Bitcoin Investing In Retirement Plans (US Version)

TL;DR, there are three ways to invest in Bitcoin through retirement plans (ordered from highly recommended to least recommended):

Self-directed IRA with self-owned Bitcoin (BTC) storage
Bitcoin index funds
Bitcoin IRA custodian

The table above gives you a quick look of how each approach ranks in different metrics. Although I ranked them from highly recommended to least recommended, this article will introduce them ordered by the setup easiness from the easiest to the most complex. Please feel free to jump right into the section you are mostly interested in.

First things first, I refer to Bitcoin index funds as something that tracks Bitcoin’s price performance. While many index funds in stock market track a basket of underlying assets, most Bitcoin index funds track only Bitcoin. Bitcoin index funds are probably the easiest for beginners to start with.

At this point, I would only recommend Grayscale Bitcoin (BTC) Trust if you’d like to invest in a Bitcoin index fund with your retirement plans. All other options, e.g. Coinbase index fund, Bitwise Bitcoin (BTC) fund, VanEck SolidX Bitcoin Trust ETF, either require you to be an accredited investor or have requirement of high minimum investment. (Go for it if you are an accredited investor.)

Grayscale Bitcoin Trust is a Bitcoin trust fund whose shares are registered with SEC and can be traded publicly. Its $GBTC shares are traded on the OTCQX, an over-the-counter market. It’s easily accessible (can be traded via most brokerages, e.g. Robinhood, TD Ameritrade) with low barrier of entry (no minimum investment required).

How to start

In most 401k plans, there are options to open a self-directed brokerage account. (You can contact directly your company’s 401k provider, e.g. Vanguard, Merrill Lynch, etc.) Once it is opened, you can then buy $GBTC there. If your company’s 401k provider is not flexible enough, you could roll over your 401k funds to self-directed IRA providers (pre-tax 401k to traditional IRA; Roth/after-tax 401k to Roth IRA) and trade over there.

Pros

Easy & quick setup.
No hassle storing and securing your bitcoin.
Easily accessible through most existing financial service providers.

Cons

NOT your key, NOT your bitcoin: You don’t own bitcoin in your own Bitcoin (BTC) wallet. You always have counter-party risk from these index funds. In addition, your investment will increase the centralization of Bitcoin (BTC), which is bad for the Bitcoin (BTC) ecosystem.
Exorbitant fee: e.g. 2% annual fee for $GBTC and similar high fees for others.
Wild premium: $GBTC is not a ETF and does not closely follow the price of underlying bitcoin holdings. Its premium, although better since 2019, can still vary between 1 and 1.45, which results in unexpected wider movement during market swings.

$GBTC premium to underlying bitcoin holdings

The next option is to use a Bitcoin IRA custodian. This will allow you to buy/sell/hold bitcoin in your IRA accounts.

How to start

The process is very similar to opening a IRA account.

Open an IRA account with a Bitcoin (BTC) IRA custodian, e.g. BitcoinIRA.
Roll over funds from your 401k or IRA into this IRA account.
After that, you will be able to buy/sell/hold bitcoin there.

Pros

Closely tracking Bitcoin (BTC) price performance: Now that your portfolio performance is closely follow Bitcoin (BTC)’s performance, there is no wild premium on it.
Earn interests on your bitcoin: Bitcoin (BTC)IRA recently partnered with Genesis Capital to offer interests on bitcoin you hold in their IRA accounts.

Cons

NOT your key, NOT your bitcoin: You still don’t own bitcoin in your own Bitcoin (BTC) wallet. Your bitcoin are under the custody of Bitcoin (BTC) IRA custodian. You are still trusting them to do the right thing.
Exorbitant fee: As some Bitcoin (BTC)ers noticed, these service providers not only charge (percentile-based) high upfront setup fees but also nontrivial (percentile-based) maintenance/storage/transaction fee during your investment period. (As of Feb 2020.)

My personally most recommended solution is to set up a self-directed IRA to hold bitcoin in a cold Bitcoin wallet. However, this approach is the most complex with the most expensive upfront cost (but will benefit you in the long run).

How it works

Self-Directed IRA setup for Bitcoin investing

As shown in the diagram above, you own a self-directed IRA account, which has the flexibility to invest IRA funds into a LLC created and solely owned by you. Once the IRA funds is invested into the LLC, the $USD funds are deposited in the business bank accounts owned by the LLC. You can then move $USD funds into the LLC-owned business trading accounts in a crypto exchange to buy/sell bitcoin.

IMPORTANT: The bitcoin in the crypto exchange can be deposited / withdrawn from/to some Bitcoin cold wallets owned by the LLC for long-term hodling.

The bitcoin owned by LLC could possibly earn interests with Bitcoin interest accounts, e.g. BlockFi. However, be aware that many of these Bitcoin interest platform only existed for not long. There is always a counter-party risk in which the platform can default in the future.

How to start

Apply for a self-directed IRA account, e.g. Madison Trust, Entrust Group, etc. (Most of paperworks will be done by them.)
Roll over funds to this account from your 401K or other IRAs.
Create a LLC solely owned and managed by you, which will be only used to invest your self-directed IRA funds. (IRA providers will usually facilitate this process.)
Open a business bank account for the LLC. (Most banks seem to be okay with this; however, some Bitcoin (BTC)ers have complained about being turned away from Chase as of Feb 2020.)
Authorize the investment of IRA funds from the self-directed IRA to the LLC you manage and deposit the fund into the LLC bank account.
Open a business trading account with a crypto exchange. (My experience with River Financial is the best, Kraken next. Some Bitcoin (BTC)ers had good experience with Binance US too. As of Coinbase, it took me several months to open a business account as of late 2018.)
Once the business trading account is approved, you should be able to connect it with the LLC bank account and start buying bitcoin.
IMPORTANT Withdraw your bitcoin into a Bitcoin (BTC) wallet owned by yourself. (Starting with Ledger, Trezor, but possibly use multi-sig and cold wallets once you learned more and gained more confidence with Bitcoin (BTC).)
(Optional) In case you are not satisfied with just holding, you can try earning interests on your bitcoin with BlockFi. WARNING: these interest accounts do not have a long track record. The best way to use it is to try a tiny amount. Always keep in mind once you move your bitcoin to those interest accounts, you DON’T have direct control of your bitcoin any more.

WARNING

During entire lifetime of this above setup, please DON’T mix the funds/bitcoin owned by IRA/LLC with your other personal investments. This can cause a lot of troubles, which might not be easy to fix. Please consult with the appropriate tax or financial professional before taking this approach.

Pros

YOUR KEY, YOUR BITCOIN: You have direct control of your bitcoin.
Flexibility: You have freedom choosing storage, exchanges, interest accounts and many other services.
Happy side benefit: You can own other assets under this IRA, e.g. gold, foreign assets, real estate, etc.
Cheap maintenance cost over the long time horizon: You pay a flat fee (hundreds of dollars per year) for maintaining IRA, LLC and Bitcoin (BTC) storage. It’s much cheaper when your Bitcoin (BTC) wealth grows bigger over the long run.

Cons

Relatively expensive upfront setup cost: Expect $1,000~$1,500 setup fee varying by states (as of Feb 2020).
Much longer setup process: At least one month. (Breakdown: 3-day IRA setup, 1-week LLC setup, 1-day bank setup, 1-week 401k/IRA rollover, 1-month+ business crypto exchange account, 1–week investment authorization from IRA to LLC) I would like to highlight River Financial which helped me set up a business crypto trading account within HOURS as of Jan 2020.
The setup is much more complex, which requires a lot of patience and study.

Published at Tue, 18 Feb 2020 05:50:05 +0000