Bitcoin IRA Guide

Bitcoin, cryptocurrencies and blockchain technologies in general are sparking a revolution in business, commerce, and the world. Each day, investors log into cryptocurrency exchanges to buy and sell crypto assets. Since launching in 2012, Coinbase alone boasts over 30 million accounts.

In addition to buying on digital currency exchanges, Americans have also started investing in bitcoin and other cryptocurrencies within a self-directed IRA. This strategy allows you to tap into the massive growth potential of cryptocurrencies, all on a tax-deferred basis.

Bitcoin IRA

These accounts are sometimes called “Bitcoin IRAs," “cryptocurrency IRAs,” or “digital IRAs.” These terms can be used interchangeably. All are subsets of self-directed IRAs – retirement accounts that allow the account owner/investor to take more direct, personal control of their IRA assets, and make trades themselves, rather than trusting in a money manager to do it for them.

While there are hundreds of cryptocurrencies in “circulation” now, bitcoin remains the most popular and successful among the general public. Most of this guide will be based on bitcoin, though the general properties of IRAs and other tax-advantaged retirement accounts will apply no matter what crypto asset is being held within them.

Why Bitcoin?

Bitcoin is the most popular of the cryptocurrencies – a brand new asset class. Bitcoin itself traces its genesis to shortly after the 2008 stock market crash, when a software developer named Satoshi Nakamoto created a white paper outlining the structure of an entirely digital currency that could facilitate transactions nearly instantaneously, from and to any point in the world with Internet access.

Unlike fiat currencies – any currency that can be printed out on the whim of a bureaucrat – bitcoins have a built-in scarcity: There will only ever be 21 million bitcoins in existence. While dollars, pesos, euros and the renminbi can be devalued or corrupted by national governments seeking a cheap way to pay off debts or carve out a short-term trade advantage at the expense of savers, the bitcoin cannot be corrupted or devalued as a matter of policy.

This is not to say bitcoin values don’t fall. They rise and fall like any commodity. But that’s only due to supply and demand. No government or politician can devalue bitcoin.

Bitcoin therefore has a natural anti-inflationary property: In times of high inflation, dollars will become less valuable. The idea is that bitcoin, as an asset class, provides some inflation protection. It may also help investors diversify their overall financial portfolios against stock market, bond market, inflation and other forms of financial risk.

There are a number of reasons to believe that bitcoin and similar cryptocurrencies will be in higher demand in the future. There are just too many advantages to conducting business with bitcoin compared to existing electronic payment systems.

Bitcoin transactions also have the advantage of being more secure than most other cash transaction methods: All transactions are recorded on the network via a secure system of distributed servers. The blockchain record of bitcoin transactions is permanent and unalterable.

Related: Bitcoin IRA Guide - How to tap into the massive growth potential of cryptocurrencies (tax and penalty free)...

Why Hold Bitcoin in an IRA?

IRAs allow investors to take advantage of tax-deferral and – in the case of Roth IRAs, tax-free growth in bitcoin assets. The same is true of any asset held within IRAs or Roth IRAs, respectively.

Because bitcoin and other cryptocurrency values have been so volatile since their inception, the Roth IRA may be a particularly effective vehicle for your more volatile bitcoin and crypto assets.

Roth IRAs

Investors don’t get an up-front tax deduction when they make a contribution to a Roth IRA. But the back-end benefit may be more than worth it: As long as you hold the asset at least five years, all the growth in a Roth IRA is tax-free, for as long as you live.

Furthermore, unlike tax-deferred accounts like traditional IRAs and 401(k)s, which require you to start taking distributions and start paying taxes upon reaching age 72, Roth IRAs have no required minimum distributions. You can let your Roth IRA assets compound indefinitely, as long as you live.

Prior to the SECURE Act, Roth IRAs were particularly potent generational wealth transfers, because you could pass the asset on to heirs who could stretch their distributions out over their entire lives.

The SECURE Act, passed in late 2019, effectively destroyed the ‘Stretch IRA’ technique and now requires most people with inherited IRAs to liquidate the entire account within 10 years of the original owner’s death.

So the lifetime withdrawal benefit, perhaps too good a deal to last, has gone away.

But the lifetime tax-free growth of the Roth IRA is still a powerful feature, especially when paired with extremely risky, volatile assets that may post outsized gains.

Beyond Bitcoin

While Bitcoin is still the dominant cryptocurrency by far, there are many other currencies you can potentially hold within your crypto IRA.

Ethereum

Ethereum is another digital currency technology that builds on the bitcoin blockchain innovations, but is also optimized for ‘smart contracts.’ These are special electronic contracts that self-execute under specific conditions. These digital contracts let you exchange money for goods and services with the contract only funding on delivery – without the need for third-parties such as agents and escrow services adding another layer of expenses.

Ethereum was “born” in 2015, at just under 67 cents per Ethereum coin. It rocketed up to an all-time high of $1,395 in January of 2018, before falling to today’s levels. As of mid 2020, Ethereum is trading just over $230, while application growth is growing strong.

Ethereum Classic is an older version of the Ethereum blockchain. Developers corrected a security flaw in the original Ethereum blockchain to create the current Ethereum, while Classic still uses the same technology. Ethereum is now much more popular than Ethereum Classic.

Bitcoin Cash

Bitcoin was an amazing innovation, but it has its limitations. One handicap: Bitcoin transactions can be slow to process. Developers worried that Bitcoin would not reach its full scaling potential created Bitcoin Cash (BCH), which allows transactions to process much faster. They created BCH by executing a hard fork off of Bitcoin in August of 2017.

The Bitcoin Cash network operates much faster than Bitcoin’s, and can handle more transactions per second than the venerable bitcoin.

Bitcoin vs Bitcoin Cash? Is BCH the winner? Not so fast…

Bitcoin Cash detractors argue the network is not as secure as Bitcoin’s network. Despite the fork and opposing factions, Bitcoin remains the most popular, and largest cryptocurrency in the world.

Bitcoin’s market cap at the time of this writing is $173,448,229,760. Bitcoin Cash is the fifth largest cryptocurrency trailing at $4,390,987,732. In terms of real-world usability and liquidity, Bitcoin is still the winner.

In November of 2018, there was another hard fork off of Bitcoin Cash, resulting in a new bitcoin variant, Bitcoin SV.

Any of these variations can be held within a digital IRA or crypto IRA.

Litecoin

Litecoin came into being in 2011 as a brainchild of Google employee Charlie Lee. It’s actually an offshoot of bitcoin technology. Lee’s new digital currency came with a higher cap on the total number of Litecoin that would be allowed to come into circulation. The system processes new blocks much faster than Bitcoin’s – 2.5 minutes per block, instead of 10 minutes.

Related: Diversify Your Retirement  with Bitcoin, Ethereum, Litecoin, and Other Crypto Assets

Who Can Benefit From a Crypto IRA?

Crypto IRA investing isn’t for everyone. While there are some crypto assets that are designed to maintain a stable value, most popular cryptocurrencies are subject to wild price swings.

They can be effective diversifiers against stock market, bond market and inflation risk (though their track record is still too short to track their performance over multiple market cycles.)

Investors should also understand that scarcity in the digital environment isn’t like the scarcity of, say, gold. The price of gold is unlikely to go to zero across hundreds or even thousands of years. There is a limit to how much we can mine out of the ground.

But even though bitcoin and many other cryptocurrencies individually have built-in limits on the amounts of such coins in circulation, there is no limit whatsoever on the amount of crypto currencies developers can create.

If a particular currency falls out of favor, its value can theoretically fall to zero – just like Enron stock.

These aren’t assets you want to buy and forget about. Successful digital IRA investors will carefully monitor developments in the field. You may need to sell one cryptocurrency that appears to be overpriced or on the decline and buy another.

For the most part, only the most risk-tolerant investors with an appetite for high volatility should be investing in crypto currencies. Do not invest more than you can afford to lose.

Related: 8 Important Signs that Bitcoin is Going Mainstream

Bitcoin IRA: The SEC Warning

In many ways, the crypto investing world is still the Wild, Wild West of the investment world. There are fraudsters and criminals out there. The Securities and Exchange Commission issued a warning to investors who are new to the crypto IRA world.

Their recommendations:

• Verify information in all your account statements;
• Avoid unsolicited investment offers;
• Ask questions and verify broker credentials;
• Be very wary of “guaranteed” returns.

If You Get Ripped Off

If you fall victim to fraud or theft in a crypto transaction or investment scheme, here are some actions you can take:

Contact the SEC Complaint Center.

Check out the SEC’s Resources for Victims of Securities Law Violations.

Contact your state securities administrator. You can find links and addresses for your state regulator by visiting the North American Securities Administrators Association’s website.

See also this resource from the SEC: How To Avoid Fraud.

The Digital IRA Advantage

This is where a digital IRA holds a distinct advantage: Outside of an IRA, you would have to pay capital gains tax on every profitable trade. Inside a digital IRA, you generally have no capital gains taxes due whatsoever.

If you hold the assets in a tax-deferred account, you don’t pay capital gains tax on trades. You just have to pay ordinary income taxes when you withdraw your money.

In the case of a Roth IRA, you generally have no capital gains tax and no income tax liability whatsoever.

How to Get Started with Crypto IRAs

If you’re new to crypto investing, you may want to work with a turnkey self-directed IRA administrator that has significant cryptocurrency-specific experience. We've included a list of the top Bitcoin IRA dealers below.

They each offer "white glove" service that walks you through the entire IRA process. They can set up an account for you, similar to a brokerage account, that will track your crypto assets, trades and cash balances. 

Establishing a Custodian

You can’t manage digital IRA assets directly. Every transaction needs to be handled by an IRS-approved custodian. This custodian will report all purchases and sales of IRA assets, and ensure transactions are reported to the IRS. 

The digital IRA dealers below all have established relationships with reputable custodians that can handle your account.

Funding the Digital IRA

From there, you fund your account, either with new contributions, or with money rolled over from an eligible IRA, 401(k) or other retirement account. Most people do the rollover from an existing IRA or other retirement account via trustee-to-trustee transfer.

Customers can roll over any type of existing IRA, such as Traditional, Roth, SEP and SIMPLE, into a Bitcoin IRA. Additionally, many employer-sponsored retirement savings plans, such as a 401(k) and 403(b), are also eligible.

Using this kind of transfer eliminates the risk of accidentally triggering a taxable distribution, which can happen if you take possession of a distribution personally and fail to complete the rollover within 60 days.

Setting Up Your Wallet

Your wallet is a secure and encrypted electronic device that holds the codes and algorithms for your cryptocurrencies.

Generally, with a digital IRA, you won’t be holding your own wallet. Your custodian will make transactions using your wallet on your behalf. 

All of the top Bitcoin IRA companies offer insured cold-storage solutions for your Crypto IRA. Specific wallet and storage options can be found in their investor guides or informational kits.

Buy and Sell Cryptocurrencies.

When you are ready to engage in a crypto transaction, simply contact your IRA third-party administrator or custodian and provide them written instruction about what to buy or sell. They should be knowledgeable in cryptocurrencies and be able to help guide your investment options.

Top Bitcoin IRA Companies

A growing number of Bitcoin IRA specialists are ready to help you diversify retirement funds into cryptocurrencies, all on a tax-deferred basis. While the industry is only a few years old, many of the big players have been around for years.

Many of the established Gold IRA specialists have expanded their offerings to include cryptocurrencies like Bitcoin, Ethereum, Litecoin, and more.

Below are a few alternative assets dealers that we have researched and currently trust to recommend to our readers.

Customers can roll over any type of existing IRA, such as Traditional, Roth, SEP and SIMPLE, into a Digital Currency IRA. Additionally, many employer-sponsored retirement savings plans, such as a 401(k) and 403(b), are also eligible to be transferred to a Digital Currency IRA.

We recommend that you contact at least two Crypto IRA specialists.

• Request their free investor guides
• Compare services and fees
• Ask questions
• Make them work for your business

BitIRA

BitIRA is a sister company of Birch Gold Group (BGG). The Crypto IRA firm opened their doors in 2017. Birch Gold Group has been in business since 2003 and is one of the most highly rated firms across all third party verified customer review websites..

Coin IRA

Coin IRA is a subsidiary of Goldco Precious Metals. Goldco has been in business since 2006, and is one of the top rated alternative assets dealers in the U.S. They began offering cryptocurrencies to their clients via Coin IRA in 2017. In addition to Crypto IRA rollovers, they also developed a non-IRA offering. Clients can buy and sell crypto assets inside their own portfolio. 

Regal Wallet

In 2016, Gold IRA specialists Regal Assets expanded to offer cryptocurrencies to their clients via "Regal Wallet." The company has a partnership with Kingdom Trust (a top custodian) and Coinbase, the largest and most mainstream cryptocurrency exchange.

See how Coin IRA (Goldco), BitIRA (Birch Gold Group), and Regal Wallet (Regal Assets) compare online. For your convenience, we've linked to verified client reviews from the Better Business Bureau (BBB), Business Consumer Alliance (BCA), TrustLink, TrustPilot, and Consumer Affairs websites. 

Bitcoin IRA Company Comparison chart last updated June 2020.