Individuals who use their retirement funds to make investments are discovering the advantages of self-directing. By establishing a Solo Bitcoin 401k, you can diversify your retirement portfolio, which may protect your assets when the market is down. According to Adam Bergman, President of IRA Financial and former tax attorney, many non-traditional investments are tangible assets, which offers psychological security. This is important during times of inflation, financial instability or political upheaval. While not a tangible asset, Bitcoin has gained confidence among many investors.
Millennials Confidence in Cryptocurrencies
According to a recent eToro survey, Millennials have more faith in Cryptocurrency exchanges than they do in the US Stock Market. Provoke Insights was commissioned for the survey of 1,000 online investors which mirrored the US Census for geography and age. The study showed that 43% of the Millennial online traders had a more favorable opinion about Crypto exchanges. Further, 93% of crypto traders (and 71% that don’t trade cryptos) said they would invest more (or start investing) in cryptos if offered by traditional financial institutions.
Here at IRA Financial, we were most interested in the number of Millennials who wanted to allocate 401k funds in cryptos. 74% of crypto traders and 45% of non-traders expressed an interest in investing in cryptos in a 401k plan. Guy Hirsch, Managing Director of eToro US said:
“While there is clearly a demand for crypto assets in 401k portfolios, there are a number of regulatory and market changes that need to occur before it becomes a mainstream offering.”
While not in the mainstream just yet, there are providers, such as IRA Financial, that allow for cryptocurrency investing in a 401k plan. Moreover, IRA Financial is one of the few Solo 401k providers that offer, and are knowledgeable about, Bitcoin 401k plans (and other crypto 401k plans). Here, we’ll talk about the rules of investing 401k funds in Bitcoin and other cryptocurrencies, as well as the benefits of doing so. Be forewarned that cryptos are relatively in its infancy and is a highly risky investment, although smart investors can still profit from them.
What is Bitcoin and Other Cryptocurrencies?
To note, I’ll be using the terms Bitcoin and cryptocurrencies interchangeably. Cryptocurrencies (or cryptos) are all the available digital currencies. Bitcoin is the oldest and most popular type of crypto today.
Cryptocurrency is a form of digital money that is designed to be secure and, in some cases, anonymous. It is a currency associated with the Internet that uses cryptography, the process of converting legible information into an almost uncrackable code, to track purchases and transfers.
Unlike fiat, cryptos are not regulated by the government. No one is out there printing digital money. Instead, so-called “miners” are using computers to solve complicated equations to unlock more cryptos. However, like digging for gold, there is a finite amount of cryptos to be had. A “blockchain”, or digital ledger, keeps track of all transactions so there can be no manipulation.
Can You Invest in Bitcoin with a Retirement Account?
Back in 2014, the IRS issued Notice 2014-21, which stated, “virtual currency is treated as property for U.S. federal tax purposes” and “general tax principles that apply to property transactions apply to transactions using virtual currency.” This means that Bitcoin and other cryptos are treated as a capital asset, such as stocks and real estate. Therefore, as long as your plan allows it, you can use your retirement plan to invest in Bitcoin.
The two most popular types of accounts that allow for alternative investing are the Solo 401k and Self-Directed IRA. If you are self-employed, the Solo 401k is generally the better option to invest with. It allows for higher annual contributions than an IRA, has a Roth option and allows you to borrow funds whenever you wish.
Investing Using a Solo Bitcoin 401k
First off, to be eligible to open a Solo Bitcoin 401k, two things must be present. You must have self-employed income and if you have your own business, there must not be any other full-time employees, other than a spouse or partner. Assuming these conditions are met, you can then open and fund a Solo 401k for Bitcoin investing with IRA Financial.
The next question is why invest in Bitcoin and other cryptocurrencies with a Solo 401k ? The main reason is that the account as tax-advantaged. This means that all gains on the investment are tax-deferred. Moreover, if you have a Roth Solo 401k , all distributions during retirement are tax-free. Also, investing with a Bitcoin 401k helps better diversity your portfolio, protect your funds from inflation and the ability to earn a larger rate of return than if you invested in the Stock Market.
Tips for Using a Solo 401k for Bitcoin/Crypto Investing
- Make sure you only use retirement funds to purchase Bitcoin and other cryptocurrencies.
- Make sure the cryptocurrency exchange account is opened in the name of the 401k plan.
- Do not purchase or sell the cryptocurrencies to yourself or any other disqualified person.
- Be sure to link your Solo 401k plan and not a personal account to the cryptocurrency exchange account.
- Do not hold the cryptocurrencies in a wallet that also holds cryptocurrencies owned by the 401k plan participant personally or any disqualified person.
- All income/gains or losses should flow from the Bitcoin/cryptocurrency investment directly to the Bitcoin 401k plan.
- Work directly with a tax professional who has expertise in the IRS prohibited transaction rules.
- Understand and weigh the risks and rewards involved in using a Solo 401k to invest in cryptocurrencies.
Since Facebook has revealed plans for its own crypto coin called Libra, set to be released in 2020, Bitcoin has surged over the past few weeks, reaching $11,000. This is the highest price for Bitcoin in 15 months. Prior to Facebook announcing its cryptocurrency project, Bitcoin had dropped as low as $6,000 earlier this year.
What does this mean for retirement investors? While you may want to jump back on the Bitcoin/cryptocurrency bandwagon, consider the facts: Bitcoin and other cryptocurrencies are a risky investment. However, you can take a cue from Millennials and educate yourself on digital currency as well as blockchain technology. This may very well be the future of our economy.
Get in Touch
To learn more about the Bitcoin 401k and how to use retirement funds to invest in cryptocurrencies, please contact us @ 800-472-0646.