I was talking to an 83yo the other day.
He asked, "You are maxxing out your IRA contributions every year right?"
😂😂
Discussion
You can do this with bitcoin now. Self custody Roth IRA in fact. No tax on the way out.
I thought Roths were funded with post-tax earnings?
So isn't that like buying self-custody bitcoin but with extra steps and kyc?
I think I may be misunderstanding why anyone would do this
Good questions. Roth SC IRA isn’t always the best bet; because stacking early matters, your marginal tax rate matters a lot. Here’s why:
If you are allowed to get a Roth, your income by definition isn’t high. So perhaps your average tax rate is 15%.
Say you earn $10,000. This leaves you with $8500 (or adjust to be whatever max contribution is for the year) to put in to a Roth.
You put away $8,500 a year for 10 years and then stop contributing…you’ve paid $15,000 in tax and both $85,000 of bitcoin but probably spent $9,000 on IRA fees. The roughly 0.34 bitcoin you accumulated is worth say $450,000 when you stop accumulated after 10 years (note, in the first three years you stacked 0.2 bitcoin). T
Then you spend 10 years spending the dollars you would have put away in an IRA…then you retire (now at 20 years total). Your bcn stack is perhaps worth $3,000,000 which you draw down at a rate of $14,500 per month, assuming draw down increases at 3% inflation per year.
Your money runs out at year 47, but would last over 60 years at $12,000 per month and indefinitely if monthly spend were $10,000 (or if inflation were 2% instead of 3%)
Your marginal tax rate with this income will probably be less than current 24%, but you don’t pay it because it’s a Roth. So your avoiding say 15% of $175,000/yr in tax..that’s roughly $25,000/yr of not tax.
This is getting long…let me run the pretax contribution scenario in a separate note
If you did a pre tax contribution, you get to buy the full $10,000 worth of bitcoin instead of $8,500.
For 10 years of stacking, you now get 0.41 bitcoin and avoided $15,000 in tax. At year 10, your stack is worth $540,000. If you decided to take this as income as a lump sum, your average tax rate might be 26%, so don’t do that, you’d spend $140,000 in tax.
Instead, you work another 10 years but just stop contributing and spend the money you would have contributed instead. At year 20, your stack is worth $3,600,000.
At a monthly draw down of $14,500 and assuming this increases at 3% per year, you take out $175,000 a year (at the beginning and the inflation adjusted equivalent after that) and pay a tax of say $25,000-$35,000/ yr.
Let’s say you draw down at the same $14,500 per month. You money lasts at least until year 65. If you want to die at year 65 from now with nothing left, you can spend $15,250 a month.
So the Roth wasn’t the better deal here. I thought it would have been the opposite. I guess it would have been a better deal if bitcoin price didn’t rise so rapidly during the stacking period (pretax stack is considerably larger than the post tax Roth stack).
Note, future bitcoin prices above are estimated using power law model, which fits historical bitcoin price data far better than other models and produces reasonable future price predictions over several decades.
Main take away from this long analysis, for which I used a very complicated spreadsheet I’ve been working on for over a year, can be summed up by the freely given wisdom of nostr:npub1rtlqca8r6auyaw5n5h3l5422dm4sry5dzfee4696fqe8s6qgudks7djtfs : nobody goes in hard enough the first time. If I re-ran these scenarios starting 5 years ago, one could contribute just for the first year and still end up ahead of the 10 year stacker today. That said, stacking moderately for 10 years beats slaving away for 40 in the current fiat system.
It seems to me that self-custody bitcoin obsoletes Roths. Why put post-tax dollars in any investment vehicle other than self-custody bitcoin?
To my 83yo friend, it seems insane to not be maxxing IRA contributions. 15 years ago this wouldve been great advice.
To me, it seems insane to put in a trad IRA any more than the minimum to get an employer's matching contribution.
I’m a little shocked at how much pretax bitcoin buys gets you.
The reason Roth makes sense over private self custody is no tax on the way out. With private self custody your tax is due in the quarter of your realized gain. Whether one has a provable gain or not is an issue for the courts, but that process is expensive even if you win.