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How to buy bitcoin in a IRA: Rules, benefits, risks, and where to buy

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Not a day goes by without bitcoin being in the news. And given the cryptocurrency’s phenomenal price rise, from zero to approximately $32,000 in a little over a decade, you — like many other individual investors — may be tempted to buy in. But how?

Actually, you can invest in finance’s newest asset via one of its most familiar vehicles: the IRA. Yes, you can buy bitcoin for a good old individual retirement account.

Cue the excitement? Maybe. In many ways, bitcoin investments are well-suited to an IRA. But, as with any investment strategy, there are pros and cons to consider. 

What is a bitcoin IRA? 

Bitcoin is a type of cryptocurrency (sometimes called a digital or virtual currency) — the oldest, and most popular of the dozen varieties available for trading and investment. So a bitcoin IRA is a type of investment retirement account that includes bitcoin within its portfolio. 

Although these accounts may carry the name “bitcoin,” they also allow you to invest in other cryptocurrencies, like ethereum, litecoin, and bitcoin cash. 

You can’t put bitcoin into a pre-existing, regular IRA that holds your stocks, bonds, ETFs, or mutual funds. Instead, you have to set up a special one, technically known as a self-directed IRA (SDIRA). The reason: The Internal Revenue Service (IRS) deems cryptocurrencies like bitcoin a type of property, which is off-limits to regular IRAs. 

“A self-directed IRA has a little bit looser IRS rules, so you can hold things like property,” or other alternative investments, confirms Victoria Bogner, a certified financial planner and chief executive officer of McDaniel Knutson.

How bitcoin IRAs work

In some ways, bitcoin IRAs work like regular IRAs. While you can set one up with any amount of funds, they have annual contribution limits set by the IRS: You can only contribute $6,000 a year for 2020 and 2021 (or $7,000 a year if you’re age 50 or older). Any returns, income, or gains generated by the investments within them grow tax-free.

You can also establish a bitcoin IRA as either a traditional account (for which contributions are tax-deductible, and funds taxed upon withdrawal) or a Roth account (no tax break on contributions, but distributions are tax-free). 

Of the two, the Roth version might have an edge, says Bogner, especially “if you are of the mindset that Bitcoin is going to explode” in price in the future. Roth IRAs are preferred by investors who project they’ll be in a higher tax bracket when they retire and start withdrawing money from the account. Since the Roth is funded with after-tax dollars, they won’t owe anything on their bitcoin gains — even if the currency has gone up 10 or 20 times. 

How to buy bitcoin in your IRA

Bitcoin IRAs do operate differently in a few ways, though.

As the “self-directed” implies, these IRAs are directly managed by the account holder (as opposed to a financial advisor or money manager). And your regular brokerage, bank, or investment app probably doesn’t handle them. Self-directed IRAs are only available through firms that specialize in the type of asset you’re interested in. 

So, to open a bitcoin IRA, you’d work with special custodians that can hold and deal in cryptocurrency. Some custodians require an application, walking you through the process. If you move forward, you can then fund these accounts via a rollover of funds from an existing IRA or another tax-advantaged account, or contribute new funds. 

Some of the better-known, well-established custodians for bitcoin IRAs include:

This is still a young field, and information on a firm may be hard to come by. Frankly, some are little more than sales platforms. So, no matter which custodian you’re considering, be sure to do your due diligence on it. 

Visit its website or call its customer service line to confirm and compare its fee structure, operations. Ask how your bitcoins will be stored, exactly, and about security procedures and measures — you don’t want your account holdings vulnerable to hackers. 

Why invest in a bitcoin IRA? 

There are plenty of positives to consider with bitcoin IRAs. 

  • Portfolio diversification. Bitcoin tends to be “a great diversifier” for your financial assets, Bogner explains. Holding a bit of bitcoin “can be a good way to own something that doesn’t move exactly like the rest of your investments move,” she says. It could also be a hedge against inflation as the dollar’s value against some other currencies has declined.
  • The potential for great gains. While there have been bitcoin drops, there also have been returns that outpace other markets. If its history weren’t enough, the fact that only a limited number of bitcoins (21 million) can ever be mined suggests great future promise. 
  • Positioning for a long-term hold. Though bitcoin fluctuates in price, it has generally trended up since its inception in 2009. Given its volatility, individual investors should consider it a long-term hold. That means it may be a good fit for an account that you don’t plan to access until retirement, anyway. 
  • Demonstrated tax savings. The IRS taxes Bitcoin as an investment — it’s subject to a capital gains tax when you sell it at a profit. But not if it’s held in your IRA. That gain is tax-shielded, as any transactions within an IRA are. You only pay taxes on funds that you withdraw, when you withdraw them — in a traditional IRA; and never if in a Roth IRA (if you obey the rules).

Are bitcoin IRAs safe?

No investment is without risk. Potential issues also exist with bitcoin IRAs. 

  • Volatility. Cryptocurrencies, including bitcoin, can have wide-ranging and sudden price fluctuations. This could be a problem if a decline hits about the time you were planning on withdrawing funds. If you don’t have the time to wait for market corrections, this kind of account may not be a fit for you. 
  • Higher fees. Bitcoin accounts can cost more to maintain or set up than other IRAs. For instance, a bitcoin account can reportedly have an initial buy-in fee of 10% or more, depending on the type and the custodian. Establishing a $50,000 self-directed IRA account can cost as much as $660 in annual charges, a Coinnotes article noted. And there can be wallet holding fees, transfer fees, and dues. All these fees can add up, eating into your returns. 
  • Investment minimums. Bitcoin IRAS can have investment minimums, some considerably high (again, compared to regular IRAs). For instance, BitcoinIRA currently has a $3,000 minimum; BitIRA currently has a $20,000 minimum. 
  • Responsibilities. While they’re called custodians, firms that offer self-directed IRA services — especially in the relatively young bitcoin IRA space — are not necessarily as responsible as conventional brokerages, registered investment advisors, and other financial services firms are. They are not overseen by regulatory agencies like FINRA, they are not SIPC-insured (reimbursing your funds if the firm goes under) and they are not bound by fiduciary rules that demand they put your interests first. In short, with bitcoin IRAs — as with any self-directed IRA — you’re solely responsible for making the decisions and taking on the risks of investing.

The financial takeaway

Bitcoin IRAs can offer an opportunity for investors who believe in the crypto’s future, but who want some tax savings along with their gains. Plus, the ease of dealing with a familiar type of account.

But there can be higher fees and account minimums when compared to other IRAs, so determine whether the trade-off is appropriate for you. Bear in mind that there are other ways to hold bitcoin, in regular accounts on crypto trading platforms like Coinbase and Binance US.

If you decide to open a bitcoin IRA, choose a custodian carefully. And only commit to bitcoin an amount that you can afford to lose, and think long term. Says Bogner: “Twenty years later, hopefully it’s worth more than what you put in.” 

Related Coverage in Investing:

How to invest in bitcoin: The major ways to buy, their pros and cons, and the strategies to consider

Cryptocurrency is an electronic, private type of money — here’s how it works and how you can invest in it

What is Bitcoin? A beginner’s guide to the world’s most popular type of cryptocurrency, and tips for investing in it

What is diversification? A portfolio strategy that uses a variety of investments to limit risk

Alternative investments are exotic assets that can diversify your portfolio — here are the five major kinds and everything you should know about them

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