Robert first came across Voyager Digital in March 2020.
Like countless others, he decided to give the cryptocurrency broker a try. The platform was easy to navigate. It offered him an up to 9% annual percentage yield (APY)—much higher than a traditional savings account. It claimed to be FDIC (Federal Deposit Insurance Corporation) insured. And being a publicly traded company on the Toronto Stock Exchange, he thought, how bad could Voyager be?
Robert, who asked to be identified by only his first name for privacy reasons, ultimately invested six figures on Voyager, or 70% of his savings, he tells Fortune. Another user, who invested on Voyager for about six years and asked to remain anonymous due to safety concerns, has about $38,000 invested on the platform.
Voyager also is not FDIC-insured, despite its advertisements that “In the rare event your USD funds are compromised due to the company or our banking partner’s failure, you are guaranteed a full reimbursement (up to $250,000).” Its “banking partner,” Metropolitan Commercial Bank, is FDIC insured, but Voyager is not.
Learning this, the user of six years said, was “like a kick in the stomach.”
“Every day, honestly, I cry,” Robert says. “I don’t know what to tell my wife. As partners, we decided to [invest on Voyager], but she trusted me, more than anyone else, to make the proper decision.”
Now these investors are learning how overleveraged Voyager was, and how it invested their savings in a now-defunct hedge fund that engaged in extremely risky behavior.
Voyager has mainly blamed defunct hedge fund Three Arrows Capital (3AC) for its troubles, saying 3AC has not repaid a $650 million loan.
Like the rest of the crypto market, 3AC took a hit after the Terra ecosystem collapse in May. By June, major cryptocurrency lender Celsius Network was rumored to be bankrupt, and 3AC wasn’t far behind. Their failures set off a domino effect throughout the industry as many of the major crypto lenders and funds seemed to be exposed to each other, and last week, 3AC creditors sought its liquidation in a court in the British Virgin Islands.
Voyager, however, is trying to restructure and not liquidate, meaning that it hopes to return at least a percentage of its customers’ investments, according to its court filings. Voyager also said in court filings that it may potentially offer shares or tokens in its reorganized company to customers post-bankruptcy. But in the meantime, its customers struggle being unable to withdraw their savings. As they await next steps, some have even shared thoughts of suicide and depression online.
“It’s heartbreaking,” Robert says. “I feel extremely awful because I was unprepared.”
Voyager acted like a bank, and most of its users treated it as such. Over time, the broker began offering customers high yield for their deposits. To make good on their offerings, Voyager lent such funds to others for sometimes even higher yield.
Up until the company announced it was pausing withdrawals and filing for bankruptcy protection, Voyager continued to tell customers that it was doing fine.
Just weeks before Voyager filed for bankruptcy protection, CEO Stephen Ehrlich stated that customers’ assets were safe. In early June, Voyager tweeted that all “products and services are fully operational and remain unaffected by current market conditions, including trading, rewards, deposits, and withdrawals. We take risk management very seriously, and safeguarding customer assets is our number one priority.”
The company stated that it “never engaged in DeFi [decentralized finance] lending activities.”
Regardless of whether it engaged in DeFi lending or not, Voyager’s overexposure to 3AC became obvious once the market took a turn for the worse. The company hoped to shore up its finances after securing a roughly $500 million line of credit from quant trading shop Alameda Ventures in late June. But, still worried about a “run on the bank” due to users attempting to withdraw their funds, as its court filing states, Voyager ultimately decided to move forward with filing Chapter 11.
“I had no idea that Voyager would be lending [customers’ USDC] out to a hedge fund,” said the user of six years. “Had I known that it would be possibly lent out, I probably would have just kept it in cash in my safe.”
“I did every single thing a reasonable person would do, which is go through and look at the company,” Robert said. He noticed that the company wasn’t targeted by regulators and thought that was a good sign. “I should have known. Everything in hindsight, obviously, is a different thing.”
Scott Melker, a well-known crypto investor and podcaster with over 851,000 Twitter followers, tells Fortune that he has been using Voyager since 2019 and has “multiple seven figures” stuck on the platform.
It “hurts” being unable to access an account he used for savings, he says, but notes that he’s hedged his portfolio and understands that he took a big risk. Mostly, Melker feels badly about those he told Voyager about, including friends, family and his viewers.
“I understand that people make their own decisions, but they wouldn’t have even thought about it if I had not brought [Voyager] to their attention. And, frankly, that’s worse than losing my own money,” he said.
A bankruptcy lawyer and a crypto lawyer told Fortune that it’s unclear how long the bankruptcy process will take. But, they emphasized that Voyager is hoping to restructure, not liquidate, a hopeful sign for retail investors getting any of their money back.
The company mentioned it hopes to provide its users with at least some of their funds after it reorganizes. Due to the variety of assets users bought on the platform, it’s uncertain whether users can be made entirely whole.
Melker tells Fortune that he is one of the top 50 asset holders on the platform, and the top 10 or 20 holders might have a say in what happens moving forward in the bankruptcy procedure, citing a hearing that just happened.
Voyager recently said it had approximately $1.3 billion of crypto assets on its platform, adding that the company has over $110 million of cash and owned crypto assets on hand, which will “provide liquidity to support day-to-day operations during the Chapter 11 process,” it says. Voyager also mentioned it has $350 million of customers’ cash held in an account at Metropolitan Commercial Bank.
This experience has scarred some to such an extent that they’ve vowed to never invest in cryptocurrency again. Others, in contrast, remain bullish.
Melker, for example, doesn’t have anything against the company or its creators. His history with Voyager runs deep—the company even briefly sponsored his podcast for a small period of time when he first started it, he says. He is hopeful that he and others will see their assets again.
“Listen, I’m out millions of dollars,” he says. “You know, it’s embarrassing. I’m a person who talks about risk management and protecting your assets, but I was arguably, in hindsight, overexposed, but it was what I was comfortable with.”
Of course, Voyager users are also hoping that they will soon have access to their savings.
“Hope, unfortunately, is not a plan, but there’s nothing I have control over,” Robert says. “All I need is to get my original assets back. I don’t need the rewards or the interest earned. I just need the assets back.”
Voyager Digital did not immediately respond to Fortune’s request for comment.
This story was originally featured on Fortune.com
American Weed Stocks Are Cheap. They’re About to Get a Sales Bump.
How Do Mega Backdoor Roths Work?
A mega backdoor Roth is a unique 401(k) rollover strategy that’s designed for people whose incomes would ordinarily keep them from saving in a Roth Individual Retirement Account. The advantage of using a Roth IRA to save for retirement is being able to make tax-free qualified withdrawals. But not everyone can contribute to these accounts; higher-income earners are excluded. That’s where the mega backdoor Roth comes into play. If you have a 401(k) you’d like to roll over, you could use this strategy to enjoy the tax benefits of a Roth IRA without having income be an obstacle.
Make sure you’re taking advantage of every opportunity to maximize your retirement assets by working with a financial advisor.
Roth Account Basics
Before diving into the specifics of a mega backdoor Roth, there are a few things to know about Roth accounts, including Roth IRAs and Roth 401(k)s.
First, these accounts are both funded with after-tax dollars. That means when you make qualified withdrawals later, you won’t pay income tax on the money since you already paid it upfront. This is the key characteristic of Roth accounts and what makes them so appealing to investors who anticipate being in a higher tax bracket at retirement.
Next, your ability to contribute to a Roth 401(k) is not restricted by your income. But it is for a Roth IRA. For the 2021 tax year, you must be within these modified adjusted gross income limits to make a full Roth IRA contribution:
Single filers: MAGI of $125,000 or less
Married filing jointly: MAGI of $198,000 or less
Head of household: MAGI of $125,000 or less
You can make partial contributions above those income limits. But your ability to contribute phases out completely once your MAGI hits $140,000 (if you file single or head of household) or $208,000 if you’re married and file a joint return. For 2021, the full contribution allowed is $6,000 with a $1,000 catch-up contribution for savers aged 50 and older.
Finally, Roth 401(k) accounts are subject to required minimum distribution rules just like traditional 401(k) accounts. This rule requires you to begin taking money from your 401(k) starting at age 72. A Roth IRA, on the other hand, is not subject to RMD rules.
What Is a Backdoor Roth?
A backdoor Roth offers a work-around for people whose incomes are above the limits set by the IRS. When you execute a backdoor Roth, you roll money over from a traditional IRA to a Roth account. This way, you won’t have to pay taxes on your retirement savings in the Roth IRA when it’s time to make withdrawals. And you’re not subject to required minimum distribution rules either.
But there is a catch. You have to pay income tax on the money you roll over to a Roth account. So while you could save money on taxes in retirement, you’re not escaping the tax liability of a traditional IRA altogether.
How a Mega Backdoor Roth Works
A mega backdoor Roth is a backdoor Roth that’s designed specifically for people who have a 401(k) plan at work. This type of backdoor Roth allows you to contribute up to $38,500 to a Roth IRA or a Roth 401(k) in 2021. This is in addition to the regular annual contribution limits the IRS allows for these types of accounts. To execute a mega backdoor Roth, two conditions have to be met. Your 401(k) plan needs to allow the following:
You can ask your plan administrator whether your 401(k) meets these criteria. And if your plan doesn’t allow for in-service withdrawals or distributions, you could still attempt a mega backdoor Roth if you plan to leave your job in the near future.
If your plan meets the criteria, then you can take the next steps to execute a mega backdoor Roth. This is typically a two-step process that involves maxing out after-tax 401(k) contributions, then withdrawing the after-tax portion of your account to a Roth IRA.
Again, whether you can follow through on the second step depends on whether your plan allows in-service withdrawals. If it doesn’t, you’ll have to wait until you separate from your employer to roll over any after-tax money in your 401(k) into a Roth IRA.
You also need to watch out for the pro rata rule. This IRS rule says you can’t only withdraw pre- or post-tax contributions from a traditional 401(k). So if you’re completing a mega backdoor Roth, you couldn’t just withdraw post-tax contributions if your account holds both pre- and post-tax funds. In that case, you may have to roll over the entire balance to a Roth IRA.
Benefits of a Mega Backdoor Roth
There are three key benefits associated with executing a mega backdoor Roth. First, you can contribute significantly more to a Roth IRA upfront this way. For 2021, the contribution limit is $38,500 on top of the regular annual contribution limit and any catch-up contribution limits that may apply.
You’ll need to know the maximum amount you’re allowed to contribute to the after-tax portion of your 401(k). So for 2021, the IRS allows a maximum contribution of $58,000 or $64,500 if you’re 50 or older. You’d subtract your 401(k) contributions and anything your employer adds in matching contributions to figure out how much you could add to the after-tax portion.
Next, you can enjoy tax-free withdrawals in retirement. This is a benefit you may otherwise not being able to get if your income is too high to contribute to a Roth IRA. By reducing your tax liability in retirement, you can help your investment dollars go further. And you may have a larger legacy of wealth to pass on to future generations.
Finally, a mega backdoor Roth IRA would allow you to sidestep required minimum distribution rules. This means that you could retain control over when you choose to take distributions from a Roth IRA.
So who is a mega backdoor Roth right for? You may consider this move if you:
Have an eligible 401(k) plan at work
Have maxed out traditional 401(k) contributions
Are not eligible to contribute to a Roth IRA because of your income
Have additional money that you want to invest for retirement
Want to leverage the higher Roth IRA contribution limits allowed by a mega backdoor rollover
Talking to your financial advisor can help you decide if a mega backdoor Roth makes sense. And your 401(k) plan administrator should be able to tell you if it’s possible, based on your plan’s guidelines.
Mega Backdoor Roth Alternatives
If you can’t execute a mega backdoor Roth because your plan doesn’t allow it, there are other ways to increase your retirement savings. For example, you could try a regular backdoor Roth instead. This might be something to consider if you still want to enjoy the tax benefits of a Roth IRA but your plan doesn’t fit the criteria for a mega rollover. You could also elect to make Roth 401(k) contributions to your retirement plan at work. This way, you still get the benefit of contributing after-tax dollars and making tax-free withdrawals. You’d be subject to the regular contribution limits and you’d still have to take the required minimum distribution. But that may outweigh the value of tax savings in retirement.
Investing in a Health Savings Account (HSA) is another option. While these accounts are not specifically designed for retirement, they can yield multiple tax benefits. Contributions are tax-deductible and grow tax-deferred. Withdrawals are tax-free when used for eligible healthcare expenses. And at 65, you can take money out of an HSA for any reason without a tax penalty. You’ll just owe ordinary income tax on any withdrawals that are not used for healthcare expenses.
Finally, you could open a taxable brokerage account to invest. This doesn’t necessarily save you money on taxes since you’ll owe capital gains tax when you sell investments at a profit. But it could help you to diversify your investments and there are no limits on how much you can invest in a brokerage account annually.
A mega backdoor Roth strategy could work well for higher-income earners who want to take advantage of Roth account benefits. There are certain rules that need to be followed to make it work, however, so you may want to talk to your plan administrator or a tax professional before going ahead. Keep in mind also that even if you can’t complete a mega backdoor Roth rollover, you still have other options for growing retirement savings.
Tips for Retirement Planning
If you’re saving for retirement in a 401(k) or IRA, pay attention to the fees you’re paying. For instance, check the expense ratios for each fund you’re invested in to understand how much you pay to own that fund on an annual basis. You can then compare that to the fund’s performance to determine whether the fees are justified. Also, consider any administrative fees you might be paying and how those affect your net returns.
Consider talking to your financial advisor about a mega backdoor Roth and whether it could be right for you. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area. You can get your personalized recommendations in minutes just by answering a few simple questions. If you’re ready, get started now.
Photo credit: ©iStock.com/designer491
Alibaba Is Tumbling. Chinese Tech Stocks Have a New Headache.
Chinese tech stocks were tumbling on Monday as two of the embattled sector’s leading players faced fresh fines from market regulators over disclosure rules.
China’s State Administration for Market Regulation announced Sunday a wave of penalties for improperly reporting past deals, in breach of competition law.
(ticker: BABA) and
(0700.H.K.) were among the companies fined as a result.
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