What Is A Bitcoin IRA?

Investing in Bitcoin for retirement could offer you substantially higher returns and add diversity to your retirement portfolio. But if there’s one thing we’ve learned about any cryptocurrency, it’s that they are extremely volatile and very risky. Here’s what you need to know if you’ve decided to save for retirement in a Bitcoin IRA.

A Bitcoin IRA is another name for a self-directed IRA. Self-directed individual retirement accounts allow you to invest in alternative asset classes, like real estate, precious metals and cryptocurrency, which are excluded from conventional IRAs.

“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.

Investing in Bitcoin for retirement may enhance your investment returns as well as provide broader diversification, although it also introduces substantially more risk to your retirement portfolio.

“Traditional financial institutions do not allow IRAs to invest in IRS-approved alternative assets because their focus is on earning fees through traditional investments,” says Adam Bergman, founder and CEO of IRA Financial. “Hence, the birth of the self-directed IRA industry.”

Currently, the Retirement Industry Trust Association (RITA) estimates that between 2-5% of all IRAs are invested in alternative assets.

How Does a Bitcoin IRA Work?

In general, a Bitcoin IRA works much like a normal IRA, except you’re investing your money in cryptocurrency instead of mutual fund shares. You’re able to choose between traditional and Roth self-directed IRAs and benefit from their associated tax advantages. You face the same annual contribution limits, $6,000 or $7,000 if you’re 50 or older in 2021.

If you’re self-employed or a small business owner, you can opt for SEP and Simple IRAs and solo 401(k)s, which have substantially higher contribution limits. You can even roll over funds from a normal IRA to a self-directed IRA.

While self-directed IRAs are largely similar to normal IRAs, they do differ in a couple of key ways. Instead of the one-stop shopping experience that most brokerage firms provide, where you can set up an IRA and buy and sell securities in one place, you may have to be a little more DIY with a Bitcoin IRA. You’ll need to keep in mind three components:

A custodian holds your IRA and is responsible for its safekeeping along with ensuring your account adheres to regulations set by both the IRS and government. This is the role banks and other financial institutions typically play with normal IRAs.
An exchange manages your cryptocurrency trades. A crypto exchange (also known as a DCE or digital currency exchange) is similar to the stock market. It’s a place where digital currencies are actively traded and where you’ll purchase your Bitcoin, Ethereum or other cryptocurrency.
A secure storage solution protects your cryptocurrency. Most providers of Bitcoin IRAs include proprietary secure storage methods to help keep your digital coins protected from theft once you purchase them.

Self-directed IRA providers may provide all of the above or any variation. For example, a Bitcoin IRA company might partner with a particular exchange or might allow you to trade using any third-party crypto exchange.

Advantages of Bitcoin IRAs

Bitcoin IRAs offer investors several advantages, including:

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 may be volatile in its own way.
Potential for high returns. “Bitcoin is very volatile, but with volatility comes the potential for huge gains,” says Bergman. “For example, Bitcoin was at $5,200 on March 15, 2020 and ended the year close to $30,000 and Ethereum, the second most popular crypto, was up over 400% in 2020. I think the huge upside potential of Bitcoin is well worth the risk, especially if you are only investing a small percentage of your overall IRA value.”
Tax advantages. “The single greatest headache for Bitcoin investors is tracking trades and calculating taxes owed,” says Eric Satz, CEO and founder of Alto, an alternative IRA company. Because you owe taxes each time you sell cryptocurrency at a profit, it can be a bookkeeping nightmare to stay on top of your various purchase prices and gains. Investing in a tax-advantaged account, like a traditional or Roth IRA, alleviates this burden as you aren’t taxed on anything as long as the money and securities are held 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

Saving for retirement with Bitcoin, however, is not without its cons:

Fees. Unlike with normal IRAs, which generally allow you to invest for free, self-directed IRAs generally come with more fees involved. From set-up fees to trading and account management fees, make sure you’re well aware of the costs associated with investing in cryptocurrency for retirement.
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.
Volatility. “We saw the price of Bitcoin go from close to $20,000 in December 2017 to as low as $3,400 in December 2018,” says Bergman. That kind of volatility is a substantial risk for an IRA, especially for investors close to retirement.
Capital losses. In a normal, taxable investment account, those kinds of losses would be unfortunate—but not without their upside. You’re generally able to deduct losses you incur while investing or use them to offset gains with other investments. Due to the tax-advantaged status of a Bitcoin IRA, this isn’t possible, however.
Complexity. In addition to handling the moving parts of custodians, exchanges and secure storage, you’ll probably need to maintain at least one other retirement account when you invest in a Bitcoin IRA. That’s because “Bitcoin IRAs are certainly not set up to accommodate traditional assets like stocks, bonds and mutual funds,” says Blaskey. This can add a layer of complexity to your retirement planning.

Can You Buy Bitcoin in a 401(k)?

It’s possible to hold Bitcoin in your 401(k) but unlikely you’ll be offered the option.

“Just like stocks, Bitcoin can be purchased in an IRA or 401(k),” says Begman of IRA Financial. “However, from a practical standpoint, an employer-adopted 401(k) plan with employees will likely not allow for any alternative investment options because of ERISA fiduciary rules.”

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.

Business owners sponsoring their own retirement plan via a Solo 401(K) or SEP IRA, however, can build their own plan that includes investments like Bitcoin.

“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.

How to Open a Bitcoin IRA

Once you’ve decided on 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.

When you’re ready to open an account, start 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. To get you started, here are six leading Bitcoin IRA providers:

BitIRA

BitIRA advertises as the world’s most secure IRA for digital currency. While pricing on its website is absent, it offers a toll-free number to get your questions answered prior to opening an account.

IRAs Offered: Yes
Solo 401(k) Plans Offered: Yes
Minimum Opening Account Balance: $20,000
Cryptocurrencies offered: Bitcoin (BTC), Bitcoin Cash (BCH), Ethereum (ETH), Ethereum Classic (ETC), Litecoin (LTC), Ripple (XRP), Stellar (XLM), Zcash (ZEC)
Disclosed Pricing: $50 account setup fee, $195 annual maintenance fee, 0.05%/month storage fee. Investors should call for additional buy/sell fees on trades

Bitcoin IRA

Bitcoin IRA boasts over 50,000 account holders and an easy-to-navigate website chock full of educational materials for prospective investors. If you’re interested in opening an account, you’ll need to call for fees.

IRAs Offered: Yes
Solo 401(k) Plans Offered: No
Minimum Opening Account Balance: $3,000
Cryptocurrencies offered: Bitcoin (BTC), Bitcoin Cash (BCH), Ethereum (ETH), Ethereum Classic (ETC), Litecoin (LTC), Ripple (XRP), Stellar (XLM), Zcash (ZEC)
Disclosed Pricing: Bitcoin IRA charges a one-time fee based on your initial investment plus a custodian and security fee. Investors must call for pricing

BlockMint

BlockMint’s website is scarce on details so investors are advised to call for additional details or submit a query via its website prior to opening an account. Notably, account holders are assigned a dedicated account executive for all their questions and needs.

IRAs Offered: Yes
Solo 401(k) Plans Offered: No
Minimum Opening Account Balance: $10,000
Cryptocurrencies offered: Bitcoin (BTC), Bitcoin Cash (BCH), Ethereum (ETH), Ethereum Classic (ETC), Litecoin (LTC), Ripple (XRP)
Disclosed Pricing: 15% transaction fee, 2.5% purchase transaction fee, 1% sell transaction fee, $195 annual maintenance fee and 0.50% monthly storage fee assessed on your IRA balance

Equity Trust

One of the oldest self-directed IRA custodians (established in 1983), Equity Trust offers a wide variety of cryptocurrencies. Its fee schedule, however, is a bit complex, so be sure to review prior to opening your account.

IRAs Offered: Yes
Solo 401(k) Plans Offered: Yes
Minimum Opening Account Balance: $500
Cryptocurrencies offered: Bitcoin (BTC), Bitcoin Cash (BCH), Bitcoin SV (SV), Ethereum (ETH), Ethereum Classic (ETC), Litecoin (LTC), Stellar (XLM), Zcash (ZEC)
Disclosed Pricing: $50-75 account setup fee, annual fee assessed based on account value, $20/month platform fee, 0.07% monthly fee based on account balance, 3.5% purchase fee, 1% sell fee

IRA Financial Trust

IRA Financial Trust is a low-cost leader in Bitcoin IRA custodians that also allows users to buy crypto using the exchange of their choice. It offers a flat-fee schedule for IRAs along with no minimum opening balances.

IRAs Offered: Yes
Solo 401(k) Plans Offered: Yes
Minimum Opening Account Balance: $0
Cryptocurrencies offered: IRA Financial Trust is a custodian and investors choose their own cryptocurrency exchange for buying and selling crypto. It has a partnership with Gemini exchange and also offers checkbook IRA control for investors who want to hold crypto not available on Gemini. Gemini currently offers 47 different cryptocurrency products
Disclosed Pricing: $75 quarterly fee for IRAs, $0 quarterly fee for Solo 401(k), no broker or management fees. When using Gemini as the exchange, customers enjoy the Active Trader fee schedule which results in fees between 0-0.35% per crypto transaction

iTrust Capital

Another low-cost platform, iTrust Capital offers cryptocurrency and digital gold assets within its self-directed IRAs. It’s also one of the few companies that allows inventors to transfer existing cryptocurrency assets to their IRAs in-kind without liquidating first.

IRAs Offered: Yes
Solo (k) Plans Offered: No
Minimum Opening Account Balance: $2,500
Cryptocurrencies offered: Bitcoin (BTC), Bitcoin Cash (BCH), Ethereum (ETH), EOS (EOS), Litecoin (LTC), Ripple (XRP)
Disclosed Pricing: $29.99/month account fee, 1% crypto trade fee, no additional storage fees

Should You Open a Bitcoin IRA?

For investors closer to retirement, it’s likely not the most prudent option to open a Bitcoin IRA, given the volatility of cryptocurrencies. However, for those who have a longer time horizon and risk tolerance, investing a small portion of their retirement savings in alternative assets, such as Bitcoin or other cryptos, could offer upside and hedge against losses from their conventional holdings.

Bitcoin IRAs come with more moving parts than the retirement accounts you’re used to. 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 understand fees, as many are not readily apparent from their websites. And, perhaps most importantly, consider Bitcoin and other cryptos as a small part of your overall retirement plan, not its entirety.