[Update Sep 26, 2021: As of last week, Alto has discontinued their Checkbook+ service for new accounts. Checkbook-control IRAs are still available, but you will need to do your own research on how to set one up.]
Checkbook control crypto retirement accounts, part 2
Well it took me over a month, but I was finally able to buy some bitcoin through my self-directed IRA. Last night, I was finally able to deposit some fiat into my SDIRA’s new FTX.us account, and purchased a few hundred dollars of BTC, wBTC and ETH. The process has been slow and somewhat infuriating, but there is nothing like having the ability to purchase cryptocurrencies within the context of a tax-advantaged account. That’s right, there are no taxable events on activities made with these funds, and once I am able to withdraw to an on-chain wallet, I’ll be able to yield farm to my heart’s content without worrying about capital gains.
Last month I wrote up about the difference between the Checkbook+ IRA from AltoIRA and how it differs from most “crypto” IRAs. Basically, most crypto accounts are custodied, and have high annual and trade fees. We’re talking somewhere between one and two percent, which for some might not be that big of a deal, but for me and others who are comfortable handling their own private keys on six or seven-figures worth of crypto it’s can be a lot. Checkbook IRAs are much cheaper, with Alto we’re talking $250 a year plus a one time $500 to set up the LLC. In addition to crypto, one can also purchase real estate, or invest in other businesses or venture opportunities through AngelList or a number of Alto’s investment partners. There are a few restrictions about how the funds can be used: no double-dipping, so you can’t purchase a rental property and use it for your vacation. Basically you can’t spend funds that give you or your immediate family any material benefit. Also, in case it wasn’t obvious, this is a retirement account, so breaking these rules subjects you to an early withdrawal penalty, and on top of that, the entire balance of the IRA immediately becomes taxable income, which for me would be considerable. That is, for me, part of the exit plan, to aggressively grow my fund tax-free until the sum of the account reaches “FU money” levels, at which point I won’t care if I have to give half of it to Uncle Sam.
The way it works is like this: Alto sets up the IRA, and you deposit cash contributions or rollover funds through them. No crypto here, just straight fiat. If you’re doing a traditional or Roth IRA you’re limited to $6000 for 2020/2021, limits are much higher if you use a SEP IRA or a 401k. I’ve actually considered changing my full-time employment status to contractor to take advantage of these higher limits, you may want to do the same if you’ve got significant gains this year.
Alto also creates an LLC through the state of Arizona. You won’t get to pick the name, it will be generated automatically using your initials and the date of creation. (You can always register a fake name later if it matters to you.) It will take about two weeks, and Alto will provide you with a taxpayer ID (EIN), operating agreement, and a few other documents. One thing you will need to do yourself is get a copy of your articles of incorporation from the Arizona Corporation Commission. You’ll need to lookup your LLC, then go to document history and look for the downloadable link. Save these docs with the operating agreement, as you’ll need them to open bank and exchange accounts.
Now the legal structure of the LLC is this: your IRA is the sole member of the LLC. The IRA is the “owner”, and all funds into the LLC have to flow through it. Technically, the name of the IRA is “AltoIRA FBO (for benefit of) Your Name”. You are named as the manager of the LLC, and have complete control over how those funds are used.
Once you have your documents you can move forward opening your bank and exchange accounts. I suggest you do both at the same time unless you like waiting. Getting a bank account was the hardest part of the process, (save for getting money out of my brokerage account, which I’ll talk about later). I have lost track of how many online account applications I went through, but I must have spent a week. First off, most of the crypto-friendly banks that are out there don’t do business accounts, and the ones that do that I could find summarily rejected my application with a “we don’t serve your kind but can’t tell you why” response. At one point I got through to a rep at Bank of America over the phone and was told that they simply don’t do open LLC checking accounts over the phone and that I would need to come into a branch to open one. I wasn’t happy about the prospect of doing business with BOA, but then this came up in my Twitter feed:
Now I’m not in Charlottesville, but I gave them a call, told them what I was trying to do and was put in touch with a branch office. A day later I had my account created, all over the phone. There were several documents that I needed to sign and scan, but I was able to do everything using my iPhone’s note taking app and email. The staff have assured me that they can open account for anyone in the US over the phone as well, so if there’s not a local bank that you’d rather deal with, give Blue Ridge a call. They’ve been very helpful, and they have $25 wire fees and integrate with Plaid for ACH transfers to crypto exchanges.
Unfortunately, there is probably not a worse time to open a new exchange account right now. With the madness of r/WallStreetBets ongoing, and in the midst off a bitcoin bull-run, retail investors rushing to the fiat onramps and exchanges are being overwhelmed. Friends in my Signal group chat were waiting almost two weeks to get signed up with new accounts on Voyager earlier this month, and there are reports of other exchanges being swamped as well. Not wanting to repeat the frustration that I went through opening a bank account, I went ahead and filled out applications for both Kraken and Gemini. Kraken was the first to respond, although it took me several days going back and forth with their support staff to clear the KYC process. Gemini responded after a week that they were running behind, but haven’t gotten back to me beyond that.
One problem I have with Kraken is their lack of ACH deposits. They only allow wire transfers for fiat, which isn’t ideal since I’m planning on doing a number of smaller transfers over the next weeks and months as I rollover funds from my equities IRA. I’d ruled out Voyager since their institutional offering seemed a bit out of my league, and I wanted to avoid doing business with Coinbase and Binance. I’d been hearing a lot of good things about FTX recently, and decided to go ahead and sign up for an account there. The process was simple, and fast. One or two days after providing my EIN and documents (operating agreement, articles of incorporation, drivers license and proof of residence), my KYC verification was completed.
So last night I linked my Blue Ridge checking account to FTX, got pre-credited on an ACH transfer and made my first purchases. It felt great! Now I’ve just got to wait for the funds to clear, then I can withdraw them off-exchange to Uniswap and into yield farms and vaults. Fun times ahead.
One note about FTX: make sure you wait for the KYC process to complete before trying to initiate an ACH, else the transfer will fail and you’ll have to remove and add your account again. It seems to be a bug in their UI that you can do one before KYC has been completed. The transaction (and the account) will be flagged as rejected.
A word about rollovers and timing
This last section may not be relevant to you if you are just starting out with a fresh account, but if you’re planning on rolling over large sums from an existing IRA you’ll probably want to pay attention. Alto is not a brokerage IRA, meaning that they won’t custody your equities. So for me to liquidate a position from Grayscale’s $GBTC into BTC directly, I have to sell all my GBTC, wait for the funds to settle, initiate a transfer into Alto, settle, transfer funds to my bank, settle, transfer funds to exchange, then buy BTC. Depending on whether you’re doing wires or ACH transfers, this process can take several weeks. And I don’t know about you, but I do not want to be out of a bull market for that long. So my original plan was to liquidate a portion of funds, say $5-25k at a time, and move them over. Unfortunately, my brokerage had other plans.
It seems that the combination of COVID and r/WallStreetBets seems to have not only overburdened the crypto exchanges, but conventional brokerages as well. Doing third party wire requests is not an automatic process, and it actually took me over two weeks to get a disbursement from my brokerage. And that was following two phone calls, the first to find out that my scanned signature page came through garbled, and a second to find out what the hold up was. Each time this involved at least an hour on hold or texting with customer service. So now I’m not sure what to do. I could speed up the process by requesting a direct wire or ACH to my personal bank account, but this would trigger the sixty-day rule, which can only be used once a year. So unless I am willing to liquidate my funds entirely, and risk a huge pump while I’m out of the market, I’ll just have to resign myself to rolling over these funds bit by bit.
For now, I’m unable to determine a better way to move these funds, and am looking at the possibility of doing these smaller transfers indefinitely over the next year or two, unless I can find a way to speed up the process. Transfers initiated via Alto only require me to fill out a signature form, whereas my brokerage requires a letter of instruction to be physically mailed to their office. In each case, a person has to review the request, and they are just so swamped right now that it will take upwards of two weeks to complete these requests. I’m also not excited about selling funds in the middle of (what is hopefully a small) correction, when both GBTC and ETHE are trading with negative premiums. So it goes.
On the bright side, this delay will allow me to figure out some of the logistics of actually handling six-figures of crypto. This is a big step, and while I already have a significant sum of crypto stored on hard and cold wallets, having all of my retirement savings as well is a bit more of a risk. I can definitely understand why one might want to pay Coinbase one or two percent a year to custody funds. This is the risk I take for complete and utter freedom. Once I have my debit card from Blue Ridge, I plan on taking a look at some other custody solutions, whether it’s via Casa or Unchained Capital for my bitcoin, or a fancy Lattice1 for my defi funds.
Regardless, it’s exciting and to have made my first purchase, and I can’t wait until I have total control of my crypto funds. Hell, I might even buy some land in Costa Rica while I’m at it!