How do I invest in a cryptocurrency IRA? Is it a worthwhile investment? Are there any special rules, regulations, or policies that I need to know about before I get started? If you have been asking yourself such questions and have landed on this article today, then you are in the right place because I will be presenting information that will give you a clear picture of what crypto IRAs are all about. If that sounds good to you, read on to find out.
What is a Cryptocurrency / Bitcoin IRA?
A Bitcoin IRA is essentially a self-directed IRA that allows you to invest in cryptocurrencies such as Bitcoin. Self-directed IRAs are special types of IRAs that allow an investor to hold assets that they would otherwise not be allowed to hold in their regular IRA. Most of the alternative assets that you can hold in a self-directed IRA present special advantages, and this makes them worth considering. Assets like gold and cryptocurrencies that you can hold in your SDIRA can help you diversify your investment portfolio for instance so that you do not lose your retirement savings due to an economic downturn.
If you search “Bitcoin IRA”, you will realize that there’s a platform that already owns this trademark, but that does not imply that the platform is the only one capable of providing the crypto IRA services. There are many other companies out there that can help you achieve this objective, though I’d highly recommend that you only work with the best company (upon having done enough research).
According to the rules laid out by the IRS, you cannot simply transfer the cryptos you own into a self-directed IRA. You will need to fund your account using U.S. dollars so that you can then purchase Bitcoin.
Your SDIRA can either be a Roth IRA, or a Traditional IRA. There are usually some IRA contribution limits that are announced by the IRS every year. In 2021, for instance, the contribution limits for an IRA are $6000 for those who are aged below 50 and $7000 for those who are aged 50 or older.
When does a Bitcoin/ cryptocurrency IRA make sense/is worth opening?
For starters, investing in Bitcoin in your IRA or through any other platform only makes sense if you’ve done your research and you’ve established that you can stomach the risks and volatility. Whereas Bitcoin prices have the potential to skyrocket, they can also come down within no time, and if you do not have the fortitude to go through massive swings then cryptocurrencies may not be the best for you. Long-term investors have, however, established that short-term volatility does not necessarily mean that one is not going to make any gains eventually- surprisingly, those who purchase cryptos and hodl them get rewarded handsomely.
Another thing to consider would be that your entire portfolio should not comprise one asset. If you already have Bitcoin in other platforms (such as a crypto wallet), it may not be necessary to hold more tokens in your IRA, since only about 10% of your wealth holdings should comprise a single asset.
If you’re getting closer to your retirement years, investing in Bitcoin may not be the best thing. In such a case, retirement investment advisors usually advise that you invest in more stable assets such as gold or silver. That said, however, you can still allocate a small portion of your funds to cryptocurrencies, owing to their potential for growth. Investors who purchased Bitcoin in 2016, when its price was about $5000, are still reaping massively, at a time when the price is well above $40,000 in 2021. As much as investing in very volatile assets as you get closer to your investment years is not highly recommended, it can at times be the difference-maker in your retirement investment portfolio.
Those who have so far followed all rules set by the IRS on IRA investments, and have purchased and held Bitcoin in their accounts for several years have benefitted significantly, so can you, but you should only do this after talking to a cryptocurrency IRA expert.
How to invest in cryptocurrency in a self-directed IRA
If you have decided that you will invest in cryptos using a self-directed IRA, then you have two ways to go about it. They are:
Invest directly using your IRA
You can create a trading profile using the name of your IRA. As long as the crypto exchange platform accepts deposits from your custodian, you are good to go and can invest in cryptos.
Create a Checkbook IRA
The second alternative that you have is to set up your single-member LLC, which will bear the name of your IRA. Such a structure is usually referred to as a checkbook IRA. With your LLC, you can channel investments in any cryptocurrency platform that you choose. LLCs are usually an easy way to invest in cryptocurrencies. They give you the liberty to transfer money to and from your trading account. Such an investment structure lets you trade crypto 24/7. Ensure that the trading account is a newly created entity that belongs to your IRA.
Some rules for crypto investments made through an IRA
There are a couple of rules that you must uphold if you’re getting started with crypto IRA investments. they include:
- You cannot purchase Bitcoin personally then sell it to your IRA
- The crypto exchange platform you chose must meet the rules and regulations set by the IRS.
- All cryptos are considered personal property by the IRS and are taxed as such.
- Holding digital currencies in an IRA presents tax advantages that are similar to those presented by other IRA investments.
- When investing in crypto through an IRA, then your non-bank custodian should hold your cold wallet (in which the cryptos are stored).
Investors who can uphold these rules and regulations are ready to purchase several cryptocurrency tokens can reach out to the companies recommended below:
That will be all for today’s article, which was aimed at answering the question “How do I invest in a cryptocurrency IRA?” Hopefully, you know what you will need to get started. If you’re still not sure what investing in cryptos using an IRA entails, reach out to me and I will offer a few tips on how to go about it. You can also share your experiences in the comments section below.
I wish you well,
Eric, Investor and Team Member at Gold Retired!