What to expect?
- What is bitcoin IRA?
- Why do we need a Bitcoin IRA?
- How to get started?
- Advantages of a Bitcoin IRA
- Disadvantages of Bitcoin IRA
- Factors to consider
- Most popular Bitcoin IRAs in the market
- Frequently asked questions
Note: We are using the term ‘Bitcoin IRA’ to mean cryptocurrency IRA (unless specifically referring to the Bitcoin IRA plan administrator).
Individual Retirement Account (IRA) is a popular investment vehicle for people to save for their retirement.
The IRAs have been a staple retirement savings method since the 1970s. Now, Bitcoin is looking to rile up this space as well.
Bitcoin IRAs have seen a massive growth in the recent years. In fact, Bitcoin IRAs processed over $400 Million in cryptocurrency transactions since 2016.
Is this craze really justified? What’s driving this latent demand? Let’s examine.
Problem with the existing IRAs
Many individuals pay into a 401(k) in the US or similar plans in other countries which are nothing but a form of an IRA.
The problem with these popular IRA plans is that they are almost always invested in stock markets (some are invested in bonds but they don’t yield much, barely enough to cover inflation). So when stock market tanks, the retirement savings tank.
Those who are looking to build a nest egg and retire peacefully are generally disappointed when this happens. Their retirement plans are postponed, sometimes indefinitely.
For instance, in the 2008 market crash, some funds have lost over 41%. For someone looking to retire with a million dollar retirement savings found themselves with $590,000. Of course, we used million dollars to simplify math since in reality people don’t have that kind of money in retirement plans. Average 401(k) balances at the time of retirement is about $200,000.
So far we did not have many alternatives in regards to where to be invested through an IRA. However, Bitcoin as a new asset class is turning heads in the IRA space.
What is a Bitcoin IRA?
Bitcoin IRAs offer the unique opportunity for investors to invest in bitcoin and a handful of cryptocurrencies.
For example, one of the most popular players in the space, Bitcoin IRA, offers investors the ability to invest in Bitcoin along with Ethereum, Ripple, Litecoin, Bitcoin Cash, Ethereum Classic, Stellar Lumens, ZCash.
Bitcoin IRAs are self-directed IRAs
At this time, all Bitcoin IRAs are self-directed IRAs, that means, you manage your digital assets in the account including making buying and selling decisions.
Unlike traditional IRAs where the investors have the option to either self-direct or seek help from brokerages and financiers, Bitcoin IRAs do not come with those options.
For this reason, it is important that individuals are aware of the cryptocurrencies that they are looking to invest in. They will also have to keep an eye on the market movements in case they plan to trade within the plan.
Why do we need a Bitcoin IRA?
Do you believe in the long-term potential of Cryptocurrencies?
Do you hope to HODL your bitcoin and cryptos well into your retirement age (59.5)?
Do you also want to take advantage of rallies that happen once in a while?
Do you hate paying taxes every time you make a profit on your crypto sale?
If you answered YES to ALL the above questions, then Bitcoin IRA may be for you.
When you invest into bitcoin and cryptocurrencies through a Crypto IRA, you have the option to buy low and sell high as many times as you want. The profits simply accumulate in your account tax free. You cannot take the money out of the plan until you reach 59.5 years of age.
If you bought and sold cryptocurrencies outside of an IRA, you are generally subject to taxes in the same year, however, transactions within an IRA are not immediately subject to taxes.
How does the Bitcoin IRA work? How do I get started with Bitcoin IRA?
To get started you will have to:
- Open an account with a Bitcoin IRA plan administrator: First step is to create an account with your favorite crypto IRA plan administrator like Bitcoin IRA or BitIRA.
- Complete the KYC: Prove your identity by finishing the Know Your Customer (KYC) process which usually involves providing a copy of your government issued ID.
- Fund your accounts: You can connect your bank to fund your crypto IRA account to start the investment.
- Rollovers, if any: You will have the option to rollover your traditional IRAs into a Bitcoin IRAs, if you choose to do so. Your plan administrator will walk you through the steps involved.
- Start trading 24/7: Once your account is funded, you can buy and sell any cryptocurrencies available within the IRA platform. Unlike traditional markets, you can trade cryptos 24/7.
That’s it. You are all set with your Bitcoin IRA account. You can self-manage the trading within your account.
Advantages of Bitcoin IRA
Tax deduction on investment
Most IRA contributions qualify for a tax deduction within the IRS approved limits. This means, you are not only able to keep your profits tax-free until distribution, you can also take a deduction for the contributions made into the Bitcoin IRA.
Trade and keep profits tax free
Any profits you make by selling the cryptocurrencies within a Bitcoin IRA remain tax free as long as you keep the funds within the plan. If you take the money out of your IRA after reaching your retirement age (59.5) – you can take advantage of tax favorable treatment.
Grow your investment without the worry of taxes
You have the opportunity to take deduction for the contributions made into the Bitcoin IRA as well keep your profits from trades shielded from taxes, this helps you grow your portfolio quickly.
Favorable taxation on distribution
Bitcoin IRA distributions, as per rules, are subject to the same favorable tax rules as traditional IRAs.
Disadvantages of Bitcoin IRA
High risk and high reward
“[Bitcoin] is either zero or it’s millions,” said Chamath Palihapitiya, and that exactly is what you need to be aware of. Yes, there is a chance that your IRA might be worth a lot or it could be worth nothing.
Not for newbies
As all Bitcoin IRAs at this time are self-directed, investors need to have at least basic knowledge of cryptocurrency options available within the Bitcoin IRA. Most plan administrators have only listed established cryptocurrencies which should make it a bit better but it doesn’t relieve the need to study them before investing.
Limited crypto choices
If you trade on an exchange, you may have 100s or even 1000s of options to pick and choose various cryptocurrencies to trade. In a Bitcoin IRA your options are limited to whatever is available in the plan.
Lock-in
You cannot access the funds before you reach retirement age (59.5). If you withdraw the funds before the eligible age, you may be subjected to penalties and unfavorable tax rates.
Hard forks
Some plan administrators may not be able to allocate the hard forks. Speak to your plan administrator before investing.
Staking rewards
Bitcoin IRA plan administrators may not be able to allocate your staking rewards from the assets you hold in your account. You have to clarify this feature before investing.
Factors to consider
Fees
Before you invest into an Bitcoin IRA, make sure you understand the fee structure. Do they have annual maintenance fees? Do they charge for every transaction, transfer, etc.,? Annual plan fees are important as well.
Distribution restrictions
Does your plan let you freely rollover your funds from a traditional IRA into a Bitcoin IRA and then from your Bitcoin IRA into your traditional IRA?
Penalties for early distribution
Bitcoin IRA is subjected to similar regulations as traditional IRA in that you cannot take your funds out until you reach 59.5 years of age. If you take distribution before that – you may be subject to 10% early distribution penalty and unfavorable higher tax rates. Talk to your tax preparer.
Difference in the price of the coin
Are the rates updated and are they competitive on par with the rates available on popular exchanges?
How is the volume?
For you to sell and sell at a profit, you need to have enough volume on the interface on the platform, make sure you get some understanding of this aspect.
Most popular Bitcoin IRAs in the market
There are quite a few bitcoin IRA plan administrators out there. However, for the purpose of this article, we are looking at two: Bitcoin IRA and BitIRA.
| Plan Administrator | Bitcoin IRA | BitIRA |
|---|---|---|
| Cryptocurrencies available (June 2020) | Bitcoin Ethereum Ripple Litecoin Bitcoin Cash Ethereum Classic Stellar Lumens ZCash Gold | Bitcoin Bitcoin Cash Ethereum Ethereum Classic Ripple Litecoin Zcash Stellar Lumens |
| Custodian | Kingdom Trust, BitGo®, and Genesis | Its own propriertory storage and Preferred Trust Company |
| Insurance | $1 Million dollar Consumer Protection Policy (and $100 Million overall Custody Insurance) | $1 million Consumer Protection policy. Data breach insurance with a $1 million Cybersecurity Policy from Hiscox. |
| Security | ID and Voice Recognition | End to end insurance, cold wallets, multi-sig authentication, trailblazers in security. Additionally, BitIRA voluntarily signed up as a Money Services Business with the U.S. Department of Treasury |
| Minimum Amount | $3,000 | $20,000 |
Frequently asked questions
Are Bitcoin IRAs legal?
Yes. IRS has classified cryptocurrencies and digital assets as property and are now deemed to be qualified for the IRA investment. IRS did not explicitly prohibit the Bitcoin and cryptocurrencies from the IRA.
Who can invest in a Bitcoin IRA?
Everyone who is eligible to participate in a traditional IRA can invest in Bitcoin IRA. Some States may specifically prohibit individuals from participating in certain plans, check with the program administrator about the rules that apply to your specific jurisdiction.
Can I rollover my traditional IRA into a Bitcoin IRA?
From a US perspective, you should be able to rollover any type of IRA including Traditional, Roth, SEP or SIMPLE, however, an employer sponsored 401(k) may have restrictions on the rollovers. Check with the plan administrator.
Will I pay any penalties if I rollover my IRA to a Bitcoin IRA?
Simple answer is, as long as you abide by the rules, there should not be any penalties.
Will I receive my hard forks?
Most Bitcoin IRAs may try to allocate your hard forks but they do not guarantee it. You have to confirm this with our plan administrator.
Can you buy bitcoin with the Roth IRA?
If you meet the income eligibility condition, you may be able to contribute into a Bitcoin Roth IRA. It may even be beneficial if you expect bitcoin and crypto to do well in the future as Roth IRA distributions (qualified) are usually tax free. Talk to your financial advisor and plan administrator about the availability, advantages and limitations of Bitcoin Roth IRA.
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IMPORTANT DISCLAIMER
Everything in this article is an opinion, not an advice of any kind. This material has been prepared for general informational purposes only and it is not intended to be relied upon as accounting, tax, investment, legal or other professional advice. Please consult with a professional for specific advice.
We do not endorse or guarantee the accuracy of the information and claims made.
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