Adelson cycled stock through more than 30 trusts, passing at least $7.9 billion to heirs and avoiding about $2.8 billion in gift taxes, per Bloomberg's analysis of his SEC filings. In 2008, before Facebook ever went public, Mark Zuckerberg, Dustin Moskovitz, and Sheryl Sandberg placed pre-IPO shares into GRATs; the eventual tax-free transfers ran near $204 million combined, arranged before two of the three had spouses or children. ProPublica's leaked files showed more than half of America's hundred richest people have used these trusts or their cousins. The lawyer who invented the modern version estimated the play cost the Treasury about $100 billion over thirteen years, roughly a third of everything the estate tax collected in that span.

Play six: move the board itself. When the first five plays aren't enough, the last one relocates the game. An American citizen ordinarily owes US tax wherever on earth he lives, with one glowing exception: Puerto Rico. Become a true resident, half the year on the island plus real ties, and under the island's decrees, the gains you build after the move are taxed at zero percent, no passport surrendered. A government audit released in December counted 5,852 such decrees granted since 2012 and found the average holder's federal tax bill fell 46 percent, about $127,000 a year, after the move. The island tightened the deal in March: new applicants from 2027 pay 4 percent instead of zero, and the program now runs to 2055. Its reported residents range from investor Peter Schiff to YouTuber Logan Paul. And for the wealthy who'd rather not move, the code offers Opportunity Zones: roll a capital gain into designated neighborhoods, hold ten years, and the appreciation comes out federally tax-free. The 2025 law made the program permanent.

Read the six plays again and notice what almost none of them attach to: a paycheck. The playbook barely mentions the W-2. Its pages open to entities, assets, trusts, funds, wrappers, structures. The code treats a man one way and a structure another, and nearly every deal in the book is addressed to the structure. That's the quiet price of entry for the whole playbook, and it's also the most hopeful fact in this issue, because a structure is not a billionaire's privilege. A structure is paperwork.

Consider what sits on the bottom shelf the day an ordinary man's side business becomes a real entity. There's a rule, reportedly born when Augusta homeowners lobbied Congress so they could rent houses to Masters Tournament visitors untaxed, that lets a business owner rent his own home to his own company for up to 14 days a year: the business deducts the rent, and the owner receives it tax-free. Courts have punished made-up numbers, so the rate must match real venues, documented. There's the S-corporation election, which splits a solo operator's profit into salary and distributions and, at around $120,000 of profit, saves a few thousand dollars in self-employment tax every year, net of the added paperwork. There's the retirement wrapper he already owns and probably underfeeds. And there's the rule from last week's issue that a married couple can realize nearly $99,000 of long-term gains in a year at a federal rate of zero. Small plays, from the same book as Thiel's.

So, the play. Not a scheme, not a product, and nothing that requires a founder's stock. The play this week is one question, asked of the man who does your taxes, and it will tell you in ten seconds which profession you've actually been paying for: "Are we preparing my taxes, or planning them?"

One: check the calendar. Planning happens before December 31. Prep happens after. If every talk you've ever had with your tax man took place between February and April, then strictly speaking, you have never planned a tax year in your life. The move is a single conversation booked in the fall, while the year can still be steered.

Two: bring the shelf list. You now hold a short list most wage earners have never seen assembled: the entity question, the wrapper question, the depreciation question if you own or ever buy rental property, the 0 percent gains bracket, the stepped-up basis on anything your family stands to inherit. Ask which of them exist at your scale. A planner will light up. A preparer will change the subject.

Three: listen for the tell. A preparer talks about documents: what to bring, what to file, what the deadline is. A planner talks about decisions: what to form, what to hold, what to time. Neither man is your enemy; the preparer is honest labor. But the wealthy don't employ historians to write their future, and after today, you know the difference on sight. What you do with it, as always, is your call.