Can I buy Bitcoin in an IRA? Are there any unique laws that govern the purchase of Bitcoin using an IRA? If you’re trying to look for ways to invest in Bitcoin using your IRA, and you’ve landed on this article today, then you’re in the right place. Herein, I will be taking you through how you can invest in Bitcoin using an IRA legally and safely. You will, of course, have to do some background research to ascertain that the companies you’re dealing with during the process are all legit and professional, but the information you read here will help you get started on the right foot.
Is it possible to buy Bitcoin using an IRA?
It is possible for an investor to hold Bitcoin in their 401(k), but it is highly unlikely that you will be allowed to use this option. Just like stocks and funds, Bitcoin can be bought in an investor’s IRA or 401(k). From a practical standpoint, however, most employer-sponsored 401(k) plans do not allow for employees to use alternative investment options such as Bitcoin, due to the restrictive ERISA fiduciary rules.
The current fiduciary rules governing employer-sponsored plans state that retirement savings plans should offer a sufficient number of investment options without necessarily exposing the participants to massive losses. Owing to the very volatile nature of cryptocurrencies, most employers tend to shy away from offering such investments as retirement plan options. That said, however, Coinbase and ForUsAll (a 401k service provider) are trying to figure out a way in which retirement plan participants can be allowed to hold up to 5% of the portfolio assets in Bitcoin (or other cryptos).
Business owners who have opted to sponsor their retirement plans by opening solo 401(k)s or SEP IRAs are in luck because they can include investments such as Bitcoin in their plans. Solo plans are not subject to ERISA rules, hence investors can benefit from investing in assets such as Bitcoin, provided the plan documents have this provision.
Can one open a Bitcoin IRA instead?
If your current retirement investment plan does not allow you to invest in Bitcoin, they have the option to roll over the funds in their IRA to a Bitcoin IRA or to open a Bitcoin IRA and fund it using funds from other sources.
A Bitcoin IRA is essentially a self-directed IRA (SDIRA) that allows you to hold in alternative assets such as cryptos. With an SDIRA, you can invest in a wide range of other alternative assets, including:
- Real estate
- Gold, silver, platinum & palladium
- Promissory notes
- Water rights
- Tax lien certificates
- Livestock, etc.
Under the umbrella of a self-directed IRA, you can purchase a wide range of alternative assets, as you try to diversify your retirement investment portfolio. You may, however, have to be very strategic about asset allocation, since most of the alternative assets (besides gold) increase your risk exposure.
Generally, most traditional IRAs do not allow investors to place IRS-approved alternative assets since their objective is to earn fees through traditional investments. SDIRAs resulted from the need to present alternative options to investors who’d like to earn money without tying themselves down to a limited number of traditional assets.
How does a Bitcoin IRA work?
In general, a Bitcoin IRA works just like the normal IRA, with the only difference being that one invests their money in Bitcoin (and other allowed cryptos), instead of stocks and mutual funds. One can choose between traditional and Roth SDIRAs, in a bid to maximize the tax advantages that come with each. Every investor is, however, expected to contribute the same amount, regardless of the type of IRA that they chose.
If you’re a self-employed investor, or you’re a small business owner, you can open a SEP and SIMPLE IRA and solo 401(k) instead, though they have substantially higher contribution limits. If you find that an SDIRA is more appealing to you, you can still roll over your funds in your solo IRA to the SDIRA.
While self-directed IRAs are to a great extent similar to normal IRAs, they are different in a couple of ways. With a Bitcoin IRA, for instance, you will need to follow up more on the account opening process by yourself, unlike with traditional accounts where brokerage firms do most of the work for you. when opening your Bitcoin IRA, you will have to consider these key components:
- An IRA custodian is supposed to hold your IRA to ensure that your account sticks to all the set regulations (all rules from the IRS and the government). Banks and other financial institutions play this role with regular IRAs.
- A crypto exchange through which you’ll manage your trades. It is similar to the popular stock markets. This is the place you will purchase your cryptocurrencies (Bitcoin, Ethereum, etc.)
- Secure storage solution to protect your digital coins. Most Bitcoin IRA providers usually include proprietary secure storage methods that enable you to keep digital coins safe from scammers and thieves when you buy them.
Why do investors open Bitcoin IRAs?
You might be wondering why it is worth thinking about Bitcoin and opening an account with a reliable Bitcoin IRA service provider. Well, most of the investors who currently own a Bitcoin IRA have opened one due to the following reasons:
Cryptos are not correlated with traditional paper assets such as stocks and bonds, which most people have in their retirement investment accounts. Owning Bitcoin helps protect you from potential losses in the event of an economic downturn, as much as cryptos are volatile in their own way.
Potential for high returns
Crypto prices are quite erratic, but they also have the potential for very massive gains. For instance, Bitcoin was at around $5000 in March 2020 and ended that year with its value well past $30,000. Ethereum, which is the second most popular cryptocurrency has its value shoot by about 400% in 2020 alone. By investing a small percentage of cryptos in your IRA, therefore, you can benefit from the massive gains if the value of your tokens goes in the right direction.
The major headache for Bitcoin investors is usually tracking trades since they have to calculate taxes each time they sell cryptos at a profit. Opening a traditional or Roth IRA (Self-directed one), will take away this burden because you’re not taxed as long as the funds are in your account.
That will be all for this article in which we have addressed the question “Can I buy Bitcoin in an IRA?”. I hope you found it beneficial, and that you have an idea of what it entails to own Bitcoin through an IRA. If you have any questions about this topic, let me know in the comments section so that I can reply back to you ASAP.
I wish you well,
Eric, Investor and Team Member at Gold Retired!