What is a 401(k), and why you need a Bitcoin 401(k) Plan

June 29, 2020 - Money Bits


Disclosure:This article is part of VBit Technologies’ “Money Bit” where we educate our clients on matters Financial Literacy.


A time that should be rewarding and blissful, yet so many people now go into it full of anxiety.

Conventional wisdom dictates that after working hard through your productive years, one should have comfort in their golden years. However, because of rising inflation over the past few decades, a decimated middle class, and yes, poor planning at times, many senior citizens in the United States (and the world over) lead a less than desirable existence. 

For decades, different types of employer sponsored retirement plans have helped Americans prepare for this period. Depending on social security alone may not be adequate to cover all spending needs. There are different arrangements through which employees can invest in their retirement gradually.

One of these plans is the 401k retirement plan.

What Is A 401k? A Brief History

A 401(k) plan is a tax-advantaged, defined-contribution retirement account offered by many employers to their employees. The name 401(k) comes from a section of the IRS code. 

The U.S. Congress passed the Revenue Act in 1978. This act added a provision to the Internal Revenue Code — Section 401(k). This provision allowed employees to avoid being taxed on deferred compensation.

Three years later, benefits consultant Ted Benna, referred to this section in the process of researching how to create a more tax-friendly retirement program for a client.  Benna settled on a strategy that involved allowing employees to save pre-tax money into a retirement plan while receiving an employer match. Even though the client rejected the idea, Benna’s own company, The Johnson Companies, became the first American company to offer the 401(k) to its workers.

In 1981, the IRS updated its rules to employees to fund their 401(k) through payroll deductions. Since then, 401(k) plans skyrocketed in popularity and most US companies adopted it as a way to contribute to employee retirement savings. In modern America, pretty much every decent organization offers a type of 401(k) plan to its employees.

The essence of a 401k is that the employer matches your contribution and you can get useful tax advantages. Accordingly, millions of people in American own 401(k) accounts which are managed by various leading management firms.

How Does It Work?

In a nutshell, an employer offers a 401(k) plan into which the employee contributes through payroll withholding. The employer can match some or all of those contributions. 

There are two types of 401k plans:

  1. Traditional 401k plan– investment earnings not taxed until the investor withdraws the money, typically after retirement.
  2. Roth 401k plan-withdrawals can be tax-free.

The difference in tax at withdrawal comes about this way: for a traditional 401(k), you make contributions before tax. Through the years, your money grows tax-deferred. You lower your taxable income now and defer it to withdrawal time where it will be taxed as ordinary income.

For a Roth 401(k), an employee makes contributions after paying tax on their income. Accordingly, their account grows tax-free, meaning that they don’t have to pay taxes when withdrawing at retirement.

The option you choose depends on your preferences, and also if the company does offer them both.

The decision of how much you wish to contribute is up to you. The IRS has an upper limit of $19,000 for workers 50 years or younger and can allow an extra $6,000 (catch up contribution) for those older than 50. 

This decision should also factor in how much you think you need to save up for your retirement, how much you can actually afford to contribute without living like a hermit, and whether you have other retirement savings investments. 

The organization you work with will stipulate the amount or percentage they are willing to match in your contribution. Moreover, a typical 401(k) plan has a range of investments in which your money can be invested in. Investment firms such as Vanguard, Fidelity, and Charles Schwab manage 401(k) accounts for many companies.

You get to choose investments like mutual funds or Exchange-traded funds (ETFs). There are thousands of stock and bond funds available. They come with varying levels of risk and your investments should preferably be simple and a level of risk you can tolerate. 

A Bitcoin 401(k)

Employees get to choose the asset classes their 401(k) accounts are invested in.

With that in mind, crypto payroll company Bitwage recently unveiled a flagship Bitcoin 401(k) plan. This account is the first of its kind and came about because of the unique circumstances the world currently finds itself. To offer a buffer for businesses during this period of Coronavirus economic disruptions, the US government rolled out the Paycheck Protection Program (PPP) for businesses.

One caveat to this program is that the government incentivized businesses to retain their employees but making loans 100 percent forgivable should the employer use 75 percent of more of the loan in payroll expenses. To use a famous phrase from the Godfather, this is an offer you cannot refuse.

Remember, for a 401k plan, the employer contributes part of the regular contribution to the account. The Bitwage 401k offers employees a way to beat the 75 percent mark by devoting part of the loans into employee’s Bitcoin 401k accounts. Employers with interest in this plan can find an efficient way to divest most of the money into payroll programs to be eligible for loan forgiveness.

Bitwage has partnered with crypto exchange Gemini, the custodian service Kingdom Trust, as well as the established pension provider, Leading Retirement Solutions, who keep records for the 401(k) plan with the Department of Labor and the Internal Revenue Service (IRS). 

In a statement marking the launch, Bitwage stated

“Our vision includes integrating a cryptocurrency trading engine directly inside of the 401(k) Plan so institutional as well as retail investors have access to the same exchange-grade trading tools inside of tax-incentivized retirement accounts.” 

This development is obviously exciting for Bitcoin enthusiasts all over the world. Bitcoin is becoming more entrenched in the daily lives of people. A 401(k) account offering is one more frontier that Bitcoin has conquered in the journey towards becoming the ‘digital gold’ of the world.

Mine Bitcoin, Be Part of the Digital Revolution

The idea of a Bitcoin 401(k) is something few could imagine a few years ago. Retirement accounts are as mainstream as they come. The fact that it is possible to now save for retirement by investing in Bitcoin is a testament to its continual ascension to the status of a great asset class.

Mining Bitcoin directly is another way to be part of this digital revolution and even a proven way of saving on taxes. Bitcoin mining is an open, competitive process by which new coins are created every 10 minutes or so. It is free. Anyone can participate in Bitcoin mining and make money.

Purchasing Bitcoin mining equipment is a direct way to go about it. However, since the equipment needs cheap power and cooling, it is better to utilize the services of a reputable and trusted hosting company located in zones with strong regulations aimed to protect the customer.

VBit Technologies plays this vital role.  Our team of dedicated professionals makes Bitcoin mining a viable endeavor for those who wish to host their mining equipment from our U.S.-based facilities and let us manage them on their behalf. 

Besides, VBit is a state-of-the-art equipment reseller, with a direct line to leading ASIC manufacturer, Bitmain.

To find out more about VBit Technologies, visit our homepage and Sign up!

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