Bitcoin IRA: Definition, Pros & Cons [ Complete Guide 2024 ]

A Bitcoin IRA is a retirement account that lets you invest in cryptocurrencies like Bitcoin alongside your traditional retirement savings.

For many fans of cryptocurrency, investing in Bitcoin for retirement is a natural choice. They believe in the long-term potential of crypto, and they understand the substantial risks of holding BTC over the long term.

If you’d like to hold Bitcoin in an individual retirement account, there are plenty of special considerations to take into account. A Bitcoin IRA can provide you with the tax advantages of traditional and Roth IRAs, but you need to understand the additional IRS rules and regulations governing this type of retirement account.

What Is a Bitcoin IRA?

A Bitcoin IRA is a type of self-directed IRA that is designed to hold cryptocurrency.

“Under the umbrella of self-directed IRAs, Americans have the option to purchase a wide variety of alternative assets,” says Jay Blaskey, head of sales at BitIRA, a Bitcoin IRA provider.

Self-directed IRAs let you invest in alternative assets like cryptocurrency, real estate, precious metals and collectables, all of which are excluded from conventional IRAs. The Retirement Industry Trust Association (RITA), a self-directed IRA industry group, estimates that 3% to 5% of all IRAs are invested in alternative assets.

Investing in Bitcoin for retirement might enhance your investment returns and provide greater diversification, although it also introduces substantially more risk to your retirement portfolio.

How Does a Bitcoin IRA Work?

In some ways, a Bitcoin IRA works much like a conventional IRA, except you’re buying cryptocurrency instead of mutual funds.

You can opt for a traditional IRA or a Roth IRA, and access their substantial tax benefits. It has the same annual contribution limits as a conventional IRA: $6,500 for 2023, or $7,500 if you’re 50 or older. In 2024, those limits will be $7,000 and $8,000 if you’re 50 or older. You can roll over funds from an existing IRA or workplace 401(k).

But the big differences from conventional IRAs make opening and managing a self-directed Bitcoin IRA challenging and potentially expensive. Instead of the one-stop-shopping experience you get at brokerage firms, where you can set up a conventional IRA and buy and sell securities in one place, a Bitcoin IRA requires extra steps.

There are three components involved in a Bitcoin IRA:

• Crypto exchanges. Exchanges facilitate the purchase and sale of crypto held in your Bitcoin IRA.
• Custodians. All self-directed IRA use custodians to hold your assets, and ensure your account adheres to IRS rules. Banks and other financial institutions are custodians for conventional IRAs, while there are specialized crypto custodians for Bitcoin IRAs.
• Secure storage solutions. These protect your crypto from theft. Most Bitcoin IRA providers utilize proprietary secure storage methods to help keep your digital coins safe once you purchase them.

Companies that offer self-directed Bitcoin IRAs may provide all three components, or there may be different companies involved in managing each step. For example, a Bitcoin IRA company might partner with a major crypto exchange to manage purchases and sales of crypto.

One advantage of a Bitcoin IRA for crypto investors is that it can simply your tax game. That’s because buying and selling assets in an IRA shelters you from capital gains taxes.

“The single greatest headache for Bitcoin investors is tracking trades and calculating the taxes they owe,” says Eric Satz, CEO and founder of Alto, an alternative IRA company.

Advantages of Bitcoin IRAs

• Diversification. “Cryptocurrency is an asset class that is not correlated with stocks and bonds, which is what most Americans hold in their retirement accounts,” says Blaskey. This may help protect your retirement balance, even though crypto prices can be quite volatile.
• Potential returns. While Bitcoin may be very volatile, it also offers the potential for huge gains. While BTC ended on a high note in 2021, it’s down 60% for the year.
• Tax advantages. Each time you sell crypto for a profit, you owe capital gains. Buying and selling crypto in a self-directed IRA alleviates this burden as you aren’t taxed as long as the money and assets remain in your account. In addition, you’ll get to benefit from the compounding growth of value you aren’t losing to taxes, says Satz.

Disadvantages of Bitcoin IRAs

• Additional fees. Unlike with normal IRAs, which very seldom charge any fees, self-directed IRAs typically come with several additional fees. These may include set-up fees, transaction fees and annual account management fees.
• Crypto exchange limitations. Some Bitcoin IRA companies only allow you to trade on affiliated currency exchanges.
• Others let you choose your preferred exchange. If you have a particular crypto exchange you want to invest with, make sure your Bitcoin IRA provider allows it.
• Price volatility. Market volatility is a substantial risk for crypto, especially for investors close to retirement.
• No tax loss harvesting. In a taxable investment account, you can take advantage of tax loss harvesting. That means you can use some of your investment losses to offset capital gains taxes. This is not possible in a Bitcoin IRA.
• Retirement planning complexity. You cannot invest in traditional securities like stocks and bonds in a Bitcoin IRA. And no one should invest all of their retirement nest egg in cryptocurrency. Anyone who opts for a Bitcoin IRA should maintain at least one other account for the balance of their retirement investments. This can add a layer of complexity to your retirement planning.

How to Open a Bitcoin IRA

Once you’ve decided you want a Bitcoin IRA, you need to decide where to open your account. That means locating a custodian to host your self-directed IRA and enable you to make cryptocurrency trades.

Like opening any brokerage account, you’ll need to have your full legal name, address, Social Security number and banking information available.

As you’re researching Bitcoin IRA custodians, remember that you’ll want to make sure the account types, exchanges and cryptocurrencies available line up with your goals. Be sure to compare any relevant fees as these can really add up over time and impair your ability to reach your retirement goals.

How to Buy Bitcoin in a Self-Directed IRA

1. Choose a custodian. Not all IRA custodians offer cryptocurrency investment options, so it’s essential to find a custodian that allows for Bitcoin investment in an IRA. Some popular custodians that offer Bitcoin investment options include Bitcoin IRA, BitIRA, and Equity Trust Company.
2. Open a self-directed IRA. Once you have chosen a custodian, you’ll need to open a self-directed IRA account. This type of IRA allows you to invest in assets beyond traditional stocks, bonds, and mutual funds.
3. Fund your self-directed IRA. After opening a self-directed IRA account, you’ll need to fund it. You can do this by transferring funds from an existing IRA or 401(k), making a contribution, or rolling over a 401(k) into an IRA.
4. Purchase Bitcoin. Use the funds to purchase Bitcoin through the custodian’s platform. The process for buying Bitcoin through an IRA is similar to buying it on a cryptocurrency exchange, but the purchase is made through the IRA custodian’s platform.
5. Store your Bitcoin. Since your Bitcoin investment is held within your IRA, it’s crucial to ensure that it’s stored securely. Your custodian will likely offer secure storage options, such as cold storage or a multi-signature wallet.

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Can You Buy Bitcoin in a 401(k)?

There are a few 401(k) plans that allow participants to hold part of their account balance in crypto.

One 401(k) plan provider, ForUsAll, cooperates with crypto exchange Coinbase to offer a plan that lets participants hold some of their assets in crypto. Employers with a Fidelity 401(k) plan may allow participants to allocate a share of their savings to Bitcoin.

While there are options allowing plan participants to buy Bitcoin in their 401(k)s, it’s unlikely that you’ll be offered the option.

“Just like stocks, Bitcoin can be purchased in a 401(k),” says Begman of IRA Financial. “However, from a practical standpoint, employer-sponsored 401(k) plans generally don’t allow for any alternative investment options because of the ERISA fiduciary rule.”

Fiduciary rules governing employer-sponsored plans state that plans must offer a range of investment options while protecting plan participants from large losses. Given how volatile cryptocurrencies can be, employers tend to avoid offering these investments as plan options.

Can You Buy Bitcoin in a Solo 401(k)?

Small business owners and solo entrepreneurs can save for retirement in a solo 401(k) plan. Some, but not all, plan providers let you hold cryptocurrency in solo 401(k) accounts.

“In the case of a Solo 401(k) plan, which is not subject to ERISA rules since there are no non-owner employees, Bitcoin and other alternative asset investments are common so long as the plan documents allow,” says Bergman.

As a bonus, solo 401(k)s have much higher contribution limits than IRAs.

Should You Open a Bitcoin IRA?

For people who are close to retirement, opening a Bitcoin IRA probably is not the most prudent choice, given the volatility of cryptocurrencies.

Investors who have a longer time horizon and higher risk tolerance might consider putting a small portion of their retirement savings in alternative assets like Bitcoin. This choice could offer upside and hedge against potential losses in their conventional holdings.

Just remember, Bitcoin IRAs come with more moving parts than conventional retirement accounts. This means you’ll need to do much more due diligence, not only when researching potential cryptocurrencies but also when determining the right IRA provider.

Make sure you read the fine print and pay close attention to fees, as many costs are not readily apparent without doing some in-depth research. Perhaps most importantly, investments in Bitcoin and other cryptos should only be a small percentage of your overall retirement portfolio.

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