Bitcoin Retirement Series Part 1: Bitcoin Investing In Retirement Plans (US Version)
Disclaimer: This should not be construed as or relied upon in any manner as investment, legal, tax, or other advice. Please consult an appropriate tax or financial professional to understand your personal tax and financial circumstances. I may get compensated by some platforms mentioned below (because of referral links). Do your own research. Enjoy #Bitcoin.
Author: Han Hua
Collaborators: @neverdidanything, Zev Mintz
Last Updated: Feb 18, 2020
Goal: This guide is intended to provide a non-exhaustive set of techniques to invest in Bitcoin through retirement plans (401k, IRA, etc.) in the US.
Non-goal: Provide a complete guide on how retirement plans work.
Non-goal: Convince you that you should invest in Bitcoin.
Non-goal: Explain how to invest in altcoins through retirement plans. (Though you should be able to know how to after reading this.)
There are many types of retirement plans (most popularly 401k and IRA) in the US that provide various tax advantages, including tax-deferred and tax-exempt benefits.
Luckily I happen to work for a company with a good retirement plan, so I decided to take full advantage of it. I’ve been looking for allocations to Bitcoin in retirement plans since 2017. My reasonings of the decision are as below:
- I am a young professional with 30+ years ahead before retirement. Even if I messed up with this investment decision now, I still have enough time to rebuild my fortune.
- I am looking for something (asymmetric bet) with enough volatility and a potential huge upside in the long-time horizon. Bitcoin is perfect for this.
- I would like a place to minimize the taxation on my potential Bitcoin gains. Retirement plans are perfect for this without too much extra setup.
- I’d like to exercise a specific portfolio management strategy (with rebalance). However, I don’t want it to affect my pre-existing personal investment.
- After a 10-year bull market, every asset class is expensive as measured by most metrics. I really would like something with low correlation and under-allocated by most people, e.g. gold and Bitcoin.
Concluded from above, I decided to invest in Bitcoin through my retirement plans. Starting with Bitcoin index funds through 401k brokerage account, I gradually learned several ways to invest in Bitcoin directly and indirectly.
One day I posted a tweet below and received a lot of interests. I decided to share several approaches I learned and dive deep into pros and cons each.
TL;DR, there are three ways to invest in Bitcoin through retirement plans (ordered from highly recommended to least recommended):
- Self-directed IRA with self-owned Bitcoin storage
- Bitcoin index funds
- Bitcoin IRA custodian
The table above gives you a quick look of how each approach ranks in different metrics. Although I ranked them from highly recommended to least recommended, this article will introduce them ordered by the setup easiness from the easiest to the most complex. Please feel free to jump right into the section you are mostly interested in.
Bitcoin Index Funds
First things first, I refer to Bitcoin index funds as something that tracks Bitcoin’s price performance. While many index funds in stock market track a basket of underlying assets, most Bitcoin index funds track only Bitcoin. Bitcoin index funds are probably the easiest for beginners to start with.
At this point, I would only recommend Grayscale Bitcoin Trust if you’d like to invest in a Bitcoin index fund with your retirement plans. All other options, e.g. Coinbase index fund, Bitwise Bitcoin fund, VanEck SolidX Bitcoin Trust ETF, either require you to be an accredited investor or have requirement of high minimum investment. (Go for it if you are an accredited investor.)
Grayscale Bitcoin Trust is a Bitcoin trust fund whose shares are registered with SEC and can be traded publicly. Its $GBTC shares are traded on the OTCQX, an over-the-counter market. It’s easily accessible (can be traded via most brokerages, e.g. Robinhood, TD Ameritrade) with low barrier of entry (no minimum investment required).
How to start
In most 401k plans, there are options to open a self-directed brokerage account. (You can contact directly your company’s 401k provider, e.g. Vanguard, Merrill Lynch, etc.) Once it is opened, you can then buy $GBTC there. If your company’s 401k provider is not flexible enough, you could roll over your 401k funds to self-directed IRA providers (pre-tax 401k to traditional IRA; Roth/after-tax 401k to Roth IRA) and trade over there.
- Easy & quick setup.
- No hassle storing and securing your bitcoin.
- Easily accessible through most existing financial service providers.
- NOT your keys, NOT your bitcoin: You don’t hold your own bitcoin, but rather the index fund does. You always have counter-party risk from these index funds. In addition, your investment will increase the centralization of Bitcoin, which is bad for the Bitcoin ecosystem.
- Exorbitant fee: e.g. 2% annual fee for $GBTC and similar high fees for others.
- Restricted trading windows: $GBTC is traded following the regular trading hours of US stock market( from 9:30 a.m. to 4 p.m. Eastern time on weekdays).
- Wild premium: $GBTC is not an ETF and does not closely follow the price of underlying bitcoin holdings. Its premium, although better since 2019, can still vary between 1 and 1.45, which results in unexpected wider movement during market swings.
Bitcoin IRA Custodian
The next option is to use a Bitcoin IRA custodian. This will allow you to buy/sell/hold bitcoin in your IRA accounts.
How to start
The process is very similar to opening an IRA account.
- Open an IRA account with a Bitcoin IRA custodian, e.g. BitcoinIRA.
- Roll over funds from your 401k or IRA into this IRA account.
- After that, you will be able to buy/sell/hold bitcoin there.
- Closely tracking Bitcoin price performance: Now that your portfolio performance is closely following Bitcoin’s performance, there is no wild premium on it.
- Earn interests on your bitcoin: BitcoinIRA recently partnered with Genesis Capital to offer interest on bitcoin you hold in their IRA accounts.
- NOT your key, NOT your bitcoin: You don’t hold your own bitcoin, but rather the Bitcoin IRA custodian does.
- Exorbitant fee: As some Bitcoiners noticed, these service providers not only charge (percentile-based) high upfront setup fees but also nontrivial (percentile-based) maintenance/storage/transaction fees during your investment period. (As of Feb 2020.)
Self-Directed IRA With Self-Owned Bitcoin Wallet (most recommended by me)
My personally most recommended solution is to set up a self-directed IRA to hold bitcoin in a cold Bitcoin wallet. However, this approach is the most complex with the most expensive upfront cost (but will benefit you in the long run).
How it works
As shown in the diagram above, you own a self-directed IRA account, which has the flexibility to invest IRA funds into a LLC created and solely owned by you. Once the IRA funds are invested into the LLC, the USD funds are deposited in the business bank accounts owned by the LLC. You can then move $USD funds into the LLC-owned business trading accounts in a crypto exchange to buy/sell bitcoin.
NOTE: John McCabe commented that in CA, a Trust might be a cheaper option since you pay $800 annual fee to government for LLC. In other states, a LLC is usually cheaper.
The bitcoin in the crypto exchange can now be deposited into the Bitcoin cold wallets owned by the LLC for long-term hodling.
The bitcoin owned by the LLC could possibly earn interest with Bitcoin interest accounts, e.g. BlockFi. However, be aware that many of these Bitcoin interest platforms have only existed for a short time and haven’t built up a reputation. There is always a counter-party risk in which platforms can default in the future.
How to start
- Apply for a self-directed IRA account, e.g. Madison Trust, Entrust Group, etc. (Most of paperworks will be done by them.)
- Roll over funds to this account from your 401K or other IRAs.
- Create a LLC solely owned and managed by you, which will be only used to invest your self-directed IRA funds. (IRA providers will usually facilitate this process.)
- Open a business bank account for the LLC. (Most banks seem to be okay with this; however, some Bitcoiners have complained about being turned away from Chase as of Feb 2020.)
- Authorize the investment of IRA funds from the self-directed IRA to the LLC you manage and deposit the funds into the LLC bank account.
- Open a business trading account with a crypto exchange. (My experience with River Financial is the best, Kraken next. Some Bitcoiners had good experience with Binance US too. As of Coinbase, it took me several months to open a business account as of late 2018.)
- Once the business trading account is approved, you should be able to connect it with the LLC bank account and start buying bitcoin.
- IMPORTANT Withdraw your bitcoin into a Bitcoin wallet owned by yourself. (Starting with Ledger, Trezor, but possibly use multi-sig and cold wallets once you’ve learned more and gained more confidence with Bitcoin.)
- (Optional) In case you are not satisfied with just holding, you can try earning interests on your bitcoin with BlockFi. WARNING: these interest accounts do not have a long track record. The best way to use it is to try a tiny amount. Always keep in mind once you move your bitcoin to those interest accounts, you DON’T have direct control of your bitcoin any more.
During the entire lifetime of this above setup, please DON’T mix the funds/bitcoin owned by the IRA/LLC with your other personal investments. This can cause a lot of trouble, which might not be easy to fix. Please consult with an appropriate tax or financial professional before taking this approach.
- YOUR KEYS, YOUR BITCOIN: You have direct control of your bitcoin.
- 24/7/365 liquidity: You can buy/sell Bitcoin anytime.
- Flexibility: You have freedom choosing storage, exchanges, interest accounts and many other services.
- Happy side benefit: You can own other assets under this IRA, e.g. gold, foreign assets, real estate, etc.
- Cheap maintenance cost over the long time horizon: You pay a flat fee (hundreds of dollars per year) for maintaining IRA, LLC and Bitcoin storage. It’s much cheaper when your Bitcoin wealth grows bigger over the long run.
- Relatively expensive upfront setup cost: Expect $1,000~$1,500 setup fee varying by states (as of Feb 2020).
- Much longer setup process: At least one month. (Breakdown: 3-day IRA setup, 1-week LLC setup, 1-day bank setup, 1-week 401k/IRA rollover, 1-month+ business crypto exchange account, 1–week investment authorization from IRA to LLC) I would like to highlight River Financial which helped me set up a business crypto trading account within HOURS as of Jan 2020.
- The setup is much more complex, which requires a lot of patience and study.
About investing Bitcoin in Trust: https://river.com/learn/investing-bitcoin-in-trust/
Now that we finished introductions to all three investment approaches, let’s reexamine the table above. As you may see, there is no best solution in all metrics; However, hopefully this guide will help you choose the one that is most suitable for you.
Personally I recommend and use self-directed IRA with self-owned Bitcoin wallets from both a Bitcoin ethos perspective and a cost perspective: owning your own bitcoin is important for the Bitcoin ecosystem and maintaining your own monetary sovereignty. It prevents any third party from messing up your fortune especially if you plan to hodl it for decades. It might also be the cheapest solution to manage your Bitcoin wealth for the long time horizon.
Bitcoin index funds can be useful when you can’t move your money into a self-directed IRA. (E.g. some company-sponsored retirement plans might restrict 401k rollovers while an employees is still employed at the company.)
NEXT STEP: This article is the first in my Bitcoin Retirement series. I am planning to create an open-source coverage on Bitcoin investing in pension / retirement plans across nations, institutions and jurisdictions. Please let me know if you are familiar with the setup in places other than the US. Happy to collaborate.
Request For Comments
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Special thanks to @neverdidanything, Zev Mintz for their huge contributions to this article. Thanks Jimbo, BTCKitty, Alexander Leishman, Miles Suter, Steve Lee, Jeffrey Czyz, Erich Lin, Sid Ramesh for your valuable comments!
- Crypto-friendly self-directed IRA providers: Madison Trust, Entrust Group, KeyKeeper IRA, etc.
- LLC Registration: self-directed IRA providers usually partner with facilitating companies, e.g. Broad Financial.
- Crypto-friendly business bank accounts: Wells Fargo, Silvergate Bank, Signature Bank, etc.
- Bitcoin exchanges with good business accounts: River Financial, Kraken, Binance US, Coinbase.
- Bitcoin wallets: Ledger, Trezor, Casa, Nodl, Coldcard
- Bitcoin interest accounts: BlockFi
- Personal Use: Fold for Bitcoin rewards