Bitcoin Retirement Plan

I have been thinking a lot lately about how to use Bitcoin or Bitcoin related investments as part of a retirement strategy.  You may be like me and have a work 401(k) that offers a variety of investment options, but those are likely limited to stocks, bonds and possibly real estate options.  You may have limited or no offerings for alternative investments that would be desirable in the current macro environment such as commodities, precious metals, or Bitcoin.  A self-directed Individual Retirement Account is generally your best option for adding these types of exposures to diversify your portfolio.  In particular, the Roth IRA is perhaps the best kind of retirement vehicle for that purpose.  If you'd like a deeper dive into why to invest in Bitcoin, check out my past blog post here.  

Here are some of my ideas relative to blending Bitcoin and retirement tools:

Bitcoin Self Custody / Loan

The first option (and my preferred approach given the simplicity and flexibility - not having to deal with all the retirement plan rules, etc.) is to simply buy Bitcoin on an exchange like Coinbase, Crypto.com, or whatever other platform you use.  Move the coins to a cold storage wallet (Trezor and Ledger are the most popular).  Continue to accumulate coins in this fashion using dollar cost averaging by buying on a regular basis, buying pullbacks, etc.  When ready for retirement, move some coins back to an exchange that offers secured loans (Coinbase currently does this and offers an 8% interest rate on these loans).  The key here is to make sure you are very conservative with the loan to value ratio - I think a maximum of 10% is ideal to avoid the potential of a big sell off that could result in you losing your coins.  You then simply repay the loan annually and reborrow, perhaps slightly increasing your borrowings as Bitcoin price increases.  Because these are loans, they are not taxable.  This strategy is not a lot different than using life insurance for retirement planning (if you're interested check out my past post for a deeper dive into this topic here).  In summary, you can borrow against your whole life policy's cash surrender value tax-free and when you die, the death benefit (which is also not taxable) is used to pay off your loan principal and the remaining death benefit goes to your heirs tax-free.  The Bitcoin loan option does not enjoy the same tax benefits upon exiting the position (i.e., your estate will have to pay taxes on the total estate value which includes the value of your coins), but with the step-up in basis at date of death, you could sell the coins for minimal tax exposure and retire the loans or just keep the loans in place, depending on needs at the time.

Roth IRA

I wish someone had told me about Roth IRA's when I was a lot younger, I would have used this a lot more than I did.  One of the best benefits of using a Roth are no required minimum distributions (unlike traditional IRA's and 401(k)) and earnings grow tax free.  Better late than never, I guess.  As a reminder, you can contribute fully to a Roth IRA if you make $129K a year or less (single) and $204K if married and the contributions phase out fully at $144K (single) and $214K (married) in 2022.  You can contribute up to $6,000 a year to a Roth ($7,000 if you are over 50).  If you are within these income limits, it's a really good idea to contribute as much as you can to a Roth - you can even do this if you contribute to a workplace plan.  Even if you make more than these limits, you can contribute to a Roth using a "backdoor" approach.  This involves making a non-deductible contribution to a traditional IRA and then immediately rolling over the balance into a Roth IRA while in cash, which should not trigger any tax on the conversion.  This is currently on the table to be eliminated in the tax legislation that is part of the stalled Build Back Better Act.  Some have said it's unlikely the tax legislation will pass this year with an effective date of this year, but it's very uncertain.  Nevertheless, this could be the last year for taking advantage of the backdoor Roth.

Leveraging Bitcoin investments into the Roth IRA with Bitcoin's asymmetric growth prospects makes for a powerful retirement vehicle.  Here's a quick example.  Let's say you contribute $40K to a Roth and pay taxes at a 40% rate, you would have paid $16K in taxes on that money since it is contributed after tax.  If the price of Bitcoin rises 10x over the next 10 years to $400K, then you avoided $144K in taxes ($160K - $16K).  If the price of Bitcoin rises 100x over the next 10 years to $4M, then you avoided $1.584M in taxes ($1.6M - $16K).  That's very powerful stuff.  Bitcoin has had an average annual increase of 200% since inception with plenty of volatility up and down.  If you zoom out (chart below) the consistent upward growth rate on the log chart is impressive.  With Bitcoin adoption globally still very low and a hard capped, fixed supply, the growth rate of Bitcoin seems likely to continue into the future.

One option for investing in a Roth leveraging Bitcoin is to setup a Bitcoin IRA that invests directly in Bitcoin (the coins are held by the IRA custodian but you can buy them directly).  There are several providers out there (here's a link to an article comparing options). I ended up going with Bitcoin IRA which although it has higher fees, has a great product and customer service.  

Another option is to have a traditional brokerage account and buy Grayscale Bitcoin Trust (GBTC), which owns Bitcoin directly.  They do charge an annual management fee of 2%, which is a bit high, but it's expected to go down significantly when the SEC approves its application to become an Exchange Traded Fund.  So far, the SEC has only approved Bitcoin futures-based ETF's, which I definitely do not recommend for a long term investor, simply because the futures contracts erode in value over time as they roll over and if Bitcoin trades flat or down you can lose a lot of money (known by futures traders as contango).  GBTC is is probably the best way to have direct exposure to Bitcoin outside of owning it directly yourself with the aforementioned shortcomings.  Currently the fund trades at a discount to the value of the coins it holds, which I think may present a short term opportunity for an investor with a long term horizon.  

Another option in some brokerage accounts (for mine in particular I couldn't invest in GBTC at the time I wanted to move to Bitcoin, so this was my only option) is to buy shares in Microstrategy (MSTR).  This is a business software company that generates about $100M a year in positive cash flow and it has converted its Corporate Treasury to Bitcoin.  Microstrategy also has issued convertible debt, normal corporate debt and stock to buy additional Bitcoin and continues to buy Bitcoin at every opportunity.  The CEO has stated they have no intention on ever selling and they will continue to look for additional opportunities to acquire more.  Talk about "all in!"  It is a highly leveraged play on Bitcoin and will tend to outperform the Bitcoin price both on the upside and downside.  Like GBTC, it currently trades at a discount to the fair value of the Bitcoin it holds due to ongoing selloff in the technology sector as well as recent weakness in the price of Bitcoin, which again seems like an opportunity if you believe the long-term Bitcoin thesis.

Roth IRA Conversion

Another option that looks like it will be available to everyone for some time (even if/when the new tax laws take effect which will sunset this option for high earners eventually) is to convert your existing IRA to a Roth.  You do have to pay taxes on the value of the account (less any contributions you made that are considered part of your "basis").  The best time to do this is when the account balance drops due to stock market volatility - this is called when life gives you lemons, you make lemonade.  Perhaps if your traditional IRA is down significantly due to stock market losses, it would be a good time to convert via roll over directly into a Roth IRA invested in Bitcoin?  That's basically what I did, although I converted into a traditional Bitcoin IRA at first when Bitcoin was close to $64K but then when the value dropped by 50%, I decided to take advantage of the short term decline and convert to a Roth since my tax bill was also cut in half and I'm undeterred by the long term appreciation thesis.  

I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2021.  To see all my books on investing and leadership, click here.  

Also check out my new podcast "Building A Financial Fortress" available soon on all major platforms -  here.

Stay safe, healthy and positive.