Adding Bitcoin to an IRA
Bitcoin IRAs Give Added Tax Advantage and Investment Security
Investors tend to look for added advantage in buying any investment – whether it’s buying below market value, buying on a dip or any other form of saving – after all “you make your money when you buy”
So whenever an investor has a choice between buying an asset and buying the same asset in a tax-advantaged way, the tax-advantaged route is going to win nine times out of ten. And this is the same with Bitcoin.
As an example, would you rather:
- buy the big-potential asset at it’s standard market price,
- at a 35% saving or
- pay no tax on your profits?
- $6,000 ($7,000 if you’re age 50 or older), or
- your taxable compensation for the year, if your compensation was less than this dollar limit.
- You can withdraw more than the minimum required amount
- Your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts)
If you answered either of the last two choices – a Bitcoin IRA could be for you!
Investing in Bitcoin for Retirement
When people first started investing in Bitcoin for retirement there was an outcry among the mainstream media. The argument ran why on earth would we be adding such a volatile asset inside our retirement plans – especially when they’re supposed to be there as a safeguard in our golden years.
Much of this furor began in April 2013 as the first Bitcoin IRA companies began advertising their services. At the time Bitcoin was trading at $138 and had already experienced an increase of 100x in the past few years.
The narrative ran that it had peaked, it was a giant bubble, it would never last, it was used by criminals – you’ll probably remember the stories.
And the media seemed to have it’s facts right. After all the infamous Silk Road website was hit by the Feds in October 2013 and with it thousands of Bitcoin accounts.
A few months later in February 2014, Mt Gox, one of the biggest Bitcoin exchanges was hacked, losing 850,000 Bitcoin in the attack and subsequently went bankrupt.
The media and Bitcoin haters shouted “we told you so!” – but those early Bitcoin IRA holders just smiled and looked at their tax-advantaged profits. After all Bitcoin had risen from $138 to $861 in those same 10 months – a 524% increase. Their $10,000 minimum investments were suddenly worth $62,391!
Fast forward a few years to January 2017 and provided those Bitcoin IRA pioneers were still holding their Bitcoin they’d have seen the price per coin pass the $1,000 threshold making their $10k pot worth $72,463.
At this point most investors would be forgiven for taking their profits and moving onto another asset – and many did. But for those who were in it for the long haul things were about to get very interesting.
2017 is the year mainstream media changed it’s mind on Bitcoin – causing the biggest gold rush in the asset’s history. We cover it in full here but in short increasingly sensational headlines about easy profits and Bitcoin millionaires saw thousands of new investors stampede towards the #1 crypto.
The price set off on an exponential parabolic curve, shooting up from $1000, overtaking gold and passing $2k, $3k, $5k, $10k and by December it touched $20k.
Now this was an unsustainable bubble and smart investors spotted this, exiting at anything from $5k to near $20,000 – and they were right to do so because 2018 saw Bitcoin collapse.
Those Bitcoin IRA pioneers could have walked away with almost $1.5m in their IRAs – but even if they’d stayed and missed the peak, Bitcoin at it’s lowest point in 2018 would have still seen their initial $10,000 investment being worth $239,128.
And today, now that Bitcoin has stabilized after the 2017 Bubble? $724.630
But it’s not just those initial Bitcoin IRA investors who won big – the following chart shows how a typical minimum $10,000 investment would have fared invested in January of each year from 2015 to present day.
| $10k Bought | Bitcoin Price ($) | # BTC | Value Feb 2020 ($) |
|---|---|---|---|
| Jan 2020 | 7,357 | 1.358 | 13,590 |
| Jan 2019 | 3,855 | 2.594 | 25,936 |
| Jan 2018 | 12,783 | 0.782 | 7,822 |
| Jan 2017 | 899 | 11.114 | 111,138 |
| Jan 2016 | 433 | 23.078 | 230,776 |
| Jan 2015 | 280 | 35.626 | 356,252 |
Yes the market is volatile and yes there are some big drops, but with the exception of January 2018, when bitcoin was mid-bubble, we can achieve a good profit – even as recently as this year.
Are you willing to work with this risk/reward ratio investing in Bitcoin for YOUR retirement?
Bitcoin in My IRA?
Bitcoin is the original, the best known and the biggest of the cryptocurrencies so out of the whole crypto market it’s the coin most investors add to their IRA.
But will a Bitcoin work inside your IRA?
Much of this depends on your existing IRA. If you have a non self-directed IRA then straight away, the answer is no, you will not be able to add Bitcoin inside it.
Even if you DO have a Self Directed IRA (SDIRA) not all SDIRA providers or SDIRA custodians are set up to accept Bitcoin because even yet 11 years after it was created, Bitcoin is still considered a new and non-standard investment.
To add Bitcoin inside your IRA you will need to work with a Bitcoin IRA specialist who will either set you up with a new SDIRA in addition to your existing account – or rollover / transfer your IRA to a new account that can accept Bitcoin.
Any of these options are straightforward and are generally full-service meaning all you need do is say how much Bitcoin you want and the specialists will do the rest.
For full information on the process we offer a free physical guide and investor kit, shipped direct to your door. Simply click below and we’ll see you have it in your hands within a couple of days:
Click to Get Your Copy
Adding Bitcoin to an IRA
Once you have a suitable account, the first-time process of adding Bitcoin to an IRA is very simple. You will typically call your account executive or broker at the Bitcoin IRA company you’re working with and say you’d like to invest in X number of Bitcoin.
You’ll either transfer funds to the broker or if there are already funds available in your account, your broker will go ahead and place a buy order on a chosen Bitcoin exchange.
On purchase they will transfer these Bitcoin directly into your new IRA wallet which will have already been set up and held inside an ultra-secure physical cold-storage depository where it is overseen by an IRS approved Custodian.
Whether you’ve opted for a Traditional or Roth IRA, your purchase will either be tax deductible on the front – or come with tax-free distribution on the end – both of which can amount to significant savings.
Selling Bitcoin in your IRA is the same story except reversed – you’ll call your Bitcoin IRA broker who will work with the custodian and depository to access your wallet and put the Bitcoin on the exchange for sale. This all happens very quickly and within what can be a matter of hours, your funds will be available inside your IRA account for reinvestment into other assets, such as gold or if you’re past 59½ they can be deposited into your bank account as a distribution.
The important thing is to work with a trusted Bitcoin specialist – as getting any element of the process wrong will come back on you in the eyes of the IRS.
This is because in a Self Directed IRA, the IRS holds you fully responsible for every aspect of your IRA. They expect you to have done full due diligence on any assets bought and be aware of all market risks. They also expect you to be fully aware of the rules surrounding IRAs, qualified investments, prohibited assets and prohibited transactions.
It’s the final part which can catch people out and some advice going around about Bitcoin IRAs is plan wrong – or at least highly suspect.
Self Dealing
One of the worst prohibited transactions in the field of IRAs is the act of self-dealing. Self-dealing is a specific prohibited transaction that can see the IRS close your IRA account, making an immediate taxable distribution of all assets held and adding a 10% penalty on top.
In self-dealing you, the IRA owner takes some from of immediate benefit from the assets inside of your IRA.
It may be you sell yourself an asset at a cut price, you sell your IRA something you already own – or you handle the asset yourself in your own home, rather than in a secure IRS-approved depository.
A recent worrying development in Bitcoin IRAs is the “home storage Bitcoin IRA” – much like the home storage gold IRA. In this, the investor is advised or even helped to set up an LLC, which then buys Bitcoin. The Bitcoin wallet is owned by the LLC and often stored in the LLC “headquarters” which is more often than not the investor’s home, where he or she will have full control and immediate access the Bitcoin inside it.
The investor’s IRA then buys the LLC (IRAs are allowed to buy certain companies) and so the theory goes, all is good.
Except as anyone can see, the IRA investor retains full control, full access and therefore full benefit of the Bitcoin – something which the IRS rightly calls self-dealing.
Yes the investor may be once-removed from the Bitcoin through the artificial structure that is the holding LLC, but all this smoke and mirrors is little more than a “prohibited step IRA transaction” where the IRS will completely disregard the step you took to hide the self-dealing trade.
Fear Not!
Even though you are legally considered as fully responsible for any and all decisions when it comes to your SDIRA – the reality is that there’s a lot of help available in terms of information and advice from intermediaries such as professional Bitcoin brokers and Bitcoin investment companies.
Although they will have at least some vested interest in you investing in Bitcoin, the best dealers have teams of genuinely expert advisors who know the market inside out and can offer something close to impartial information.
And a good place to start is our free SDIRA Investor Kit.
Is there a Bitcoin 401k?
Sadly no. Bitcoin cannot be held in a 401k or any other form of employer retirement plan.
The only retirement account capable of holding Bitcoin is a Self-Directed IRA or SDIRA and even then, not all SDIRA providers are set up to be able to correctly store Bitcoin in an IRS approved depository.
If you have a 401k plan or similar and are able to exit it, then you wil need to perform a Bitcoin IRA transfer, where you will transfer the funds from your 401k to a new Bitcoin IRA.
Even where you are tied into your 401k through your current employment, it’s still possible to open an additional retirement account for use with Bitcoin – provided your total annual contributions don’t exceed IRS limits.
The process of performing a Bitcoin 401k Transfer is relatively straightforward but involves working with several different parties and must be performed in an exact way otherwise it could create a taxable event and even tax penalties.
This is why most people carrying out a Bitcoin IRA rollover work directly with a Bitcoin IRA specialist to ensure a smooth and trouble-free transfer.
Essential Bitcoin IRA Rules
Bitcoin IRA Basics
All IRAs have contribution limits. For 2020 (as with 2019), your total annual contributions to all of your traditional and Roth IRAs cannot be more than:
This limit is up $500 from 2018, where total contributions were $5,500 or $6,500 for those aged 50 or older.
Note: The IRA contribution limits do not apply to rollover contributions or qualified reservist repayments.
Required Minimum Distributions:
Unlike buying and holding precious metals outside of a retirement account, you are not allowed to keep retirement assets in your IRA indefinitely. Investors generally need to begin taking distributions from their IRA, SIMPLE IRA, SEP IRA, or other retirement plan account when they have reached age 72.
Your “required minimum distribution” is the minimum amount you must withdraw from your account each year.
For IRAs this starts April 1 the year after the calendar year in which you reach age 72.
If you have any questions or need more detail on these distributions or contributions, look at the IRS website or speak to a Bitcoin IRA specialist.
A Bitcoin IRA Rollover
What is a Bitcoin IRA Rollover? A Bitcoin IRA Rollover is a process where funds are rolled over from one retirement account into a new self-directed IRA or Bitcoin IRA.
Although these funds will typically be distributed to you for reinvestment, this process if done correctly doesn’t trigger any taxable events.
As an example you may want to move funds from an old employer-sponsored retirement plan into a new self directed IRA. An IRA rollover will preserve the tax-deferred status of the assets in your old retirement account, without paying current taxes or any early withdrawal penalty at the time of transfer.
Step #1: Select a Custodian / Trustee to Accept Your Rollover.
There are many custodians and trustees out there, only some of whom regularly work with Bitcoin investments. By working with a professional Bitcoin IRA specialist, they will have direct and regular contact with the best of any Bitcoin IRA custodians.
The regular business the broker who specializes in Bitcoin IRAs sends the custodian will also result in a smoother and quicker process – and in some cases may also come with financial benefits in terms of reduced fees.
To get started you fill in a simple form to create a suitable new self-directed IRA account – your Bitcoin IRA. These days you’re just as likely to fill in digital forms for faster processing as older paper forms sent by post – meaning your new Bitcoin IRA can be active in 2-5 days, sometimes sooner.
Step #2: The Rollover of Funds
Now comes the time where you make a distribution from your existing retirement plan, into your new plan. This is the rollover.
The administrator of your old plan could issue your distribution in the form of a check made payable to your new account, or to you – or by direct deposit. No matter which route your payment takes, the important aspect is that there are no taxes withheld from your rollover and provided the rollover reinvestment happens within the correct time frame of 60 days or less there is no taxable event.
If you go beyond 60 days however, it counts as a taxable distribution and this is why it pays to work with efficient specialists.
Step #3: Buying Bitcoin
If you’re working with a Bitcoin IRA specialist, you may have already discussed the cryptocurrencies you’re looking to buy. Specialist Bitcoin brokers can help advise you on the crypto coins most suited to your needs.
With tokens chosen, your specialist will open wallets in each of the cryptocurrencies.
Due to the speed at which crypto markets operate, your funds should be in place with the broker before placing a buy order. With your Bitcoin and/or other cryptocurrencies chosen, your dealer will lock the prices at a market rate you’re happy with – and trigger the purchase, adding the coins to their appropriate wallets.
Your Bitcoin IRA wallet / secret key then sees insured delivery directly to your chosen depository vault if this option is available, or the digital wallet is stored with your custodian – and that’s the rollover complete.
What IRAs can be rolled over?
| Roth IRA | Trad. IRA | Simple IRA | SEP-IRA | |
|---|---|---|---|---|
| Roth IRA | YES 1 | NO | NO | NO |
| Trad. IRA | YES 2 | YES 1 | NO | YES 1 |
| Simple IRA | YES 2 (after 2 yrs) | YES 1 (after 2 yrs) | YES 1 | YES 1 (after 2 yrs) |
| SEP-IRA | YES 2 | YES 1 | NO | YES 1 |
| *1: Only one rollover in 12 months *2: Must include in income | ||||
Note that from January 1, 2015, the IRS changed rollover rules to only allow a single rollover from one IRA to another IRA in any 12-month period, regardless of the number of IRAs you own. There are exemptions however: The one-per year limit does not apply to rollovers from traditional IRAs to Roth IRAs (conversions), trustee-to-trustee transfers to another IRA, IRA-to-plan rollovers, plan-to-IRA rollovers and plan-to-plan rollovers.
A Bitcoin IRA Transfer
Much like an IRA rollover, a Bitcoin IRA transfer is another tax efficient way to add bitcoin and other cryptocurrencies to your retirement portfolio.
A transfer involves the direct transfer of retirement funds from one trustee to another. The funds do not enter your bank account as in a rollover. While a direct transfer of funds from one account to another sounds simple in theory – in practice there are some providers who don’t always work well with others and need to pre-approve the transfer.
Trustee-to-trustee transfers are not subject to any tax withholding and are exempt from the above one-per-year and 60 day rollover rules.
When Would You Carry Out a Bitcoin IRA Transfer?
You carry out a Bitcoin IRA transfer if your existing retirement plan is unable to contain bitcoin or other cryptocurrencies. Transfers are most commonly carried out on company pensions because 401k plans can only hold traditional paper assets. They may also be subject to a withholding tax when rolling over to an IRA – whereas a transfer is not.
Also despite it being several years since the IRS relaxed it’s rules on alternative assets within IRAs, there are still a number of trustees who can’t or won’t accept Bitcoin.
A Bitcoin IRA transfer consists of three simple stages:
Step #1: Select a Custodian / Trustee to Accept the Transfer.
If you don’t already have a suitable IRA, you will need to set one up. To get off to the best start and ensure your chosen trustee works well with cryptocurrencies we advise you to work with a Bitcoin IRA specialist. They have close relationships with the best trustees in the precious metals market, any forms required – and can help you fill them in if needed.
An additional bonus is IRA set-up fees are often reduced thanks to the volume of business the Bitcoin IRA specialist sends the trustee’s way.
Paperwork is either all-digital or in some cases traditional printed forms, but are rarely complex and the whole account opening process can take as little as a couple of days.
Step #2: The Trustee-to-Trustee Transfer
Your new Bitcoin IRA trustee and your old trustee will now arrange to carry out a trustee-to-trustee transfer.
This means the financial institution holding your current plan to makes the payment transfer directly into your new retirement plan, the funds moving from one account to the other without entering your personal accounts and triggering a distribution or taxable event.
Importantly there are no taxes withheld in any form of transfer – a boon for moving from a 401k to an IRA. They are also exempt from the one rollover per year rule.
Transfer Step #3: Buying Bitcoin
As with the Bitcoin IRA Rollover above, now comes the time to add cryptocurrencies to your new IRA.
If you’re working with a Bitcoin IRA specialist, you may have already discussed the cryptocurrencies you’re looking to buy. Specialist Bitcoin brokers can help advise you on the crypto coins most suited to your needs.
With tokens chosen, your specialist will open wallets in each of the cryptocurrencies.
Due to the speed at which crypto markets operate, your funds should be in place with the broker before placing a buy order. With your Bitcoin and/or other cryptocurrencies chosen, your dealer will lock the prices at a market rate you’re happy with – and trigger the purchase, adding the coins to their appropriate wallets.
Your Bitcoin IRA wallet / secret key then sees insured delivery directly to your chosen depository vault if this option is available, or the digital wallet is stored with your custodian – and that’s the rollover complete.
What are Bitcoin IRA Fees?
A Bitcoin IRA much like any IRA does involve a degree of specialist work in setting up if you want to ensure you’re in compliance with IRS rules. While you can go it alone, the risks are usually considered too high.
Costs of a Bitcoin IRA do vary considerably across the marketplace, with some companies charging as much as four figures for set up and annual fees, so what is it that makes up these costs and what do companies do in return for your hard-earned money?
Bitcoin IRA costs consist of four main elements: the initial set up fee, ongoing maintenance fees, charges for physically vaulting your cold storage device – and transaction fees.
Initial Set Up Fee
This is the point at which Bitcoin IRA specialists really earn their keep – as the process must be carried out to exacting standards to follow IRS rules.
For Bitcoin IRA Rollovers and Bitcoin IRA Transfers the company must set up a new self directed IRA, liaising with your soon-to-be custodian and IRS-approved depository at the same time as liaising with your existing 401k plan operator or IRA trustee.
After much back-and-forth communication, funds are released from your existing account and added to your new SDIRA – within strict time-frames to avoid tax penalties. This guarantees your new account maintains it’s tax-advantaged status.
The specialist will organize your cold-storage vaulting working with an approved trustee or custodian – and then with the new account, vaulting and custodial services in place they’ll organize the transfer of your funds to buy Bitcoin.
Due to the work involved and dealing with several third parties, IRA transfers especially can take 2-3 weeks to carry out – and even at a low hourly rate, fees soon mount up.
Set up can costs can be between $500-$1000 unless you’re working with a high volume specialist.
Annual Maintenance Charges
Maintenance charges for the first year can often be included in set-up fees – but these cover the custodian’s duties across the year – to maintain your self-directed IRA on your behalf, carrying out your requests and ensuring the IRS is notified of any tax events.
Again, like fees, some companies can charge based on the work involved and so it pays to look into the fee break downs given.
Cold Storage Vaulting Costs
High security depositories are not low-cost facilities to build, run and maintain – but they can offer the ultimate in Fort Knox-like security to ensure your cryptocurrencies are held safely and to IRS standards.
They will typically include full at-market-value insurance arranged through top-tier specialist insurance houses – to absolutely ensure there is no chance of loss.
Some facilities will charge a percentage of total value held, which for $100k+ investments soon adds up, eating into capital appreciation. Others charge a fixed fee which can offer good value, especially if you’re planning to add to your holdings over time.
Percentage rates can run from 0.2% up to 2.5% and fixed fees tend to be around the $250-$500 mark.
Transaction Fees
Bitcoin IRA accounts will need to pay transaction fees because buying and selling Bitcoin on any exchange comes with trading fees.
These are unavoidable and can be as much as 3.5% per transaction although some also do fixed costs for transactions.
Choosing a Bitcoin IRA Company
When you’re choosing a Bitcoin IRA company to work with – you’re looking for an expert who’s well versed in the complex setup required to ensure full compliance with IRS rules.
The IRS requires there to be an IRS-authorized third party acting as a legal custodian for any Bitcoin investments you hold within the account. Your Bitcoin should be held in a wallet that you have no immediate access to and these are typically stored in an IRS-approved secure depository.
Payments made to the Bitcoin IRA and distributions made from it must all meet strict maximums and in some cases minimums, be made within certain timescales and follow precise procedures.
Added to this complexity, your Bitcoin IRA company needs to ensure your funds are safe at all times in any Bitcoin transactions and so will only work with the best exchanges offering the highest levels of transactional and in-transit security – and with it, insurance for if things go wrong.
Not all Bitcoin IRA companies are created equal and not all Bitcoin IRA companies are working with Bitcoin in ways the IRS would strictly agree with, so we recommend caution and due dilligence before working with any Bitcoin IRA company. At a minimum:
Read Reviews
Look for a strong performance across the big review websites – and if the company is part of a larger operation look at how the parent company fares too. Check out the BBB or consumer protection sites like Scam Report.
Do be aware that most companies offering Bitcoin IRAs also run affiliate / referral reward programs. This means a lot of reviews, especially on smaller less well known sites may be biased towards whoever pays the highest referral commissions.
Ask the Right Questions
Get your prospective Bitcoin IRA company on the phone and ask about fees and other costs – and with Bitcoin being so at-risk of hacking or digital theft ask about the company’s insurance and the steps they take to ensure your Bitcoin are safe.
Are they securely vaulted in cold storage, or are they held online? Does their insurance cover all risks – not just technical failure, but criminal risk such as hacking or insider-theft?
Is there an upper limit on insurance payouts? With Bitcoin being capable of 1000%+ increases in a year would you be covered in a perfect storm?
Check Efficiency
How smooth is the whole setup and investment process? You’ll get a good feel for efficiency just from how your initial inquiries are dealt with – from speed of returning calls, to answering emails and sending out any paperwork.
If they make time promises at this early stage and don’t keep them it doesn’t bode well for the future. You’ll also have read reviews by this stage and if you see recurring complaints about delays or errors, you’d do well to walk away because a Bitcoin IRA transaction is a complex beast and Bitcoin is so volatile that the difference of an hour versus 2 days can mean a massive profit or a loss during major price movements.
Need help? To make things easier, we’ve prepared a Bitcoin Investor Guide which covers all elements of the buying process in detail including selecting a company:
Click for Your Bitcoin Investment Kit
About Tim Schmidt
Tim Schmidt is an Entrepreneur who has covered retirement investing since 2012. He's also a published author, and his views on investing have been featured in USA Today, Tech Times, The Huffington Post, Nasdaq, and many more.
