When it comes to assets, bitcoin is the new kid on the block. Gold, cash, bonds, and equities have all been around for more than a hundred years. Bitcoin is barely a decade old.
In this definitive bitcoin IRA investors’ guide, we take a look at everything you need to know about the digital currency and how to use it to secure a happy retirement.
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A traditional IRA or individual retirement account is a tax-deferred saving account comprising cash, stocks, bonds, and other securities.
A Bitcoin IRA (sometimes called a crypto IRA) is just a new form of retirement savings account that enables you to invest in crypto assets too.
Note here that we said “crypto assets,” not just bitcoin. Financial institutions used the term Bitcoin IRAs for brand recognition purposes.
Bitcoin IRA's work in fundamentally the same way as regular IRAs. As before, you invest your pre-tax gross pay, reducing your tax liability.
But instead of saving in cash or traditional securities, you convert your money into bitcoin.
In practice, owners of Bitcoin IRAs appoint a custodian to manage their self-directed accounts.
This agent converts your dollars into cryptocurrencies on the exchange on your behalf, speeding up the process.
Just remember, they do not have a fiduciary responsibility towards you, so think carefully before making an investment or following their advice.
Bitcoin IRAs are becoming increasing in popularity. Past rises in crypto prices are leading some investors to believe the trend will continue in the future.
The value of bitcoin, for example, increased from $1,000 per coin in January 2017 to more than $19,700 by December 2017.
The returns on the upside, therefore, are impressive. There is, of course, no such thing as a free lunch, though.
The market can go up, but it is also highly volatile.
After reaching its December 2017 high, the price of bitcoin fell by more than two-thirds to $6,252 in February 2018, wiping out savings in the process.
Owners of Bitcoin IRAs also incur substantial costs.
It is not uncommon for service providers to charge account fees in the region of $20.
For these IRAs to make sense, therefore, you need to have a lot of money behind you AND be prepared to accept a high level of risk.
$6,000 limit for people under 50 years of age. There’s a limit on the value of crypto assets you can deposit in your IRA per year, just as there is for a regular IRA. Currently, the threshold for people under the age of 50 is $6,000. For those 50 or older, it is $7,000.
You cannot buy cryptocurrency separately and then deposit it in your Bitcoin IRA. You must use the services of a dedicated firm to carry out the transaction for you.
You still have to pay taxes on bitcoin capital gains, even though it is a form of cash.
The price of bitcoin varies wildly from day to day and hour to hour. Thus, you can usually only trade the currency during regular trading hours.
Any wealth stored in the form of cryptocurrency is at risk of being hacked.
For that reason, many Bitcoin IRA providers advanced technologies to keep it safe.
Some agents use “multisig wallets.” These work by insisting that two or more trusted people provide access authorization.
Other agencies use what they call “true cold storage,” where they store all your money and data on servers with no connection to the internet.
Finally, some companies provide end-to-end insurance products.
These protect you if you find your account compromised for any reason, such as theft, mistakes, fraud, or hacking.
If you already have an IRA and want to convert some of it to a Bitcoin IRA, you can.
You may, however, have to pay a fee, depending on the provider.
Most companies include the cost of rollover in their regular fees. BitcoinIRA is a good example.
The Bitcoin IRA market is competitive - a boon for retirement savers.
There are now numerous companies offering savers the opportunity to augment their portfolios with bitcoin.
Many of today’s leading Bitcoin IRA companies emerged from firms that initially offered investors gold-related products.
CoinIRA is one such company. It came into existence in 2017 as the cryptocurrency subsidiary of Goldco, one of the leading gold investment product providers in the nation.
It provided one of the first places where savers could add crypto to their IRAs.
The company prides itself on providing clients options with their self-directed IRAs.
Noble Bitcoin is a Bitcoin IRA provider on a mission to make it easy and safe for retirement savers to add cryptocurrencies to their asset mix.
Offering clients a way to save in bitcoin and other digital currencies was, in their view, the best way to achieve this goal.
BitcoinIRA was the first service in the US that allowed IRA savers to convert savings into a broad range of cryptocurrencies, including Ethereum Classic, Bitcoin Cash, Litecoin, Ripple and Ethereum.
The company’s mission is to make the process of investing cryptocurrencies both simpler and safer, protecting you through each step of the transaction process.
The firm’s consultants are transparent and committed to helping you achieve your financial goals.
It certainly is. Changes in the rules and the emergence of Bitcoin IRAs now mean that anyone with an IRA savings account or qualifying employer 401(k) can diversify into cryptocurrencies.
Please note, though, that Bitcoin IRA agencies do not have a fiduciary responsibility towards you. These accounts are self-directed.
You can buy bitcoin through an IRA, whether you have a traditional, rollover or Roth.
You place the order through your Bitcoin IRA agent, and then they go to the exchange, collect your bitcoin, and deposit it in your account.
Bitcoin IRA agencies will take a percentage fee based on the total amount of money you spend.
So, for instance, if you request $5,000 worth of bitcoin and the charge is 1 percent, you’ll pay $50.
You cannot transfer bitcoin (or other cryptocurrencies) held elsewhere to your IRA. You can only add cryptocurrencies directly.
No investment product is entirely safe. But, in many ways, Bitcoin IRAs present investors with more risks than traditional assets.
The first is the risk of hacking, theft, crashes, and other digital maladies.
Even though they are finite, cryptocurrencies are not impervious to hacking, crashes, or computer failures.
Bitcoin IRA providers offer a one-two combination of IT defenses and insurance to put investors at ease.
Software, debugging, and “cold rooms” slash the risk of a breach. At the same time, insurance provides additional backup, should you lose your money.
Bitcoin IRAs are also potentially dangerous for another reason: price volatility. Bitcoin is notorious for significant percentage moves both up and down.
Thus, for people saving for retirement who need a stable store of value, cryptocurrencies might not be the best option.
With that said, it all depends on your investment horizon and expectations.
If you’re in your thirties and plowing money into a Bitcoin IRA, you still expect to wind up considerably better off in twenty years, even if there is volatility along the way.
A self-directed IRA, sometimes abbreviated SDIRA, is a form of individual retirement account.
It allows you to hold a range of assets that are usually prohibited.
SDIRAs still have custodians like regular IRAs, but they only provide an administrative function.
If you own one of these accounts, it is your responsibility to allocate your savings.
In general, SDIRAs are only available through specialized firms.
Furthermore, these agencies are not allowed to give specialist financial advice.
They have no fiduciary responsibility to you. The burden of research and due diligence falls on you.
Yes. Under the current rules, the IRS treats items in your IRA, such as cryptocurrency, as a form of property for income tax purposes.
Converting your 401k savings into bitcoin is relatively straightforward.
If you want to do it, you’ll need to go through the following process.
Open a self-directed Bitcoin IRA. You can use any qualified custodian to open an SDIRA through which you can buy bitcoins. Once you set up your new account, you can begin transferring the savings in your 401k.
Get a specialist agent to perform the transaction for you. Bitcoin IRA custodians have the training, security, and financial facilities to safely transfer funds from your existing account, convert them into the cryptocurrency of your choice and deposit them in your new one.
Check your digital wallet. At the end of the process, you should be able to see the new funds in your digital wallet. Your custodian should also provide you with a receipt, showing you the price at which they bought the coins, the number of coins you have, and their fee for the transaction.
There are several factors that you should consider when hiring a Bitcoin IRA custodian. These include:
Fees. Custodians do a lot of work to maintain your account. For that reason, they invariably charge a fee. Fee structures differ considerably from one provider to another. Most charge a combination of custodial fees (which you pay regardless of any transactions you make), and transfer fees, paid as a percentage of any assets you buy.
Accreditation with the Better Business Bureau. Membership of the BBB generally indicates that you’re working with a quality and legitimate organization.
Check their security. Good Bitcoin IRA custodians should publicize the security measures that they use to keep your money safe.
For that reason, it helps tremendously if there is a helpline you can call.
Here is a comprehensive list of retirement accounts that are eligible for a Bitcoin IRA rollover:
If you have a retirement account that is not listed, it may still be eligible for a rollover.
In order to find out, you can directly call the company representatives to see which of your accounts will qualify.
Here are some of the cryptocurrencies you can store in a Bitcoin IRA:
If you don't see your chosen cryptocurrency provided by a custodian, either stay patient and wait for them to add it or go ahead and give them a call.
Offers A More Highly Diversified Portfolio
The more that you can diversify your portfolio, the higher your risk-adjusted return.
Cryptocurrencies may be uncorrelated with other asset classes.
Early Investors Could See Significant Percentage Gains If Demand For Crypto Rises
When it comes to making massive returns, it always pays to be an early investor.
The sooner you can snap up an asset, the better.
If you’d bought $10,000 worth of bitcoin in 2011, it would be worth tens of millions of dollars today.
Many people believe that we’re still early on in the story of bitcoin and other similar currencies.
The total market penetration of crypto assets remains well below one percent, meaning that there’s a lot of room to run.
The price of bitcoin could explode if it reaches the market share cash enjoys today.
Investors Could Avoid Capital Gains
Capital gains tax applies to practically all investment.
However, there are some accounts, such as Bitcoin IRAs, that offer shelter.
You can, therefore, buy crypto assets while also protecting yourself from IRS tax take when you withdraw in the future.
It’s not all good news, of course.
There are also cons associated with investing in bitcoin.
Bitcoin Trades Incur A Fee
If you want to trade into or out of particular crypto assets, you have to pay a fee.
Bitcoin IRA providers usually calculate these fees as a percentage of the value of the transaction.
The amount you pay typically ranges from 1 to 3.5 percent.
Some providers offer a flat fee. Thus, for investors wanting to conduct large transactions, these services may be superior.
Remember, though - all fees cut into your returns.
You May Also Have To Pay Account Maintenance And Custody Fees
Keeping a Bitcoin IRA open isn’t free.
Providers of the service incur costs, just like any other business.
Account-holders, therefore, must pay maintenance and custody fees, even if they don’t perform any transactions from one month to another.
Moreover, these fees can be high, depending on the provider.
For this reason, it is vital to shop around before you settle on any particular account.
Prices for some accounts can be substantially lower for your purposes than others.
The Hype Around Bitcoin Could Be Exaggerated (And Has Been In The Past)
Proponents of digital currencies believe that they will soon replace government paper as the dominant medium of exchange.
That, however, is yet to materialize.
Right now, the price of most crypto assets is volatile, and regular cash isn’t going anywhere.
Critics, therefore, caution people against plowing all their money into digital currencies.
There’s no evidence yet that it is a challenger to the traditional monetary system.
Most individuals and businesses still trust the dollars in their pocket - there doesn’t seem to be a strong case to make the switch - at least not yet.
That, of course, could all change if regular currencies start losing their utility.
At that point, people may flip.
But, likely, regular money will always have some residual value.
Cryptocurrencies Face Regulatory Risk
For now, cryptocurrencies are such a small part of asset markets that governments can afford to ignore them.
In the future, though, that might not be possible.
Monetary mismanagement by central banks around the world could lead to rampant inflation.
That, in turn, could precipitate a switch to cryptocurrencies as people search for mediums of exchange that hold their value.
And when that happens, we could see authorities crackdown.
Hopefully, that will never happen, but it could.
Governments will do whatever they can to maintain their power.
Bitcoin is one of the most exciting asset classes on the planet. It has the potential to revolutionize the economy by changing the nature of money.
Digital currencies are still in their infancy, but many commentators believe we’re at the start of something genuinely transformative.
Blockchain-powered digital money could potentially compete alongside government fiat, and even replace it, thanks to its inherent advantages.
Thus, holding bitcoin today could see your purchasing power rise dramatically in the future.
If people make the switch en masse, the value of bitcoin is liable to go up, not only in terms of fiat money but goods too.
Holding on to bitcoins, therefore, could increase your quality of life in retirement. You should note, though, that investing in bitcoin is fundamentally different from investing in equities.
When you buy a share of a firm, you’re purchasing the rights to a proportional share in that company’s future profits.
Purchasing a stock is not speculation but rather taking ownership of the productive potential of the economy.
Bitcoin is different. When you buy a coin for investment purposes, you’re essentially speculating that its value will rise in the future.
There’s no business backing it up. You’re hoping that people will move out of regular currency and into crypto, pushing up the price.
They might not.
The best way to get started with a Bitcoin IRA is to approach an accredited custodian.
They can guide you through the entire process, rolling over money from your other IRA accounts, if necessary, and ensuring proper reporting to the IRS.