Why My Roth Money Is 100% Bitcoin & Why You May Want to Follow Suit

I confess.

Until a couple of years ago, I was a crypto skeptic. No, that’s not strong enough.

I didn’t think Bitcoin was all smoke and mirrors. I was sure of it!

Then I started reading what a semi-retired investment banker had to say about it. Dave Coker said he’s been buying Bitcoin every week for years.

Say what?!

An investment banker, who’s been around the financial block far more than I’ll ever be, who has enough invested in conservative dividend stocks to cover his expenses five times over, that guy thinks Bitcoin is a good investment?

That started me thinking more seriously, maybe I should do some of the same?

Putting My Toes in the (Crypto) Water

At that point, I had no idea how one even buys crypto. 

I was clueless about self-custody of crypto coins (“Not your wallet, not your coins…”). 

Hot wallets, cold wallets, software wallets, hardware wallets, multi-sig wallets — that was all just word salad to me.

So, I took the simplest, easiest, and possibly safest (given my ignorance) way in. I bought a bit of Bitcoin through PayPal’s convenient crypto account (not an endorsement — do your own due diligence). 

Then I bought some more. 

Then I bought some of “alt coins” they offered. And I started reading to educate myself enough to stop figuratively walking around with a large “Scam me!” sign on my forehead.

That was December 2023. 

Fast forward a few months, and those alt coins went down enough to shake me loose, but Bitcoin appreciated by almost 50%.

Great News, But with a Cloudy Lining

With an investment going up 50% in four months, you’d think I’d be thrilled.

I was, but it also got me thinking – what happens when I decide to take profits? A hefty tax bill, that’s what.

I’m one of the rare breed who actually think paying income taxes is good. That’s what funds those things we often take for granted – great highways, national defense, mostly safe food, mostly safe drinking water, mostly breathable air, etc.

It’s just that if my investment kept going up anywhere near that rate (yeah, right!), in just five years, a $10k investment would be worth over $4.3 million!!!

And even at long-term capital gains tax rates, the tax bill when selling it would be over $860k!

All that, with just $10k invested.

But what if I invested even more? I don’t know about you, but owing millions in taxes isn’t my idea of fun.

How to (Legally) Avoid Paying Taxes on Billions in Gains

Around that time, I read about Peter Thiel’s $5 billion Roth IRA (yeah, billion with a “b”!).

The TL;DR of it is that he invested about $2k of his Roth money in startup companies, and when they exploded in value, his shares ended up worth about 250 times as much as it takes to make it to the top 1% in net worth for Americans.

Even ignoring all his other assets, that would have put him solidly in the middle of the Forbes 400 list of wealthiest Americans!

If you know anything about Roth accounts, you know that Thiel would owe exactly $0 in taxes on that $5 billion investment, despite 99.99996% of it being pure gains.

Pulling My Own (Small-Time) Thiel Maneuver (Hopefully!)

At the time, I had about 2.5% of my invested net worth in a Roth IRA. 

Also around that time, the SEC approved a dozen or so new spot Bitcoin Exchange Traded Funds (ETFs).

Hmmm…

What if I invested 100% of that in a Bitcoin ETF? I mused.

If Michael Saylor is to be believed, Bitcoin could go to $13 million per coin by 2045. But even if it never hits that exorbitantly lofty price and goes to “just” $1 million, my Roth IRA would be worth over 15 times its starting value.

That would increase it from 2.5% of my invested net worth to nearly 40%, while increasing said net worth by almost 40%. And best of all, like Thiel’s $5 billion Roth, none of my Roth’s 15x increase would be taxable – sweet!

And for the mathematically curious among you, if Bitcoin ever hits $13 million, my net worth would increase sixfold (assuming none of my other investments ever made a dime). And since none of it would be taxable, the after-tax impact would be closer to 10x!

But What If Bitcoin Goes to Zero?

Before we go all starry-eyed, we have to acknowledge that this is a risky bet.

Here’s a non-exhaustive list of risks, in no particular order:

• Saylor’s company owns nearly $72 billion worth of Bitcoin, so if, for whatever reason, they’re forced to liquidate, Bitcoin would crash.
• Since Bitcoin is considered by many to be “digital gold,” what happens if that narrative is ever abandoned, either because some other cryptocurrency becomes the new darling investment of the day or because Bitcoin loses grace for any other reason?
• If quantum computing development happens faster than Bitcoin encryption can be made “quantum-decryption-proof,” Bitcoin could become worthless.

So, keeping these and other risks in mind, and remembering that Bitcoin has gone through some incredible crashes (99% loss in a single day in 2011, 83% in 2013, 84% in 2017-18, plus several crashes of over 50%), I had to consider the downside.

My worst-case scenario was that Bitcoin literally goes to zero. 

In that case, my investment portfolio would lose 2.5% of its value. Not fun, for sure, but what does it mean in practice? 

I expect that we can live on under 4% of our portfolio value per year in retirement. If the portfolio loses 2.5%, that’s not even a bad year in the stock market. And even if we put such a 2.5% loss on top of other potential investment losses, we could either draw 4.1% instead of 4% in retirement, or reduce our retirement budget by (a very survivable) 2.5%.

An Asymmetric Bet I Was Happy to Make

Considering that the (implausible) worst-case scenario is easily survivable, and that even a semi-plausible best-case scenario adds 40% to our net worth, I decided that putting 100% of my Roth money into Bitcoin (via a spot ETF) was a no-brainer bet.

Should You Do the Same?

Here are several reasons for you to avoid doing what I did:

• If when, not if, Bitcoin crashes again, you’ll panic-sell because you can’t sleep at night, don’t do it.
• If losing a few percent of net worth would move you from barely able to afford retiring to just not able to afford it, don’t do it.
• If your portfolio is already extremely risky and you don’t want to make it even more so, don’t do it.

But if none of the above is true for you, I’d suggest you seriously consider it. 

It’s not for nothing that BlackRock, the largest asset manager in the world, recently started suggesting that its clients put 2-3% of their investment portfolio into Bitcoin.

Tim Dyer, Owner, Dyer Wealth Management, sees this as a valid option, for some, “Investing Roth IRA funds in cryptocurrencies may or may not be a good idea. Clients want to take advantage of tax-free growth within the account. However, they don’t want to ‘squander’ that opportunity by investing in something that might lose a significant fraction of its value. 

“One metric we use with clients to assess suitability is if they qualify for the ‘mega’ back-door Roth opportunity through their employer-sponsored plan. This often lets them plow up to $60k into their tax-free Roth account per year. In such instances, using a small portion of those funds to speculate longer-term with cryptocurrencies, like Bitcoin, may be warranted. If clients simply contribute up to the $7k annual limit ($8k if over age 50), the juice may not be worth the squeeze, so to speak.”

In fairness, there are many out there who see a 2-3% allocation as woefully short of what they think is called for. 

Given the current fiscal realities, with our national debt already over 20% higher than our Gross Domestic Product (GDP) and increasing by the minute, like the dollar, Euro, Yuan, etc. facing large inflationary pressures due to massive money printing, etc., these people think that even a 40% allocation (!) is too little.

Shane Galante, Co-Founder of CSG Financial, thinks even such a large allocation can sometimes be reasonable for certain people, “Younger clients, say under the age of 40, can have 5-25% of their assets allocated to Bitcoin in their Roth IRA. 

“One of the questions I ask to see if this could be a good fit is, ‘Are you okay knowing you could lose 50% of this money at any given moment?’ Bitcoin is an extremely volatile asset and is known for major price swings, up or down. If a client can’t stomach these moves, they may be better off investing in something else. 

“People need to understand that while Bitcoin and other cryptocurrencies are becoming more mainstream, they are relatively new markets. Bitcoin, the first cryptocurrency, was created in 2009, 16 years ago. The stock market, by comparison, has been around since the 1800s.”

Well, color me (just a tad) conservative, but I hesitate to make such a huge bet on Bitcoin, especially when even a few-percent allocation could make us multi-millionaires.

The Bottom Line

Crypto is far from a sure bet.

And if you want to invest in it other than through an ETF, you need to learn a lot to do so safely.

But if you agree with me that the investment case is highly asymmetric, with a survivable worst-case downside vs. an incredible upside potential, you may want to consider investing in Bitcoin. And if you do, you may want to consider investing through a Roth account so your (potentially huge) gains would be tax-free!

Because sometimes, while playing it safe ensures you don’t lose big, you’ll probably still lose compared to those who take carefully calculated risks.

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.