With cryptocurrency on the rise and Bitcoin head and shoulders above the rest, adding Bitcoin as an asset to your self-directed IRA is now possible. These Bitcoin IRAs are offered by many companies and services, making the process of setting up your cryptocurrency IRA easier than ever before.
Here is everything you need to know about Bitcoin IRAs and getting started with them. First, you must understand Bitcoin IRAs and other pertinent details about their work, including their advantages and disadvantages. Next, you’ll need to find a top Bitcoin IRA provider with the needed services.
Let’s start our guide with Bitcoin IRAs 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, so 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 regular IRAs. You can opt for a traditional model or a Roth IRA like ordinary IRAs. The main difference between the two is how they are taxed.
Even with cryptocurrency, annual contribution limits are calculated to the value of the Bitcoin you’re putting in. If you already have a regular 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 essential differences between self-directed and regular 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 regular IRAs, these are banks and similar financial institutions. With Bitcoin IRAs, they are the companies that allow individuals to build their self-directed IRAs.
- Exchange: The party that is used to acquire assets for the IRA. In ordinary IRAs, they would be stock exchanges. Bitcoin IRAs are crypto exchanges that trade in Bitcoin and other viable cryptocurrencies.
- Storage: This component is more critical for self-directed IRAs, where assets must be stored safely, unlike average IRA shares, 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 not for everybody. To help you determine if it is ideal for you, have the main advantages and disadvantages of Bitcoin IRAs.
First, let’s cover the advantages. There are three:
- Diversified Assets: The crypto market moves independently from stocks and bonds, making it a diversified asset. While most self-directed IRAs focus on the more significant 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 sharp growth in 2020, many speculate it can happen again as more little coins are mined. This is good for those who hold Bitcoin as part of their self-directed IRAs. Even a little Bitcoin in your IRA can pay off tenfold, if not more.
- Makes Taxes Easier: Do you already trade in cryptocurrencies? The tax situation surrounding them is murky and complicated for individual investors to manage. Every trade is taxed, which adds up when 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 regular 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. 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, you won’t be able to do that with tax-advantaged Bitcoin IRAs. Instead, you take the capital loss and reap tax benefits elsewhere instead.
- It’s Complex: Self-directed IRAs are more complex than traditional ones. 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 new investment avenue.
Can You Get Bitcoin With A 401(k)?
Holding Bitcoin in a 401(k) is possible, though you probably won’t get offered this option. In most cases, employers won’t let you, typically due to fiduciary rules intended to protect employee investments by sticking to boring traditional assets. In short, the volatility is too much.
However, employers can 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 decided 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 one will typically specialize in self-directed IRA options.
Opening an account requires a name, address, social security information, and 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 with higher risk tolerance and can hold for a long. Those close to retirement are unlikely to reap significant benefits from a Bitcoin IRA.
That concludes our guide to Bitcoin IRAs and what 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.