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401K to Bitcoin IRA Rollover: What To Know About

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It is always good to have some sort of versatility for any type of investment to prevent significant value losses.

Unless you have been living under a rock you have probably heard how much return a humble Bitcoin investment would do for you if you did it earlier.

The good news is Bitcoin here and will only grow over the next coming years. Although cryptocurrencies are still considered by many people as “speculative assets” you may still want to invest at least some of your savings in there.

Let’s say you want to roll your 401k into a Bitcoin IRA. You may be wondering what is the best way to do that.

If you would like to invest Bitcoin or any other type of cryptocurrency, a self-directed IRA is a much safer way to go for a BTC IRA. Bitcoin IRA just allows you to invest in Bitcoin or Ethereum.

Until recent years most companies were not willing to offer plans with a minimum contribution amount less than $20K. However, nowadays there are companies that let you start even with a $10K contribution. (Regal Assets is one of the best when it comes to investing in crypto to diversify your 401K or IRA account)

You can invest in every form of cryptocurrency and even day trade in a self-directed IRA (as a matter of fact you can invest in practically everything imaginable-securities, bonds, precious metals, and even real estate).

You have absolute power over the “checkbook” of whatever funds you allocate. Although SDIRA’s is a legal investment vehicle since 1975, they were not widely used since most financial institutions guided their clients to invest in their own products.

The benefit of having a self-directed retirement plan to invest instead of actually spending money directly in cryptocurrencies is that any time you transfer your assets, you may make transactions or turn the funds back into fiat currency, without creating a taxable event.

Any transfer of money or exchange to dollars without a retirement account is classified as a taxable transaction and would require you to report and pay the capital gains tax by the end of the tax year.

You will not have to keep track of any single transaction or transfer you make. Instead, you simply report how much your investments are worth on a valuation form at the end of the tax year. This allows you even more freedom when doing business, and eliminates the hassle of maintaining close track of each transaction.

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Moreover, it is an outstanding investment tool as the investment can raise tax-deferred before you withdraw (allowing the impact of compound interest to take its course) while an individual invested explicitly in crypto would have to pay capital gains tax for converting, for example, from bitcoin to ripple or putting their money into a mutual fund.

The drawback to investing in this manner is that you would definitely wind up paying a higher tax rate relative to what you should have paid in capital gains tax until you actually want to remove the assets entirely for good (unless you have a Roth account).

Most average income earners pay only 15–20 % or less on capital gains, while a traditional IRA account is taxed at the income tax rate that may be as big as 37 % (under the current tax plan this is higher than the former 39.6%.)

And if you withdraw it before retirement age, you face an annual tax of 10%. It is a far higher rate but keep in mind that at this point your money has had room to accumulate tax-free for years. On the other hand, if you save using a self-directed “Roth” IRA and cash out at retirement, you are simply going to pay NO income tax.

You can make penalty-free withdrawals as early as 59 1/2 and you can make early withdrawals at 55 1/2 penalty-free if you run a company (even a part-time) and invest with a Solo 401k. In essence, there are other exceptions and approaches but here we are not going to get through it.

The main downside is that you can not profit back any losses from the initial investment. However, you can deduct up to $5,500 per annum from a non-Roth IRA (the savings that you will switch around and reinvest).

For my situation, I have borrowed using a non-Roth IRA because I decided to carry over certain contributions without taxes from a pension plan because it was the only alternative permitted under IRS rules. There are online businesses that can set up for your self-directed accounts. Equity Trust, Kingdom Trust, IRA financial group, Broad Financial, Discount Solo 401k are a few of them.

Though, a word of advice, SDIRA’s have some specific rules you ought to go by such as no self-dealing or doing business for friends and loved ones. Purchasing bitcoin from a friend, for example, is a forbidden transaction, like purchasing a rental house, and then living in there. If you are going to purchase crypto, I suggest that you set up an institutional account on exchanges like Gdax or Gemini explicitly for your IRA.

Hold the retirement assets and entirely separate from personal accounts! Also, go so far as to only purchase a separate hardware wallet for your IRA funds (paid for by the IRA account). Obviously, you will still have your retirement funds deposited either in your designated retirement bank account or in your specified portfolio.

Never withdraw your money early or you have taxes and fines to face.

Another word of caution is to look closely at each trust company’s fee schedule because they will nickel and dime you for any wire or transaction fee (I minimize such fees by actually writing checks and mailing them, but for other people, this could be too sluggish).

Find a bank or credit union which offers the minimum wire fees.

If you have a business, a solo 401K will be an even better bet.

It runs with a much less complex and higher contribution limit SDIRA (check out the discount solo 401k, they simply give the smallest set-up rates at about $500). There are loads of tips and tutorials from YouTube that inform you about the SDIRA and Solo 401k.

Do your homework and educate yourself to give more accurate decisions.