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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.

Should you consider alternative investments for your retirement funds?

Consider alternative investments for retirement funds

You’re at a social gathering and you mention, I put some of my retirement funds in cryptocurrency. What type of response would you get from your circle of friends and acquaintances?

My bet...not a positive one.

It's Only A Fad

Is digital currency and money a fad and another madness of crowds? It truly depends upon who you ask. And, what's the use case for economies where money and the banking system just work?

I encourage you to do a deep dive and form your own opinions. Generally speaking, following the herd rarely turns out successful with investing. You'll tend to get in late, buy high, and sell low...only after a lot of sleepless nights.

Macroeconomic Drivers

Right now, many macro-level economic facts are ever-present in our daily lives. Facts are indisputable statements. And, they do exist regardless of what people believe. As an example, how sure are you that the sun will rise tomorrow? I think you get the point. It's a choice on what story you want to trust to satisfy your own needs.

When it comes to emerging technology and investing, the question is, why and when? That's the research you'll need to do to form your own opinions. Yes, it takes time, and it can be challenging to sort through all the data and opinions.

If you were able to travel forward in time 20, 40, or even 60 years, what would life look like? Ok, that was a joke...maybe. If you've studied the past, you'd know there have been many unpredictable events in the last 100 years. What makes anyone think the next 100 years will not be the same? Since you can't predict the fringe events, it's about looking for the likely events.

For example, think about what the future looks like concerning particular national and global facts:

  • Rising national and global debts

  • Longevity of USD as the global reserve currency

  • Economic boom and bust cycles

  • Polarized governments and the inability to make critical policy decisions

  • Tools to effectively respond to economic downturns

  • History of money and the digitization of assets

  • Political structures of geographies and countries

  • Human impact on the environment

  • Entitlement programs

  • Growing separation between the rich and poor

  • Trends in healthcare and education

  • Efficient cross-border money transfers

  • Inflation cycles

  • Terrorist attacks and other acts of violence and sabotage

  • Personal sovereignty and ownership of data

  • Privacy

  • Insert your own...there are many, many more

These issues aren't fringe events or exceptions; they are real. If multiple items need to be addressed at the same time, by one or various countries, it could cause significant instability in the global financial markets.

The above points aren't a partisan or political discussion; they are issues and facts ever-present in today's economic and social environments. The current trend of how we resolve our problems give rise for the automatic selection of alternatives for us. Remember, it's all about choice.

Consideration

I am making a case to consider macroeconomic trends and their impact on society as it relates to your hard-earned dollars. Digital money is real today. When you log into your bank account and see a number on the screen, it's virtual and digital right now. The question is, where is all this going?

Here's a simple example. The basis of the US banking system is a fractional reserve system. Let's talk about your mortgage relating to that statement. Hypothetically, what if the mortgage company said, I need for you to pay off your entire remaining balance now right now, would you be able to? The same is true of banks. They lend money they do not have, and the government promises solvency. Who called the shots during the last US financial crisis, printed money, increase the deficit, and bailed out to big to fail? These are historical facts and something you can use to your advantage. The past is always a great predictor of the future, and history does repeat.

Are We All Doomed?

No, nothing of the sort. Just tonight, I was having a conversation on what each of us can do to help modify the human condition at the highest positional levels in our countries. Sure, some are called into service to work with the political infrastructure directly. Most of us are not, but we still can choose.

If you believe in a democratic society, people still have the power. Voicing your beliefs is also demonstrated on how you spend your money and where you invest your monies. There are many ways to be in service of changing the human condition for the betterment of your country.

What's Next?

How do you use this type of information to promote positive change as well as personal gain using the emerging industry of digital currency and money? Simple! You'll need to use your left AND right brain and form your own herd.

Your Digital Money Herd is a four-part series on retirement investing in cryptocurrency. Continue with the series by reading the second article, Buying cryptocurrency in your retirement account. There, we'll talk about some options on how to invest retirement funds in cryptocurrency.

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.