Peter Thiel Took $1,700 and a Standard Roth IRA Account and Turned It Into $5 Billion. You Can Do It Too.

When somebody starts talking about a Roth IRA, your mind probably conjures up images of index funds, slow growth, and a comfortable retirement home. Well, billionaire Peter Thiel had a very different idea.

Instead of treating his IRA like a simple retirement vehicle, the PayPal (PYPL) and Palantir (PLTR) co-founder took advantage of the account's tax-free growth to purchase pre-IPO shares in startups that turned out to be major household names. The result: Thiel managed to turn just $1,700 into a fortune worth roughly $5 billion.

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This has to be the best investment return ever achieved in a retirement account, and it's definitely something everyday savers and investors can try to replicate. 

Before you get too excited, let's manage expectations here. You're probably not going to turn your boring Roth IRA into a sparkly $5 billion nest egg. But the principles behind Thiel's strategy are surprisingly accessible, and his success does offer a fundamental lesson in how wealth is created.

How Did Peter Thiel Turn $1,700 Into $5 Billion?

Before we speed right into how Thiel amassed his tax-free fortune, let's pump the brakes and look at how these retirement accounts actually work.

In its most basic form, a Roth IRA is a tax-advantaged individual retirement account that's funded with after-tax money. Because all of your tax contributions are made upfront, any interest, dividends, or capital gains that you chalk up inside your IRA compounds without generating tax liabilities. That means whatever fortune you may be able to amass in your account is 100% yours to keep.

Peter Thiel definitely used that to his advantage, but not quite how you or I could ever go about doing it. Instead of buying up on slow-growth index funds, he used his Roth IRA to buy shares in his own company. While PayPal was still in its infancy in the late 1990s, Thiel purchased loads of PayPal stock (among others) while the company's valuation was really low.

When PayPal's value blew up and it was acquired by eBay (EBAY), Thiel made enormous gains, and they were all sheltered inside his retirement account. That created a powerful compounding effect without having to worry about getting taxed on any of it — and so he was able to reinvest at will.