Sunday, February 2, 2014

Is there a way to put my 401k into Bitcoin yet?

Posted on 10:58 AM by Unknown
Over at Reddit we came across the following discussion:

Is there a way to put my 401k into Bitcoin yet? (self.Bitcoin)
submitted  ago by gonzobon
I have some money sitting in a 401k account. Looking forward to rolling it over somewhere.
all 30 comments

sorted by: 
best
[–]benjamindees 12 points  ago
Sorry, banks not done front-running you yet. Please stand by.
[–]jzcjca00 3 points  ago
Yes. I have bitcoins in my Roth IRA, and it is possible to hold them in some kinds of 401ks as well.
[–]bruce_fenton 7 points  ago
It cannot be done yet. I'm in the investment business and we are working on this. It's unlikely that direct Bitcoin will be available in IRA and 401k accounts in the foreseeable future....but there will be Bitcoin based and Bitcoin backed investments which will offer exposure to Bitcoin and ease of purchase through normal brokerage accounts.
[–]whitslack 9 points  ago
What do you mean? It's always been possible to hold bitcoins in an IRA. You just have to start your own LLC, have the LLC buy and hold the bitcoins, and you hold ownership of the LLC in a self-directed IRA. Yes, it's lame that the tax code makes you jump through so many hoops, but it's possible.
[–]bruce_fenton 2 points  ago
A 401k is different than an IRA -- and even within an IRA with an LLC I've had this conversation a lot and people are convinced it works fine....it doesn't. Companies like Broad Financial will supply documents needed to set up the LLC and an IRA prototype....but that's a big difference from having something that is actually compliant. To prove that the LLC owns the Bitcoins etc....it's a much more complex matter than people think. Believe me, if there was a way I would offer them tomorrow and increase our assets by a billion dollars....Fidelity and Morgan Stanley etc. would beat me to it.
[–]whitslack 2 points  ago
So is this wrong?
[–]autowikibot 1 point  ago

Section 6. IRA LLC of article Self-directed IRA:
In an effort to reduce fees, paperwork, and processing delays, title issues, etc., as well as provide the IRA holder with greater investment control, some self-directed IRA investors choose to employ a Limited Liability Company (LLC) IRA structure. An LLC is a passthrough entity for tax purposes but respected as a corporation for limited liability purposes. In other words, the LLC does not pay any federal income tax on income it receives, but instead, the LLC members (owners) would be responsible for paying tax. However, in the case of a self-directed IRA, since an IRA is exempt from tax pursuant to Internal Revenue Code Section 408, by using an LLC to make IRA investments, in general, no federal income tax would apply to any income or gains generated by the IRA LLC. In addition, the members of the LLC are offered limited liability protection. As a result, the LLC is the most common type of special purpose entity used in connection with making retirement investments. In such a structure the account holder directs his or her IRA custodian to invest into a limited liability company in return for a percentage interest in the LLC that the account owner or a third-party manages himself or herself. The self-directed IRA LLC manager (i.e. account owner) can then execute transactions for the IRA LLC without the involvement of the IRA custodian, thus reducing fees and eliminating custodian transactional fees and delays. Since an LLC is treated as a passthrough entity for Federal Income Tax purposes, the profits of the LLC pass through to the IRA, which is exempt from tax under Internal Revenue Code Section 408 (408A in the case of a Roth IRA). A number of tax attorneys believe that this IRA LLC strategy has been legitimized through a tax court case: Swanson v. Commissioner, 106 T.C. 76 (1996) and IRS Field Service Advice Memorandum 200128011, which mirrors the facts and confirms the Tax Court’s conclusion in Swanson.
/u/whitslack can reply with 'delete'. Will delete on comment score of -1 or less. | FAQs | Mods | Magic Words | flag a glitch
[–]bruce_fenton 1 point  ago
It's not wrong legally it's just not possible in practical application for regular investors....to do this is very expensive and a major red flag for auditors.
People have wanted to do this for a long time...owning real estate etc. and the main practical problem is that no recognized custodian will handle those assets and auditors to audit the holdings will be expensive.
So, it can be done but I've never seen it effective for anyone other than the very wealthiest people with large balances of $10 mm plus or so.
[–]chuckymcgee 1 point  ago
I hold Bitcoins in my company's 401k, setup through Broad. It would be pretty simple to prove ownership of Bitcoins, should the IRS inquire. My company cuts a check to the 401k trust in the amount that payroll records indicate I have designated of my salary to go into the 401k trust account. The check is deposited into the trust checking account. Those funds are moved into a Coinbase account in the name of the 401k trust and Bitcoins are purchased, then transferred into an offline wallet, which the blockchain indicates no further transfer of funds. When the value of the 401k account reaches the required threshold, I'll file the required paperwork with the IRS. The paper-trails a mile long. What's the IRS going to dispute?
[–]bruce_fenton 2 points  ago
Whet 401k co does the company use and who is the custodian? Who runs the 401k trust...is this something you set up with Broad also? How does the company calculate the value for 5500 filings etc?
[–]chuckymcgee 2 points  ago
It's setup through Broad. I act as trustee in managing the funds in the 401k trust. 5500 filings are not required if the value of the funds are less than $250,000. I'll likely value the Bitcoin at bitstamp's average 24-hr price as of December 31st. If the IRS wants me to use a different value, they can tell me. Since it's a Roth and tax has already been paid on the contributions, it's not as though my valuation of the 401k investments really has any impact on immediate tax payments. After-tax money goes into an investment which isn't a prohibited transaction, investments stay there inaccessible until I retire, what's the IRS going to care about?
[–]bruce_fenton 1 point  ago
I've got no dog in this fight....it hurts me not a bit if someone does this.
I'm just saying that in 22 years in this business I've seen 1000 people try this and 5000 more talk about it....I've never, ever seen it work successfully or ever even met anyone who did it successfully beyond a couple years...with the exception of very wealthy people through family offices and law firms.
On the other hand I have seen many people have these turned over...I've also seen first hand how harsh the IRS is and I've seen many large checks come frommsiezed accounts or fines and be sent to them.
[–]chuckymcgee 1 point  ago
Mhm, that's nice. What's the IRS going to care about in my situation?
[–]bruce_fenton 1 point  ago
Maybe nothing....but if they did care then you'd be looking st an audit.
Have you looked into all the costs of filing taxes for the LLC and filing costs etc? You mentioned it's under $250k --- seems like those costs would eat up a ton of the value of a smaller plan.
I take it you are self employed also or a small business - so that adds another likely audit reason.
[–]chuckymcgee 1 point  ago
Filed in a state which doesn't have annual filing costs. There's no income to pay taxes on, one because of the nature of the account and two because there hasn't been a realizable event. The annual fees for the 401k/IRA are a bit under a grand, which is high as a percent, but can be paid separately from the contributions. The returns from being able to invest in Bitcoin have easily outweighed whatever extra costs I have compared to a low-fee index fund.
It certainly is more probable that I'm audited, but I really don't worry about the 401k being an issue. Since all tax have been paid on the contributions as a Roth, there are no unpaid taxes or improper deductions to come after me for. At the very worst they just decide it's not really a Roth 401k and that I will eventually owe taxes on my gains.
I agree it's a bit messy and not for everyone. But being able to have completely tax-free gains on my bitcoins is an enormous benefit which makes it worth it for me.
[–]waxwing 2 points  ago
Presumably if the Winklevoss ETF gets approved, it will be possible to put a 401k in it? (not American myself so not sure). Personally I will be amazed if that ETF ever gets approved.
For now accredited investors are allowed to invest in BIT from 2nd Market. But that's not relevant to this query(?).
Just bite the bullet and buy via Coinbase, an exchange like bitstamp, or localbitcoins.
[–]bruce_fenton 1 point  ago
Yes, the ETF would be available in IRA accounts and in 401k accounts IF the employer allows it or offers a self directed option. The BIT is not available in 401k plans and is available in certain IRAs....it's a private placement. Coinbase etc. are not in IRA accounts.
[–]2ndEntropy 2 points  ago
I read the title as meaning $401,000
[–]dsterry 1 point  ago
I've heard https://www.pensco.com may be an option now or in the future.
[–]stillnope 1 point  ago
why not buy like 10-20฿ or so per day on regular exchanges?
on p2p exchanges only trade with reputable vendors if you send a lot of money.
[–]Oracle_of_Knowledge 1 point  ago
why not buy like 10-20฿ or so per day on regular exchanges? on p2p exchanges only trade with reputable vendors if you send a lot of money.
You comment has nothing to do with this question. He is asking about an American 401k Retirement Account. This is a pre-tax investement (before income tax is taken out) that is locked down until retirement age. When you withdraw at retirement age, you pay taxes then.
[–]tritor 1 point  ago
Hi gonzobon, this is my idea to try to solve your request;
If we can connect the next three kinds of people, then perhaps we can find a possible solution to your conundrum:
  • 1. People with Bitcoins willing to invest in Real Estate;
  • 2. People with USD willing to buy Bitcoins (you);
  • 3. People willing to sell Real Estate for USD (me).
For the moment I'm building my database on caribestate; if you are able to help me find the "first kind" maybe you can get your bitcoins, and everyone can get what they want.
Regards
This entry was posted in

1 comment:

  1. AnonymousFebruary 24, 2014 at 9:09 AM

    Its no problem to invest in bitcoin through a self directed "checkbook" ira. I have one myself, primarily for real estate investing but I may invest in any non-prohibited investment including bitcoin. Educate yourself on checkbook iras sufficiently before creating one. You have to observe a variety of rules - no co-mingling of funds or dealing with yourself or a relative - but its not hard to do.

    ReplyDelete

Subscribe to: Post Comments (Atom)