Buying cryptocurrency in your retirement account

Buying crypto currency in your retirement account

This article discusses the self-directed, qualified retirement plans with checkbook control used for direct investment in crypto coins/tokens. These vehicles are called the IRA, LLC and Solo/Individual IRA.

In Part One of this series, I wrote about the macro themes on considering cryptocurrency for investment. This article extends upon that discussion and shares information about the specific qualified retirement plans you can use to invest in cryptocurrencies.

Background

If you're wondering how to buy Bitcoin or the Alts in your IRA or 401k, call your retirement plan administrator to see if it's possible. My guess is it's highly unlikely your retirement plan allows for direct purchases. To be specific, direct purchases mean you have the ability to buy coins/tokens and control the offline wallet. There are progressive services out there like Robinhood, but they don't offer retirement accounts, and you'll still need the ability to control your keys. Remember, not your keys, not your coins.

We're going to discuss the preparation for using your retirement monies to buy cryptocurrency through the tax-free investment constructs of an IRA or 401k. If you lack the knowledge of these retirement terms and how the plans work, you MUST consult professional help. The setup can be very complicated, and if done incorrectly, you could trigger a sizable taxable event.

Basic Overview

After doing your research and consulting professional help, if this is a direction you want to pursue, there are two self-directed options to consider. I'll start with the more common one first, the IRA, LLC, then discuss the Solo 401k.

Keep in mind; you'll already need funds in a qualified retirement account when setting up one of these crypto-friendly plans. There is one exception to this I'll discuss below.

Ready to enter the vortex of investing retirement funds in crypto?? Here we go!

IRA, LLC / Self-Directed IRA LLC

You'll commonly see this plan listed as an IRA, LLC or Self-Directed IRA LLC. Both of them are accurate and mean the same. It's a self-directed, qualified retirement plan that anybody can setup. Overall, there are two components: a Self-Directed IRA and an LLC. Each serves a fundamental purpose, and the IRA owns the LLC. One benefit of this plan is the ability to invest in alternative investments like real estate, precious metals, cryptocurrency, and others as long as it's allowed under IRS regulations. You also gain checkbook control over the retirement funds for additional flexibility.

The LLC is manager managed meaning you'll be named as the manager and have full control over managing the LLC, the checking account, and investments.

There are two essential components of setting up this type of plan:

  • Creating and funding the IRA, LLC

  • Selecting the IRA Custodian

Creating and Funding the IRA, LLC

The process can be a bit complicated and generally consists of the following steps:

  1. Create the IRA, LLC, and EIN

  2. Fund the IRA with monies from your qualified retirement plan

  3. Open a checking account in the LLC's name

  4. Transfer funds from the IRA into the LLC checking account

  5. Open an account with a cryptocurrency exchange that allows for business or institutional accounts

  6. Buy cryptocurrency and store it in your own wallet!

In the fourth article, I will go into much greater detail on each of these steps for creating an IRA, LLC.

Selecting the IRA Custodian

It's necessary to use a IRA Custodian with your IRA. These companies are regulated and abide by U.S. Code Title 26 Section 408.

The main reason for the IRA custodian to exist is for setup, support, administrative, and compliance purposes as it relates to your IRA. There are an initial setup fee and the yearly charges of around $200-250.

Solo 401k / Individual 401k / Self-Directed 401k

You'll commonly see this plan listed as a Solo 401k, Individual 401k, or Self-Directed 401k. All of them are accurate and mean the same. This plan can only be set up for owner-only businesses or those owners with part-time employees. Anybody can create a company to utilize this plan, but it wouldn't make sense unless you were getting paid a salary. You'll make contributions to the Solo 401k based on what you make.

The Solo 401k has the same benefits as the IRA, LLC with a few more advantages I'll discuss below.

Management of the Solo 401k is by the trustee of the trust meaning you'll be named as the trustee and have full control over managing the trust, the checking account, and investments.

There are two essential components of setting up this type of plan:

  • Creating and funding the Solo 401k

  • Selecting the plan provider

Creating and Funding the Solo 401k

The process can be a bit complicated and generally consists of the following steps:

  1. Create an IRS approved Solo 401k plan

  2. Create a trust, with you as the trustee, to manage the trust and investments

  3. Open a checking account in the name of the trust

  4. Fund the Solo 401k plan using monies from your qualified retirement account

  5. Funding for the Solo 401k plan has one exception; an initial tax-deductible contribution from your company is eligible as the funding source

  6. Open an account with a cryptocurrency exchange that allows for trust accounts

  7. Buy cryptocurrency and store it in your own wallet!

In the third article, I will go into much greater detail on each of these steps for creating a Solo 401k.

Selecting the Plan Provider

It's necessary to use a plan provider with your Solo 401k.

The main reason for the plan provider to exist is for 401k setup, support, administrative, and compliance purposes as it relates to your Solo 401k. There are an initial setup fee and a yearly charge of around $100-150.

Why Choose a Solo 401k?

Generally, both plans above accomplish the same goals: the ability to make alternative investments and establish checkbook control.

If you're eligible for a Solo 401k, you'll get the following additional benefits:

  • Contribute up to $62,000 (2019)

  • Tax-free loan option up to $50,000 or 50% of your account value

  • Make a real estate investments using non-recourse funds without triggering the Unrelated Debt-Financed Income Rules and the Unrelated Business Taxable Income (UBTI or UBIT) tax

  • No cost of creating an LLC

  • Better creditor protection in case of a bankruptcy

  • Easy administration since the IRS only requires Form 5500-EZ on plan assets over $250,000

Summary

This article is a high-level overview of the IRA, LLC and Solo 401k plans. In the next two articles, I'll go into much greater detail on each plan and share some of my learnings.

Your Digital Money Herd is a four-part series on retirement investing in cryptocurrency. Continue with the series by reading the third article, Setting up a Solo 401k (coming soon). There, we'll talk about details and my learning when setting up a Solo 401k to invest in cryptocurrencies.

Please share your thoughts, concerns, and comments below!

Disclaimer: This article does not contain investment advice and has educational value only. Moreover, the author may have a financial stake in securities mentioned in this article. As a result, the opinions presented in the article above are never intended to provide advice for any investment.

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