This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult a tax, legal, and/or CPA before engaging in any transaction.
Bitcoin as a retirement investment offers wealth-building opportunities. Using a Solo 401k or Roth Solo 401k retirement account to invest in cryptocurrencies like Bitcoin, Ethereum, and many others, greatly reduces your tax liabilities while potentially earning exponential growth.
Why Invest in Bitcoin with a Roth Retirement Plan?
Bitcoin and other cryptocurrencies offer a variety of ways to exploit this fast-emerging new technology that has made its way around the world in a few short years (Bitcoin first appeared in 2009). You could be a day-trader making money from the price differences that occur among the many different cryptocurrencies (Bitcoin, Ethereum, Litecoin, and more) or you can choose one and hold it until you decide to take a profit in a few months or longer.
There are also other ways such as mining your own Bitcoin or setting up a business that accepts crypto as payment for goods and services. One thing that each of those methods has in common is that they will all owe taxes on either short or long-term capital gains.
The method that you want to look at carefully is holding Bitcoin as a retirement investment in a Roth Solo 401k account. The surge of new investors has great expectations for extraordinary growth in the very near as well as long-term future. Investors that hold Bitcoin and other cryptos in a Roth Solo 401k do not pay capital gains taxes upon withdrawing money from their accounts after the age of 59 and a half. Not paying taxes can easily add 20% or more to your gains. It is a secret to keeping more of your wealth.
#1 Diversification
Bitcoin and other cybercurrencies are the most exciting new investment to become available in a lifetime. Today could very well be the best opportunity you have to add Bitcoin as a retirement investment.
Solo 401k retirement accounts offer investors the ability to diversify beyond Wall Street stocks and bonds into alternative investments. Real estate has long been a darling alternative investment offering multiple paths of divestment that include rental houses, mortgage notes, tax liens, etc. Investing in private businesses is another option along with gold and other opportunities that creative investors have discovered.
Very few, if any, stoic corporate 401k accounts allow investing in Bitcoin or other cryptocurrencies. These corporate administered 401k accounts are notoriously known for limiting what individuals can invest in. Government guidance insists they protect unsophisticated investors from anything other than low-risk choices (if you consider stocks and bonds to be low risk). Although Bitcoin and other cryptocurrencies have created tens of thousands of millionaires, the-powers-that-be still rates Bitcoin as a high-risk alternative investment.
Nabers Group does not try to influence what alternative investments you make but we also don’t get in the way of how you decide to diversify. However, the crypto veterans at Nabers Group began investing in bitcoin in early 2013. We expected the investment would pay off so we decided to put some of our money into crypto via our Roth Solo 401k funds. Because Roth 401k funds are “after-tax” dollars, our growth and gains will be tax-free whenever we’re ready to cash out and take our distribution at retirement age.
With their long-term outlook, Solo 401ks, Roth Solo 401ks, and self-directed IRAs are excellent vehicles for investments that hold major potential on the scale of decades. These may help to protect retirement accounts in the event of a major market downturn today or other tumultuous activity in the future.
#2 Potential for High Returns
Some might consider Bitcoin as too high of a risk to be a safe investment, but the earnings so far have been of such a magnitude that the Internal Revenue Service issued a special notice in 2014 concerning how Bitcoin and other cryptos will be considered for tax purposes (IRS Notice 2014-21.1).
What is the future of Bitcoin as a retirement investment? The value of Bitcoins has a lot to do with scarcity. In fact, it has a lot to do with absolute scarcity. Fiat currencies such as US Dollars have no scarcity. Governments print more fiat currency whenever they want. Governments print more money to intentionally create inflation. Governments that borrow money cause inflation because their debt will be repaid with inflated money that has less value.
On the other hand, Bitcoin has absolute scarcity. The total number of Bitcoins will never exceed 21 million because that limit is written in Bitcoin’s source code and enforced by network nodes. Twenty-one million is the maximum number of Bitcoins that will ever exist.
Will Bitcoin displace fiat currencies? El Salvador made history in September 2021 by becoming the first country in the world to make Bitcoin an official currency alongside the U.S. dollar. Low-income countries have long suffered because their currencies are weak and extremely vulnerable to market changes and that triggers rampant inflation. The Panama National Assembly is currently considering a bill to include cryptocurrency as legal tender in their country.
Other countries such as the central banks of Honduras and Guatemala are exploring ways to include digital currencies that enable global transactions in ways that are less susceptible to inflation of small national currencies. Another benefit is attracting international business investment through a non-inflationary currency. Other countries looking at these possible advantages of crypto include Tonga, Turkey, and Bolivia.
However, bitcoin as a retirement investment might not be appropriate for all investors. Especially those with a short-term investment/retirement horizon. Bitcoin is still a new technology experiencing large swings in value as it seeks its place in the financial system. Recently, it was valued below $34,000 in late January 2022 after having hit a high of over $68,000 in November 2021. Despite the volatility and recent slumping price, many experts still say Bitcoin is on its way to passing the $100,000 mark, though with varying opinions on exactly when that will happen. A recent study by Deutsche Bank found that about a quarter of Bitcoin investors believe Bitcoin prices will be over $110,000 in five years.
If you are interested in looking at the history of Bitcoin earnings, you can work through multiple scenarios and time periods using this Bitcoin return calculator. As with any investment, history cannot predict the future. This calculator is for informational or research purposes only. Do your due diligence.
#3 Potential Tax Advantages of Bitcoin as a Retirement Investment
Although the cryptocurrency market is still in its infancy, many investors believe that bitcoin and the technology behind it, blockchain, will reshape the global financial markets. From an investment standpoint, Bitcoin as a retirement investment could see its main benefit as a long-term investment in a new asset category.
If you are open to taking a little risk now with the possibility of large returns in the future that come with a lifetime of serious tax savings, Bitcoin as a retirement investment in a Roth Solo 401k could be your answer. Using a Roth Solo 401k to buy bitcoin instead of personal savings makes perfect sense from a tax standpoint.
Like any other 401k, a Roth Solo 401k is simply an IRS-approved retirement account known as a one participant 401k plan that includes the Roth option. The Nabers Group Roth Solo 401k allows you to invest and store crypto using the same standards as if you were investing in any other asset class, along with including the Roth tax benefits.
The IRS has clearly established that crypto is treated the same as any other investment for short and long-term gains. That means cryptocurrency is subject to capital gains tax unless the Roth Solo 401k method is used. Like other Roth accounts, contributions come from income that’s already been taxed. Instead of an upfront tax break, any withdrawals from a Roth Solo 401k made after age 59 ½ are tax-free, as long as you make them at least five years after you began making contributions. Also important is that no income limits prevent high earners from making contributions.
Because the Roth Solo 401k pays taxes before contributions but not on the earnings, it is highly beneficial for investments that are expecting to have strong future earnings that they do not want to be taxed.
The Solo 401k is also a good alternative for Bitcoin as a retirement investment. Both the Solo 401k and Roth Solo 401k can invest in real estate, private placements, and other alternative investments. Both have the highest annual contribution limits ($61,000 plus a $6,500 catch-up contribution for those 50 or older in 2022). A contribution limit that can double if both spouses are part of the business sponsoring the Solo 401k. Another unique benefit is that you can borrow up to the lesser of 50% of the plan value or $50,000 and repay the loan to yourself along with interest.
You can also work for another company to take employer contributions from that employer and still have a Solo 401k or Roth Solo 401k. And the benefits continue such as being exempt from taxation on debt leveraged real estate investments. Setting up a Solo 401k that includes a Roth Solo 401k is easy.
The Roth Solo 401k: Everything You Need to Know
Buying crypto in a self-directed IRA is another option worth considering. This account also allows for alternative investments such as real estate, private placements, and cryptocurrency. The annual contribution limit for 2022 is $6,000 if you’re younger than age 50. People age 50 and older can add an extra $1,000 per year as a “catch-up” contribution, bringing the maximum IRA contribution to $7,000. Contributions can be taxed deferred the same as a Solo 401k or after-tax contributions with tax-free earnings the same as a Roth Solo 401k. You can contribute to both a self-directed IRA while contributing to another employer’s 401k. However, some 401k benefits such as loans are not available with an IRA.
#4 Potential Hedge Against Inflation
Inflation is the decline of a currency’s purchasing power over time. It means that the same unit of currency used to purchase a basket of items today will purchase fewer items in the future. The effect is similar for investment assets such as stocks and bonds. Stocks and bonds decline in value in response to inflation. Compared to 2018, the stock market asset declines in 2021 and 2022 look to be tracking at double the pace. Where they will bottom out is impossible to forecast and is dependent on if the Federal Reserve can guide the economy to a soft landing from its current state.
Inflation is all about governments printing more fiat money to pay their debts from yesterday. The newly printed fiat money has less value and requires more of it to pay for today’s purchases. Hence, interest rates go up to shrink the money supply and slow inflation. But individuals can’t print more money. People need a true store of value.
For an asset to be considered a store of value, it is expected to hold its purchasing power over time, meaning that it should either remain stable or increase in value. The main point of Bitcoin is to be a store of value. That starts with scarcity – a limited supply means that greater demand will likely push prices up. A store of value also requires that the market will value and accept the asset (accessibility). This is the stage that Bitcoin has been going through since its inception in 2009.
The other requirement for a store of value is durability – assets will continue to be in demand over time. This is what we are now learning about Bitcoin and why it is still considered an emerging asset.
Early investors are in the process of learning the value of Bitcoin as a hedge against inflation and its ability to store value over the long term.
#5 Short-Term/Long-Term Capital Gains Tax Savings
Because of short and long-term capital gains taxes, the taxation of cryptocurrency is not favorable for most investors. However, the use of Roth Solo 401k or Solo 401k retirement account to purchase Bitcoin as a retirement investment changes that. With a Roth Solo 401k, capital gains will never be taxed as long as withdrawals are made after retirement and according to the simple rules.
The Solo 401k and self-directed IRA provide immediate tax advantages by deferring income tax in the year the income is earned. The Solo 401k and self-directed IRA will pay income tax when withdrawn (but not capital gains) and for many people, this is a tax advantage because they are in a lower income tax bracket after retirement. Overall, these accounts allow Bitcoin as a retirement investment without capital gains tax.
Still, investing in crypto can be risky. While a Solo 401k or Roth Solo 401k will not reduce that risk, it can maximize your earnings by reducing or eliminating the tax. Do your due diligence and understand the crypto market for the best results.
Risks of Investing in Bitcoin as a Retirement Investment
Cryptocurrency is new enough that many unknowns remain. One overarching consideration should be that crypto is not part of a bank and is designed to be free from government control. You shouldn’t expect these institutions to step in if investments go wrong.
Although more and more businesses are using crypto to pay for goods and services, only a few countries recognize it as legal tender today. Crypto has a way to go before it can be considered a well-established alternative investment. A strong indication of this is that the price of Bitcoin can fluctuate by plus or minus 5% on a given day. That is far more volatile than most alternative investment assets. Due diligence based on an understanding of this new technology is the only reasonable way to proceed before investing.
How To Buy Crypto In A Retirement Account
Bitcoin as a retirement investment makes perfectly good sense for many investors. Especially those seeking alternative investments using a Solo 401k or Roth Solo 401k. These accounts are easily available to anyone wanting the highest IRS-approved contribution limits. Other benefits include the ability to borrow from your retirement account without paying early withdrawal penalties and fees. The Solo 401k or Roth Solo 401k also allows you to borrow outside money to finance your investments without having to pay Unrelated Debt Financed Income (UDFI) tax, which is required with an IRA.
You can start where you are, or you can rollover funds from another retirement account. The application will only take you about 10 minutes. After you submit your application, we’ll have your documents prepared and delivered to your private encrypted 401k document dashboard in just a couple of hours!
The Nabers Group team is here to help every step of the way. Click here to book a free call with one of our experts. Or go straight to opening your online account now!
External links
short or long-term capital gains
https://www.irs.gov/taxtopics/tc409
IRS Notice 2014-21.1
https://www.irs.gov/pub/irs-drop/n-14-21.pdf
cryptocurrency as legal tender
https://www.bloomberglinea.com/2022/03/21/panama-ponders-cryptocurrency-legislation/
Bitcoin prices will be over $110,000 in five years
Bitcoin return calculator
Roth Solo 401k is simply an IRS approved retirement account
https://www.forbes.com/advisor/retirement/solo-401k/
one participant 401k plan
https://www.irs.gov/retirement-plans/one-participant-401k-plans
