Due to Bitcoin’s rise in popularity, many service members and veterans ask about adding it to their retirement portfolios. In theory, adding cryptocurrency to a retirement portfolio will add both asset diversification and potential upside. While investing in Bitcoin through a Thrift Savings Plan (TSP) is not allowed, we’ll use this article to explain an alternative for TSP account holders.
Specifically, we’ll discuss the following:
- Thrift Savings Plan Overview
- Using an SDIRA to Indirectly Invest in Bitcoin with TSP Funds
- Transferring TSP Funds to an SDIRA to Invest in Bitcoin
- Risks of Investing Retirement Funds in Bitcoin
- Final Thoughts
Not financial or tax advice. This article is strictly educational and is not investment advice.
Thrift Savings Plan Overview
The Thrift Savings Plan, or TSP, serves as the government’s version of a private company 401k plan. That is, the TSP provides government employees, military members, and other eligible participants a tax-advantaged retirement account option. And, most plan participants receive some form of government match on their contributions, further increasing the retirement benefits of a TSP.
TSP participants can contribute funds to one of two account types, each of which offers its own unique tax advantage for retirement saving. With a traditional TSP, participants get a tax benefit now. Every dollar they contribute to a TSP plan up to an annual limit reduces their current taxable income. For example, a $10,000 contribution to your TSP would reduce the amount of taxable income for the year by $10,000, saving you money on your current tax bill. However, with traditional TSPs, individuals pay taxes in retirement when they take distributions from their accounts.
Alternatively, the Roth TSP provides a tax benefit later. You pay tax on contributed funds, but you can withdraw those contributions and associated earnings tax-free in retirement. This reduces your tax bill in retirement without providing any current tax savings.
TSP Investment Options
As a retirement plan, the TSP has the benefit of extremely low administrative expenses. Plan participants pay significantly less than the fees associated with most comparable retirement plans. But, the TSP also has one major disadvantage: limited investment options.
TSP participants can choose between five individual funds, composed of different categories of stocks or bonds. Or, they can opt for a lifecycle fund, which includes a unique mix of these five individual funds tailored towards a target retirement date. While these options provide exposure to the broader market, they do not allow participants to invest in alternative asset classes (e.g. Bitcoin, real estate, precious metals, etc.).
This limitation creates a dilemma for many TSP participants. If someone has saved a significant amount of money in a TSP, he or she may want to allocate a portion of those funds to alternative assets like Bitcoin. As the TSP does not allow this option, participants need to take a different route: transferring part or all of your TSP funds into a self-directed IRA, or SDIRA. We’ll discuss the considerations for this move in the next section.
Using an SDIRA to Indirectly Invest in Bitcoin with TSP Funds
A self-directed individual retirement account, or SDIRA, is a unique type of IRA. Unlike their IRA counterparts, SDIRAs allow account holders to invest in a far broader range of asset classes than just stocks, bonds, and mutual funds – to include cryptocurrencies like Bitcoin. This represents the primary practical difference between normal IRAs and SDIRAs. And, due to this additional complexity, most IRA custodians do not offer SDIRAs. Rather, if interested in this route, you’ll need to find an IRA custodian that focuses solely on self-directed IRAs.
Some of these alternative assets available in an SDIRA have significantly greater risk than more traditional investments, which is why only experienced investors should consider SDIRAs. But, if interested in A) investing in Bitcoin with your TSP funds, and B) receiving the tax advantages of a retirement account, transferring your TSP to an SDIRA may make sense. More precisely, making this move allows individuals to indirectly invest in Bitcoin with TSP funds.
Transferring TSP Funds to an SDIRA to Invest in Bitcoin
To actually make the transfer from a TSP account to an SDIRA, participants need to take the following steps. Additionally, most TSP participants must have separated from military service to do this, as the TSP only allows for two types of in-service withdrawals (financial hardship and age-based “59 ½” withdrawals).
Step 1: Identify an SDIRA Custodian
Most IRA custodians do not also serve as SDIRA custodians. Consequently, you first need to find a designated SDIRA custodian. But, due to the complexity of different alternative assets offered in these retirement accounts, you should also find a custodian that specializes in your desired asset class. In this case, if you want to use your SDIRA to invest in Bitcoin, you can – and should – find a custodian that focuses its services on cryptocurrencies.
Step 2: Conduct the TSP to SDIRA Transfer
Once you’ve identified your account custodian, you need to fund the SDIRA. Before making any requests of the TSP, alert your new SDIRA custodian that you will be completing a direct rollover from your TSP account. While you can conduct an indirect transfer, which sends you a check that you then forward to the SDIRA custodian, this poses far more risk of making a mistake that could trigger taxes and penalties.
Once you’ve alerted your SDIRA of the impending rollover, you can begin the transfer process with the TSP. Fortunately, the TSP website makes transferring your funds a relatively straightforward process. When you log into your TSP account online, there’s an option for a full withdrawal. The website will walk you through its withdrawal wizard, which will ask you a few questions and use your responses to automatically complete Form TSP-70, Request for Full Withdrawal (alternatively, use Form TSP-77, Request for Partial Withdrawal When Separated, if you prefer to leave some funds in your TSP). Of note, if married, you’ll need to notarize this form, as well.
After you’ve completed the Form TSP-70, you can send it directly to your SDIRA custodian. Then, this new custodian can directly handle the TSP to SDIRA rollover on your behalf. This limits the likelihood of mistakes. Alternatively, you can submit the form directly (the TSP website lets you upload it). Regardless of which path you choose, the TSP will eventually acknowledge that A) it received your withdrawal request, and B) has completed the associated account transfer to your SDIRA.
NOTE: If rolling over your traditional TSP to a traditional SDIRA, you will not trigger a taxable event. But, if you choose to convert your traditional TSP into a Roth SDIRA, you will need to pay the associated income taxes, as all of your prior TSP contributions and investment growth have been with pre-tax funds. When you complete a withdrawal, the TSP will issue you a 1099-R, which will clearly indicate the taxable amount of the funds moved into your new SDIRA for tax filing purposes.
Step 3: Choose Your Investments
Once your SDIRA custodian receives the TSP funds, you need to choose your investments. For individuals who want to invest in Bitcoin, choosing a custodian familiar with cryptocurrency will make this a far smoother process. Simply put, these custodians focus primarily on this sort of investment, meaning they will intimately understand the ins and outs of purchasing Bitcoin with your retirement funds.
But, from a compliance perspective, it’s important to understand that all investments will be completed in the name of the SDIRA – not you personally. More precisely, the IRS considers SDIRAs separate legal and taxable entities from the individual account holder. This means that you need to pay all investment-related expenses from the SDIRA, and you must receive all investment income into the account.
Risks of Investing Retirement Funds in Bitcoin
Before taking any steps to invest TSP funds in Bitcoin, you should consider the below risks.
Cryptocurrencies like Bitcoin represent one of the most volatile asset classes currently available. While stocks regularly go up and down, they rarely face the same level of astronomical growth immediately followed by massive crashes that come with cryptocurrency investments. Bottom line, be prepared for massive value swings – for better or worse – with your Bitcoin holdings.
Lack of Regulation
Unlike government currencies and publicly-traded stocks and bonds, Bitcoin is not regulated. To some, this serves as a tremendous advantage (e.g. criminals who want to avoid government scrutiny and money trails). But, this lack of oversight also presents tremendous risk, as you largely have no legal recourse if anything happens to your Bitcoin holdings (e.g. you lose them when your cryptocurrency exchange is hacked, which has occurred multiple times).
Valuation Difficulties and Speculative Nature
In many respects, individuals do not invest in Bitcoin – they speculate. That is, they buy the cryptocurrency in the hope that it’s value will increase and they can resell holdings for a profit. This is due to the fact that, unlike more traditional assets like stocks, bonds, and real estate, no standard valuation model exists for Bitcoin. As it doesn’t produce income (like a company or rental real estate), Bitcoin’s value is derived solely from what the market will pay for it. In other words, many Bitcoin speculators adhere to the “next dumbest person” approach, betting that someone will be willing to buy the cryptocurrency for more than they paid for it.
Due to the TSP’s limited fund options, participants cannot directly invest in Bitcoin through the Thrift Savings Program. Rather, they first need to transfer money in a TSP into an SDIRA, at which point they can invest directly in Bitcoin or other alternative assets.
But, before making this move, investors should consider the risks associated with cryptocurrencies, particularly their volatile nature. Rather than invest all of your TSP funds in Bitcoin, it’s far safer to invest a portion, preferably an amount you can lose without crippling your retirement prospects. This exposes you to potential upside while mitigating the risks of massive volatility.
Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.
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