Fund Solo Ethereum Validator Node with IRA

TL/DR

Learn how I used money from my retirement account to buy 32 ETH and set up a solo Ethereum validator node (a server that helps run the Ethereum blockchain and earns an ETH reward for that work).

Here's a diagram that shows the flow of $USD and ETH. I'll go through this in more detail below (in Step 3).

Sequence Flow of $USD to ETH and back to $USD
Sequence Flow of $USD to ETH & back to $USD (Click for high-rez image, and to find source image files for remixing.)

Table of Contents

Target Audience of this Article

This article will probably be useful to you if:

  • You are motivated; probably by one or both of these:

    • You believe in Ethereum and its ideals and you want to support the cause.
    • You think buying ETH for the long term is a good investment.
  • You're in the USA. (This article is USA-centric, but the general process may be helpful to folks in other countries too.)
  • You have a 401k and/or IRA that you'd consider investing in ETH. And your retirement account(s) have enough $USD to buy 32 ETH.
  • You're willing to learn how to manage a server to make this happen. (i.e. making sure you have internet 24/7, managing software upgrades, etc.)

Disclaimer

This is of course NOT financial advice. It's just my story. Nonetheless, I hope that it will help you, dear reader, by serving as a starting point for your own research. As they say, DYOR (do your own research).

Motivation

Setting up a solo validator is a great way to help secure the Ethereum network, and earn some ETH. But it requires an investment of 32 ETH, which most people (myself included) don't have lying around. Using 401k retirement funds seemed like a great way to accomplish the funding part of this project.

But Simon, you may be asking, why not put your 401k in stocks and bonds like most people do?

Here's why: I'm excited about Ethereum for many reasons (which Vitalik summarizes nicely here). Because of that excitement, I'm bullish on ETH. I think that, in the long term, ETH will go up. There have been several boom-and-bust cycles in the crypto market so far. Assuming that continues, there will be multiple opportunities to cash out during a bull period before my retirement. (Again, this is not financial advice, just my opinion.)

Okay, let's get down to brass tacks, as they say. I've broken this into three steps:

Step 1: Open Accounts with an IRA company, a Bank, & some Centralized Exchanges (CEXs)

Gantt chart showing timeline of opening accounts
Open Accounts with an IRA company, a Bank, & some Centralized Exchanges (CEXs) (Click for high-rez image, and to find source image files for remixing.)

  • Checking: I opened a business checking account in the name of my Checkbook LLC with a local credit union. I'm a fan of local credit unions since they're non-profit and generally cheaper than banks. Here's a website to help find credit unions near you: mapping.ncua.gov. In search of low wire fees, I tried a few FinTech non-banks-acting-like-banks too, but I wouldn't recommend them. I'll share them here for completeness:

    • Bluevine.com opened my account and worked fine for ACH transactions to CEXs. But when I tried to wire funds to a CEX, they said I couldn't wire to crypto companies. I Googled and found that crypto was on their list of restricted industries for banking products. I clearly stated what my IRA LLC does when I opened my account. I wish they would have denied my account at the beginning rather than wasting my time.
    • Mercury (affiliate link) replied, "Unfortunately, we can’t open an account for you as your business is in an industry we currently can’t serve." I'm guessing they have a similar policy to Bluevine about not serving crypto companies. I fear that you too, dear reader, may find this to be a common policy for business checking accounts. But hopefully, your local credit union will be able to help you out.

  • CEXs: I opened institutional accounts with several centralized exchanges:

    • Coinbase was the fastest to review and approve my application. They allowed $5,000/day deposits via ACH with no fee. But there was a holding period before I could send ETH to my self-custody wallet.
    • Kraken was pretty quick to review and approve my application. Their trading fees seem to be the lowest. They allowed $10,000/week deposits via ACH with no fee.
    • Gemini was the slowest to review and approve my application. To connect my checking account, they wanted a wire transfer first (as opposed to using Plaid or ACH).

But Simon, you may be asking, why open accounts with multiple CEXs?

Because I wanted to have the flexibility of multiple fiat-crypto on-ramps & off-ramps available. And because I wanted to compare their prices and fees.

Simon, you may be asking, why did you choose these three CEXs?

I looked for CEXs with the best reputation and commitment to serving U.S. institutions. I don't want to use services from companies that could go bankrupt (like FTX did), or stop serving institutions (like crypto.com did). Some might consider using binance.us, but I decided not to for now.

Step 2: Plan Infrastructure

  • Created a self-custody wallet. I like KeyStone hardware wallets (affiliate link). I also like their metal, recovery phrase backup storage accessories too. Self-custody means I'm responsible for my crypto. If someone learns my 24-word seed phrase, they could steal all my ETH. So it's worth spending some time on security. (It's a big topic, so I'll link to a Google search to help you get started: how to secure your crypto recovery phrase.)

  • Server setup. Running a validator node requires some work. I'm still ironing out my plans for this. I hope to share my final plans in a future post. But for now, I can tell you that I'm considering:

    • Buying a server from a company that specializes in this kind of thing (either a DAppNode or an AVADO), or...
    • Starting with a Rocketpool node and rolling my own server solution for it.

Step 3: Transfer Funds and Get Started

Now we'll go through all the steps on this diagram in detail:

Sequence Flow of $USD to ETH and back to $USD
Sequence Flow of $USD to ETH & back to $USD (Click for high-rez image, and to find source image files for remixing.)

  • I rolled over $USD from my 401k to my self-directed IRA. I had to fill out a form with IRA Club to start the process.

    • I made sure I had enough $USD to buy 32 ETH (plus some for gas).
    • Remember, this process is going to take some time and the price of $USD/ETH can fluctuate. Best to have more than enough $USD if possible.

  • I transferred $USD from my self-directed IRA to my LLC's checking account. I left enough money in the IRA to cover annual fees and such.

    • I had two options for how to make this transfer: mailed check or wire transfer. Let's consider the pros & cons:

      • Wire transfer Pro: faster.
      • Wire transfer Con: fees to send and receive the wire.
      • Mailed check Pro: cheaper than a wire.
      • Mailed check Con: takes longer than a wire.
  • I deposited $USD into my CEX account from my checking account. I did chunks of $5,000 at a time via ACH (as opposed to wire transferring it all at once). Why? Because there are no fees with ACH transfers. Plus, that strategy made me DCA (Dollar Cost Average) my ETH buys.
  • I bought 32+ ETH. Making sure to have some extra ETH to pay for Ethereum Mainnet gas fees (steps 5-9). Since this is a long-term strategy, I was patient; always placing post-only limit orders (which have cheaper fees than market orders where you pay the taker fee).
  • My solo validator will do its thing. I'll keep it running and connected to the internet. And voila, I'll earn ETH rewards. And I'll feel cool because I'm helping secure the Ethereum network.
  • These "partial withdrawals", as they're called, will happen automatically (because I submitted my withdrawal wallet address during step 6).
  • My plan is to periodically withdraw these ETH rewards as they accumulate.
  • Periodically, I'll sell the ETH rewards for $USD. This is a long-term strategy, so I will be patient; always placing post-only limit orders for these trades.
  • Periodically, I'll send $USD via ACH to my IRA LLC checking account...
  • ...and then, send that $USD to my IRA via mailed check. (Avoiding wire fees.)
  • Every year, I'll need to report the $USD value of my 32 ETH to my IRA company.
  • Once I turn 59½ years old, I'll be able to start taking retirement withdrawals. IRA Club currently has a $5/month fee for ACH withdrawals like this.

Alternate Idea: Compound ETH Rewards

One alternate idea I'm considering: instead of selling the ETH rewards periodically (steps 9-12 above), I could stake the ETH with an LSD (liquid staking derivative) provider like Lido. LSDs are a tokenized representations of staked assets in a blockchain network. They allow users to take advantage of validator staking rewards, even if they have less than 32 ETH to stake. But they take a percentage of the ETH staking rewards for their service (10% fee with Lido).

Following this strategy, once I earn enough ETH rewards to get a second chunk of 32 ETH, I could set up a second validator node. Or, maybe by the time that happens, Ethereum will have incorporated EIP-7251, which will increase the max ETH staked limit from 32 ETH to 2048 ETH. That will allow me to compound my ETH rewards in my one validator node, without having to use an LSD like Lido.

That's all, folks!

Thanks for reading! If you have any questions or suggestions for improving this article, please send them my way (hi@yamlike.com). Cheers.

—Simon Dorfman

Shout-out and thanks to Rodrigo Vasquez, James He, Dale Dobeck, and Seth Akkerman for review and feedback on this article.

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