Bitcoin and Your 401k: Two Different Pathways

The 401k retirement plan has been in existence since 1981 and is widely used both by US companies for their employees. However, few company-sponsored 401k plans permit purchases of Bitcoin or other non-traditional investments. Here’s a simple way for you and other single-employee business owners to leverage the power of Bitcoin and your 401k. By creating a Solo 401k plan, you’ll be able to invest in  Bitcoin and a wide variety of other investments for your retirement years. You can make far larger annual contributions to a Solo 401k than you can with a self-directed  IRA LLC or a custodial IRA.

Let’s Roll One

Before investigating the Solo 401k plan, a quick word regarding current, traditional 401k plans. If you have a traditional 401k, it’s highly unlikely that you’ll be permitted to invest in Bitcoin. You’ll instead need to roll your 401k into a self-directed IRA that is Bitcoin approved. The process of creating a self-directed IRA LLC is covered in a previous Coincentral.com article. You can also roll your 401k assets into a custodian IRA that can invest in Bitcoin. Both the IRA LLC and custodian IRA can be configured as traditional IRAs or as Roth IRAs.

Figure 1.) Smart retirement planning can mean the difference between retiring on a beautiful island or living in poverty. Chart graphic: Donald Pendergast; Puerto Rico, 2013

The Solo 401k: A Unique Retirement Plan for Small Business Owners

This interesting variation of the original 401k plan is sure to grab your attention. Especially if you are a self-employed person with no full-time employees (other than your spouse). It can be created in before-tax (traditional) or after-tax (Roth) configurations and, best of all, Bitcoin and your 401k get to be best friends for life.

A Solo 401k (or Individual 401k) allows you a maximum annual contribution limit of $18,500. But depending on your age, your business can also make profit sharing contributions into the account. These additional contributions can bring your total up to $55,000 per year. Compare that to a traditional or Roth IRA that’s capped at $5,500 per year. Of course, with either style of plan (Solo 401k or IRA), persons over 50 can enjoy even higher annual contribution limits.

Loan Provisions

The Solo 401k also permits you to borrow the lesser of $50,000 or half of its account value. Your loan needs to be repaid within five years and must also have a reasonable rate of interest. The remaining account balance will serve as security for your loan. Make sure that your Solo 401k is configured to allow for a loan provision at the plan’s inception.

Several Advantages

Your Solo 401k is immune from creditor attack should you declare bankruptcy. No need to eat cold pork and beans with a silver spoon (in your golden years!) in the trailer park after losing it all in a sea of red ink! Even better, your Solo 401k does not require an LLC and you’re also permitted to serve as its Trustee. This means that you don’t need to get an IRA  custodian’s okay in order to buy Bitcoin, shares of Apple, gold bullion or cannabis stocks. Of course, this also means that you have no one else to blame if you’re a crummy investment manager.

Another Solo 401k perk is its ability to invest in your own business. It can even invest in real estate. Make sure you understand the IRS rulings governing such investments before moving any money around.

Pitfalls to Avoid

You will certainly want professional tax advice when creating and operating your Solo 401k. If the account value exceeds $250,000, you will need to file IRS Form 5500-EZ at tax time. Fail to file the form on time and you’ll get a special love letter from Uncle Sam. You must also be diligent to avoid any prohibited transactions. The IRS rules governing these are detailed and nuanced, so make sure your tax advisor is knowledgeable. And, like all retirement plans, the Solo 401k also features hefty early withdrawal penalties should you withdraw funds before you’re 59 ½.

Bitcoin and Your 401k

For sole-proprietor businesses with no full-time employees, the Solo 410k stands head and shoulders above a typical IRA. With a $55,000 annual contribution limit vs. the IRAs paltry $5,500, the numbers alone make the Solo an obvious choice. Smart business owners should consider adding an IRA anyway, as you can put that much more away for retirement.

Common Sense

Retirement planning for small businesses is vitally important. The tax advantages offered via a Solo 401k or IRA can be significant. However, don’t go overboard trying to stash every possible penny into your Solo 401k or IRA plan. You must pay equal attention to your on-hand, non-retirement account cash stash, too. As a business owner, cash flow is your lifeblood. Having too much locked away in retirement accounts could be a problem in times of recession, illness, divorce, temporary insanity, etc.

Figure 2.) Wise business owners respect the fact that life can be unpredictable. Photo by Arthur Yeti on Unsplash

Financial markets experience regular boom-bust cycles that will impact your retirement account, so don’t go ‘all-in’ on any one investment idea. Consider scaling-in to different investments via dollar-cost averaging (DCA). Respect the fact that life doesn’t always go as planned. Wise business owners and investors plan ahead for all contingencies.

Diversity, Patience and Time

Certainly, Bitcoin is a good choice for a Solo 401k or IRA account. Adding a mix of stocks, bonds, gold, and cash can also offer your retirement account the opportunity to prosper in virtually any economic scenario.