Harvard Law Attorney George Blower reviews how to use a Mega Backdoor Roth Solo 401k to save up to $61k to a Roth IRA and then invest in bitcoin and other cryptocurrencies.
Mega Backdoor Roth Solo 401k to Crypto IRA
- Contribute up to 61,000 or $67,500 if age 50 or older for 2022
- Potential for Tax-free growth in ROTH
Mega Backdoor Roth Solo 401k
- Self-employed with no full-time w-2 employees
- Solo 401k Provider:
- Offers a plan that allows for voluntary after-tax contributions and in-service distributions (e.g., conversion or rollover)
- Assists with establishing required sub-accounts (Pre-Tax, Roth & Voluntary After-Tax)
- Provides ongoing compliance support (required 1099-R reporting)
Contribution Example Scenario
- Self-employed business taxed as an S-corporation
- One Participant
- Goal is to Voluntary After-Tax Contributions and then convert to Roth IRA
- $100,000 of w-2 wages from the self-employed business
- How much can I contribute?
- Employee (Pre-tax or Roth): $0 [100% of w-2 wages up to $20,500 for 2022 reduced by any contributions made to another retirement plan unless 457 governmental plan]
- Employer Pre-tax Contributions: $0 [25% of w-2 wages provided total contributions don’t exceed overall limit]
- Voluntary After-Tax: $61,000 for 2022; [Lesser of Self-employment compensation or the overall limit of $61,000 for 2022 reduced by any employee or employer contributions made to the Solo 401k; Note: limit does not increase if you are 50 or older]
How do I make contributions?
- To make the contribution, you will make the check payable in the name of the solo 401k and write “Annual Contribution” on the memo section of the check.
- Electronic Transfer is also acceptable.
- Check with the financial institution that holds the accounts.
- Note: Other than Fidelity most brokerage firms don’t allow electronic deposit.
- Each participant deposits his/her contributions into separate sub-accounts
- Pre-tax, Roth and after-tax funds must go into separate sub-accounts.
Steps to Invest via Crypto Roth IRA LLC
STEP 1 – Open an IRA LLC
- Choose a Self-directed IRA custodian/trust that allows for LLC investments
- Choose an IRA LLC provider with experience in helping others invest
STEP 2 – Fund the IRA LLC
- Rollover After-tax Solo 401k funds to self-directed Roth IRA
- Open a bank account in the name and EIN of the IRA LLC & invest self-directed Roth IRA funds in LLC
STEP 3 – Open & Fund LLC Account at Cryptocurrency Exchange
- Open a Cryptocurrency Exchange Account in the name & EIN of the LLC owned by your Roth IRA
- Transfer funds from the IRA LLC bank account to the account at the crypto exchange
STEP 4 – Store Cryptocurrency
- Separate and segregated wallet exclusively for IRA LLC investments
- Store in safety deposit box associated with IRA LLC bank account
Investing IRA LLC funds in cryptocurrency
Opening an Account at a Cryptocurrency Exchange
- Name and EIN of the LLC owned by your IRA (consider tax reporting by the exchange)
Funding an Account at Cryptocurrency Exchange
- Confirm that the account can be funded with Fiat money
- Wire/ACH funds from a bank account in the name of the LLC owned by your IRA
- Do not fund from personal account per IRA LLC funding rules
- Confirm that the seller or buyer is not a disqualified person to ensure that you don’t commit a prohibited transaction
- Do not combine or “tie” the transaction with non-retirement transactions