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At first glance, the volatility of Bitcoin and the prudence of an Individual Retirement Account (IRA) seem to mix like oil and water.
A Bitcoin IRA?
No one wants to be close to retirement and see their portfolio experiencing massive price swings.
But for those in their 20s or 30s with a long time horizon, does it work? What about those with a high-risk tolerance? Is it good for diversification? How do taxes factor in?
We’ll answer all of these questions — and more — in this guide to a Bitcoin IRA.
What is a Bitcoin IRA?
A Bitcoin (BTC) IRA is a self-directed IRA that holds BTC.
While a Traditional IRA might hold ETFs, mutual funds, and blue-chip stocks, a self-directed IRA allows you to make alternative investments like precious metals, commodities, and digital currency.
How a Bitcoin IRA Works
All of the same rules of a traditional IRA are going to apply to your Bitcoin IRA:
- You can invest up to $6,000 per year or $7,000 if you turn 50 or older in 2021 into a Bitcoin IRA.
- You can face penalties for withdrawing before retirement.
- You need a custodian to keep your account safe, ensure you arenʻt breaking any rules, and execute trades. Custodians are similar to the role a bank or a traditional IRA manager would play.
- You need an exchange to purchase and sell your Bitcoin. Theyʻll look and function similar to brokerages like TD Ameritrade or Fidelity.
Advantages of a Bitcoin IRA
The advantages of a Bitcoin IRA include:
Diversification
BTC and digital currency have established themselves as an asset class separate from the traditional market of stocks, bonds, and metals. A diverse portfolio with Bitcoin could help if other sectors or markets experience a downturn.
Taxes
Perhaps the single most significant benefit of a Bitcoin IRA is for tax purposes.
Any Bitcoin trader can tell you itʻs a headache every tax season with all the calculations and cost averages.
As long as your gains stay in your account, you wonʻt have to deal with any of that. There aren’t any short or long-term capital gains taxes on assets in an IRA.
Growth Potential
Bitcoin and the entire cryptocurrency market are still in their infancy stage. Of course, how high it can go is purely speculative.
Bitcoin has historically outperformed the S&P 500 recently — but keep in mind there have been massive corrections of 30-60%.
Disadvantages of a Bitcoin IRA
The disadvantages of a Bitcoin IRA include:
Volatility
Itʻs easy to say how great Bitcoin is when we can look at the charts and see it hit all-time highs.
However, any grizzled Bitcoin holder will remember the long "crypto winters," which are stressful.
So, ask yourself if you feel comfortable with that level of risk and stress — most will not.
Capital Losses
Because of the tax-advantaged status of a Bitcoin IRA, selling your Bitcoin at a loss wonʻt give you any deductions.
State Law Limitations
Depending on which exchange works with your Bitcoin IRA, you might be blocked entirely from purchasing Bitcoin by state law. There are plenty of other exchanges, but it's more difficult for some states, particularly New York and Hawaii. So, check your local laws.
Active Investing
If you want to deposit money, have it invested, and never have a second thought, a Bitcoin IRA might not be for you.
You're going to have to juggle multiple accounts because crypto and stocks donʻt like to play together.
Though itʻs not much, it’s worth mentioning that managing your Bitcoin IRA will take more time than a traditional IRA.
Fees
No, a Bitcoin IRA isn’t without fees. Exchanges, set up, maintenance, and trades will cost money.
Examples of Bitcoin IRAs
There are many Bitcoin IRAs to choose from, each with advantages and disadvantages. Here are a few examples.
BitcoinIRA.com
Bitcoinira.com is the original and largest Bitcoin IRA. They have an app that makes it easy to buy and store your Bitcoin. You can rest assured that your Bitcoin is insured up to $100 million.
The downside to BitcoinIRA.com — fees. You'll pay yearly custodial fees, a start-up fee of up 10-15% of your initial investment, and a 5% buying fee.
iTrustCapital.com
Itrustcapital.com has the lowest fees at 1% per translation and $29.95 a month. They offer 24/7 trading with only a $30 trade minimum.
If you're looking for advice and tips, iTrustcapital isn't going to be the best Bitcoin IRA for you because they have no onboard financial advisors.
CoinIRA.com
CoinIRA.com is stocked with cryptocurrency experts and financial advisors that are there if you ever have questions. CoinIRA fees fall in the middle between BitcoinIRA and iTrustcapital.
CoinIRA splits the difference between the top Bitcoin IRAs but requires a minimum initial investment of $20k that might keep you away.
The Bottom Line: Bitcoin IRAs
Whether or not you choose a Bitcoin IRA depends on your financial goals.
Is it best for someone with retirement on the horizon? No.
Is it best for someone with a long time horizon, or someone with a high risk tolerance? Maybe.
Ultimately, a retirement plan is saving money in the wisest of ways — and not losing it.
