With cryptocurrency on the rise and Bitcoin head and shoulders above the rest, it is now possible to add Bitcoin as an asset to your self-directed IRA. These Bitcoin IRAs are offered by many companies and services, making the process of setting up your own cryptocurrency IRA easier than ever before.
Here we have everything you need to know about Bitcoin IRAs and getting started with them. First, you need to understand what Bitcoin IRAs are and other pertinent details about how they work, including their advantages and disadvantages. Next, you’ll need to find a top Bitcoin IRA provider that has the services you need.
Let’s start our guide with what Bitcoin IRAs are and how they work.
What Are Bitcoin IRAs?
As we have already said, Bitcoin IRAs are self-directed IRAs that accept cryptocurrencies as part of their investment assets. They can also hold other alternative investments, like precious metals or property. These are typically excluded from conventional IRAs.
Most IRAs are not self-directed IRAs that accept Bitcoin. However, with Bitcoin becoming more legitimized as an investment opportunity and cryptocurrency becoming more popular, people are starting to opt for Bitcoin IRAs instead.
They aren’t for everybody, which is why we have explained the pros and cons of investing in Bitcoin as part of your IRA below. Investing with a Bitcoin IRA can enhance retirement for some, not to mention diversifying your portfolio, though it can introduce more risk too. Cryptocurrencies, even the best like Bitcoin, are known for their volatility.
How Do Bitcoin IRAs Work?
So, how do they work? With a Bitcoin IRA, you’re dedicating amounts of the cryptocurrency to it instead of the mutual fund shares that go to normal IRAs. Like normal IRAs, you can opt for a traditional model or a Roth IRA. The main difference between the two is how they are taxed.
Even with cryptocurrency, there are annual contribution limits that are calculated to the value of the Bitcoin you’re putting in. If you already have a normal IRA or 401(k) plan, you can roll the funds over into a self-directed IRA, to which you can then add cryptocurrency assets.
There are important differences between self-directed IRAs and normal IRAs that you need to understand before making the change. As the name suggests, self-directed IRAs, and so Bitcoin IRAs, require more engagement on your part.
Self-directed IRAs are composed of three main components. They are:
- Custodian: The party that holds your IRA for safekeeping and follows regulations set by the IRS and the government. With normal IRAs, these are banks and similar financial institutions. With Bitcoin IRAs, they are the companies that allow individuals to build their own self-directed IRAs.
- Exchange: The party that is used to acquire assets for the IRA. In normal IRAs, they would be stock exchanges. In Bitcoin IRAs, they are crypto exchanges that trade in Bitcoin and other viable cryptocurrencies.
- Storage: This component is more important for self-directed IRAs where assets need to be stored safely, unlike normal IRA shares where they are logged with exchanges. To safely store assets like gold and digital cryptocurrency, many self-directed IRA providers offer secure storage as part of their plans.
Advantages & Disadvantages
Everybody needs a retirement plan that’s fit for them. While many can benefit from dabbling in cryptocurrency investment, it is certainly not for everybody. To help figure out if it is ideal for you or not, here we have the main advantages and disadvantages that are associated with Bitcoin IRAs.
First, let’s cover the advantages. There are three:
- Diversified Assets: The crypto market largely moves independently from stocks and bonds, making it a diversified asset. While most self-directed IRAs focus on the bigger cryptocurrencies, there are also thousands of cryptocurrency projects that you can invest in.
- Good Volatility: Good volatility is volatility that benefits you! With Bitcoin experiencing a very sharp growth in 2020, many speculate that it can happen again as more limited coins are mined. This is good for those who hold Bitcoin as part of their self-directed IRAs. Even just a little Bitcoin in your IRA can pay off tenfold, if not more.
- Makes Taxes Easier: Do you already trade in cryptocurrencies? At present, the tax situation surrounding them is murky and very difficult for individual investors to manage. Every trade is taxed, which adds up when you’re buying, selling, and swapping crypto all day. With IRAs, you are only taxed when the assets or securities in your account are moved. Self-directed IRA companies professionally log trades and calculate taxes owed for you.
Then there are the disadvantages that should be considered:
- Fees: Self-directed IRAs have more fees attached than normal IRAs. Set-up typically comes with a fee, along with account management fees.
- Bad Volatility: Volatility is a double-edged sword. Just like Bitcoin rocketed in 2020, it also crashed and burned in 2018 and has recently trended downward too. Holding cryptocurrency exposes you to volatility and sometimes it can come at your expense.
- Limited Exchange Options: Many Bitcoin IRA providers partner with exchanges, so they only offer to trade on them. This can limit the cryptocurrencies and services available to you, though everybody trades Bitcoin.
- Capital Loss: Capital losses can be deduced or used to offset gains with traditional taxable investment accounts. However, with Bitcoin IRAs that are tax-advantaged, you won’t be able to do that. Instead, you take the capital loss and reap tax benefits elsewhere instead.
- It’s Complex: Lastly, self-directed IRAs are more complex than the traditional option. In fact, Bitcoin IRAs are often ill-suited to holding traditional IRA assets like stocks, bonds, and mutual fund securities. Many who have Bitcoin IRAs also have a traditional one alongside it. With this all said, maintaining a Bitcoin IRA is complex for a reason. It gives you more control over your financial future and opens up a whole new avenue of investment.
Can You Get Bitcoin With A 401(k)?
It’s possible to hold Bitcoin in a 401(k), though you probably won’t get offered this option. Employers won’t let you in most cases, typically due to fiduciary rules that are intended to protect employee investments by sticking to the boring traditional assets. In short, the volatility is too much.
However, it is possible for employers to offer cryptocurrency as part of their plan. It all depends on where you work and where you live. If you’re in charge of your own 401(k) through a solo plan or a SEP IRA, where there is no fiduciary duty, you can include Bitcoin.
Opening A Bitcoin IRA
If you have made the decision to get a Bitcoin IRA, you need to know how it is done. You do this by finding a custodian with which you can open the account. This will typically be one that specializes in self-directed IRA options.
Opening an account requires a name, address, and social security information, along with banking details. Platforms that allow self-directed IRAs should have information online about their onboarding process and the steps you need to take.
They work best for those who have higher risk tolerance and can hold for a long time. Those close to retirement are unlikely to reap any great benefits from a Bitcoin IRA.
That concludes our guide to Bitcoin IRAs and the things you need to know before investing with their providers. The information here should make it clear whether a Bitcoin IRA is right for you or not.