IRA Financial Blog

Bitcoin 401k Gains Trust Among Millennials

Bitcoin 401k

Investors are discovering the many advantages of self-directing their own future as it pertains to investing strategy. A cutting-edge option is our Solo Bitcoin 401(k), one tool that can be used to diversify retirement portfolios. Historically, diversification is one way a savvy investor protects their assets in more uncertain times. According to Adam Bergman (tax attorney and founder of IRA Financial), “many non-traditional investments, such as real estate and gold, are tangible assets, which offers psychological security to many investors. This is important during times of inflation, financial instability or political upheaval.” While not a tangible asset, digital assets, including Bitcoin, Ethereum, and a bevy of others, has gained confidence among many younger investors, especially during the COVID-19 pandemic.

Millennials’ Confidence in Cryptocurrencies

According to an October 2022 survey taken by Charles Schwab, 46% of Gen Z and 45% of Millennials said they “wish” they could invest in cryptocurrencies as part of their retirement planning. This number continues to grow as more and more users are using and learning about various cryptocurrency markets and more importantly, the rising legitimacy of some cryptocurrencies.

Millennials (anyone born between the 1980s and mid-1990s) and Gen Z (anyone born between the mid-1990s and the early-2010s) answered the survey in stark contrast to older generations (such as Gen X or the Baby Boomers).  Those born anywhere between the mid-1940s to late 1970s voiced little desire to involve cryptocurrencies in their retirement plans, with just 31% indicating an interest in involving cryptocurrencies into their own 401(k), and even fewer (11%) being current investors in the asset class. 

Crypto investment options in an IRA or 401(k) are legitimate and there is a growing sense of excitement surrounding the concept. That being said, investors’ general trust of cryptos as an asset class suitable for one’s retirement account remains lacking. This is especially true following the collapse of FTX, BlockFi, Voyager, and Celcius in late 2022.

While not in the mainstream, some providers, including the financial experts at IRA Financial, allow cryptocurrency investing in a 401(k) plan or a Self-Directed IRA. Moreover, IRA Financial is one of the few Solo 401(k) providers able to work in cryptocurrencies. Our expertise in Bitcoin 401(k) plans and other Crypto 401(k) plans is second to none.

Below, we will talk about the relevant rules when it comes to investing 401(k) funds in Bitcoin and other cryptocurrencies, as well as the benefits of doing so. Be forewarned that cryptos are relatively new and remain a highly risky investment, although smart investors can still profit from them.

What is Bitcoin and Other Cryptocurrencies?

Bitcoin and cryptocurrencies are terms that can be used interchangeably in most contexts. When I use the term “Cryptocurrencies” (“Cryptos”), I mean to include all available digital currencies, including but not limited to Bitcoin and Ethereum. Bitcoin is the oldest, most popular, and most valuable type of Crypto today.

In essence, every Cryptocurrency is a form of digital money designed to be secure and, in some cases, anonymous. It is a digital currency associated with technology, and using cryptography, the process of converting legible information into an uncrackable code, purchases and sales are tracked accurately and privately.

Unlike fiat currencies, cryptos are not regulated by any government or any central reserve. No one is printing physical versions of digital money. Instead, so-called “miners” are using computers to solve complicated equations to unlock more crypto tokens. However, like digging for gold, there is a finite amount of cryptos to be had. A “blockchain,” or digital ledger, manages every transaction in an encrypted and secure form.

Can You Invest in Bitcoin with a Retirement Account?

In 2014, the IRS issued a rule notice, one that clearly stated that “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.” In essence, this means that Bitcoin and other Cryptos are treated in the same way as any other capital asset, such as stocks and real estate. Therefore, if your plan allows it, you can use your retirement plan to invest in Bitcoin or any other Crypto.  The primary advantage of using an IRA or 401(k) to invest in cryptos is that all gains would go back to the IRA or 401(k) tax free.

The two most popular types of accounts that allow for alternative investing are the Solo 401(k) and the Self-Directed IRA. If you are self-employed, the Solo 401(k) is typically the best option for investors. It allows for higher annual contributions than a traditional IRA, has a Roth option and allows you to borrow funds whenever you wish.

What Type of Business Can Setup a Solo 401(k)?

Any U.S. based legal business. The IRS generally defines a business as an activity in which a profit motive is present and economic activity is involved. In other words, if you are self-employed and use a Schedule C to report income or expenses, you likely qualify for a Solo 401(k).  Note – if rental income on a Schedule E is your sole source of income, you will not be deemed a business as Schedule E is for passive real estate or interest income.

What type of retirement accounts can I use to fund a Solo 401(k)?

Any United States retirement account, except a Roth IRA, can be used to fund a Solo 401(k). This includes: IRA, SEP IRA, SIMPLE IRA, Solo 401(k), 401(k), Keogh, profit sharing plans, Rollover 403(b), 457(b), or defined benefit/cash balance plans.

Who will receive the most benefits from a Solo 401(k) Plan

The Solo 401(k) plan is unique and popular because it is designed for the small, owner/employee business. It’s a tax efficient and cost effective plan that offers all the benefits of a Self-Directed IRA plan, but comes with other benefits, including high contribution limits. There is also a $50,000 loan feature. And more. There are a plethora of features of the Solo 401(k) plan that makes it especially appropriate and popular among self-employed business owners.

What are the contribution limits for a Solo 401(k) Plan?

Both the employee and the employer are able to contribute to a Solo 401(k).

Employee Elective Deferrals: For 2023, up to $22,500 annually ($30,000 if age 50+), can be contributed by the participant through employee elective deferrals. These contributions can be up to 100% of the participant’s self-employment compensation.

Employer Profit Sharing Contributions: As an employer, an additional contribution of up to 20% of the participant’s self-employment compensation or 25% of their W-2 income may be made on an annual basis.

Annual Limit: In total, both contributions top out at $66,000 per year in 2023 (or $73,500 for persons at least age age 50).

Do I need to pay a custodian if I have a Solo 401(k) Plan?

No. The most significant cost benefit of the Solo 401(k) Plan is that it does not require the participant to hire a bank or trust company to serve as trustee. With the IRA Financial Solo 401(k) plan, the plan account can be opened at most local banks or financial institutions.  In addition, we work with Capital One Bank to help you open a Solo 401(k) account in minutes.

How do I buy Bitcoin in a Solo 401(k) Plan?

1.      Set-up a Solo 401(k) account at IRA Financial through our app.
2.      Move funds from your other retirement account to your new Self-Directed Solo 401(k), tax-free.
3.      Use Capital One or open a trust bank account at a bank of your choice.
4.      Open a crypto exchange of your choice in name of the Solo 401(k) or use the IRA Financial app to invest with Bitstamp.
5.      Transfer funds from Capital One to the exchange.
6.      Invest in cryptos without tax!

Can I hold Crypto Private Key for my Solo 401(k)?

When one owns cryptocurrencies, controlling the private key is vital to guaranteeing your ownership of the associated cryptocurrency. In essence, your private key unlocks the right for the crypto owner to control the associated cryptocurrencies and, thus, have the power to spend it. Consider it the same as a key to a traditional vault box rental at a traditional bank. Crypto wallets operate the same as a traditional wallet, generally to hold money and allow the owner to use it. In the crypto universe, wallets are essentially storage devices, a physical or digital medium for storing your crypto public and private keys. A cold storage wallet may be a USB drive holding both public and private keys.

A Tax Court recently considered the issue of whether a retirement account owner can hold their private keys on a cold wallet. In McNulty v. Commissioner, 157 T.C. No. 10 (November 18, 2021), the tax court ruled that an IRA owner cannot take personal possession of an IRA asset and cannot have unfettered control over any IRA asset. The McNulty case involved a taxpayer who used a Self-Directed IRA LLC to invest in precious metals and real estate. The tax court held that an IRA owner cannot take personal possession of an IRA asset and cannot have unfettered control over any IRA asset. While the case did not directly implicate cryptos, it is a reasonable extension of the holding that IRA or 401(k) owned cryptos on a cold wallet in one’s personal possession could be prohibited.  Some distinctions remain following this case:

  • McNulty focused on metals (not Cryptocurrencies), specifically on IRC Section 408(m), which clearly prohibits from personal holdings.
  • The case did not invoke the prohibited transaction rules under IRC 4975, instead relying on IRC 408(m), which implicates only metals.
  • When one buys Bitcoin or any other cryptocurrency, the public address of the coin is found on a blockchain. The blockchain provides accountability and transparency not just for investors, but also comes with reporting duties to the IRS.

Tips for Investing in a Bitcoin 401(k)

Only use retirement funds to purchase Bitcoin and other cryptocurrencies.

Consider the McNulty case if you plan on using a cold wallet to hold cryptos.

Open the Cryptocurrency Exchange Account in the name of your 401(k) plan.

Do not purchase or sell the cryptocurrencies to yourself or any other disqualified person.

Link your Solo 401(k) plan account (not a personal account) to the cryptocurrency exchange account.

Do not hold any personal cryptocurrencies in a wallet that also holds cryptocurrencies owned by the 401(k) plan participant personally or any disqualified person.

All income/gains or losses flow from the Bitcoin/cryptocurrency investment directly to the Bitcoin 401(k) plan.

Work directly with an experienced tax professional with expertise in IRS transaction rules.

Understand and weigh the risks and rewards involved in using a Solo 401(k) to invest in cryptocurrencies.

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