What is a Bitcoin IRA Rollover & How It Works?

Bitcoin IRA Rollover

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The rise of Bitcoin and other cryptocurrencies in recent years has opened up a new way for you to start thinking about retirement. Despite the volatility and increased risks, investing in Bitcoin can yield higher returns and diversify your portfolio.

But what is a Bitcoin IRA rollover, and how does the process work?

A Bitcoin IRA Rollover is a method to move funds from your existing IRA, Roth IRA, SEP-IRA, SIMPLE IRA, 403b, or 401k into a self-directed IRA, which allows you to invest in alternative assets such as cryptocurrency. This improves diversification and increases the potential for high returns.

The IRAs run by traditional financial brokers limit your investments to IRS-approved alternative assets and focus on building investment portfolios on traditional assets like bonds and equities. 

However, a self-directed IRA makes it possible to invest in a broad range of assets, such as precious metals, real estate, or cryptocurrencies.  In this article, we will explain how a Bitcoin IRA works and how to carry out the process of a Bitcoin IRA Rollover.

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What is a Bitcoin IRA?

A Bitcoin IRA is simply another name for a self-directed IRA, similar to a traditional IRA, but allows you to invest in a broader range of alternative investments.

The difference between a self-directed IRA and a traditional IRA lies in the custodian of the IRA. Traditional IRAs will use a bank or stockbroker to be the custodian, and investment options are therefore limited to the investments that have been approved by the institutions that the custodian forms part of. i.e., A traditional IRA will only allow investments in stocks, bonds, ETFs and mutual funds.

Custodians of self-directed IRAs are not subject to regulatory bodies’ same regulations and oversight as custodians of traditional IRAs. This means they can invest in alternative assets like gold, silver, and cryptocurrencies.

You can choose between traditional and Roth self-directed IRAs when setting up your Bitcoin IRA, and your investments will be subject to the same tax benefits and the same rules.

Due to their higher contribution limits, small business owners may prefer SEP and Simple IRAs and solo 401(k)s.

However, with a self-directed IRA, the process of managing your investment requires more work on your behalf, along with transaction and brokerage fees every step of the way.

The custodian is the person looking after your investment, keeping it safe and ensuring that it’s following SEC regulations. In traditional IRAs, this would be the bank or the broker, but with a self-directed IRA, you need a custodian that exists outside of traditional financial institutions that will facilitate your cryptocurrency trades.

The exchange is the next institution that forms part of the Bitcoin IRA ecosystem. They manage your cryptocurrency trades and operate similarly to the stock market and facilitate cryptocurrency trades.

Finally, a self-directed IRA investing in Bitcoin would have to manage the account’s security mechanisms. Given the digital nature of cryptocurrencies and the sums of money you’re dealing with, security risks are genuine.

Failure to be vigilant in this respect can be catastrophic, and you could lose everything.

A self-directed IRA service provider will be offering you all of the services above if they are focused on cryptocurrency investments. You should consider these facets of their services when considering who to trust with your money and future.

Pros & Cons of Bitcoin IRAs

Due to the volatile nature of cryptocurrencies, their accessibility, volatility, and the lack of a designated IRS account, there are several advantages and disadvantages to investing in Bitcoin IRAs.

Pros

The first and most apparent advantage to investing in a Bitcoin IRA (and in altcoins) is that it improves diversification, protecting your investments from future market downturns. 

By investing in several cryptocurrencies or in conjunction with other alternative investments and traditional investments, you aren’t putting all of your eggs in one basket.

Secondly, the trajectory for Bitcoin’s value in the long term seems limitless. As cryptocurrencies grow in popularity and become more and more accessible, their values could continue to skyrocket, and IRAs could serve as a perfect, safeguarded method to invest in the burgeoning industry while reaping the same rewards as short-term investors.

Finally, there are numerous tax advantages that investing in a Bitcoin IRA could bring about. It is challenging to keep track of the capital gains taxes you owe for each sale that yields a profit when trading Bitcoin.

But, as long as the money is held in an IRA, you will not be taxed as long as the money stays in the same account.

Cons

While Bitcoin’s value has risen astronomically over the last decade, it has also been remarkably volatile. After reaching an all-time high in December 2017 of $19,650, the price plummeted to $6,984 by April 2018.

Yes, the value of Bitcoin rose to over $60,000 by April 2021 but then dropped below $32,000 by June, but for anybody close to retirement, riding out the market downturn may not be possible if you retire at the wrong time.

Furthermore, the future of Bitcoin and cryptocurrencies is unclear, and many people still view this new asset class as a fad that will never fulfill its potential. So, it cannot be said with confidence that the values of cryptocurrencies will continue to rise.

And, despite all of its promises to supplant fiat currencies, Bitcoin has yet to do so anywhere, and it remains inaccessible to many people around the world.

Furthermore, the major disadvantage to investing in a Bitcoin IRA is the fees associated with running the account. Trading takes place at the exchanges, not with the IRA custodian, as is the case with traditional IRAs, meaning an additional layer of fees is involved.

On top of this, the process of looking after a self-directed Bitcoin IRA is incredibly complicated. The potential tax benefits will be challenging to exploit and add another set of fees to the process.

Finally, there is the risk associated with Bitcoin IRAs. Self-directed IRA brokers aren’t bound by the same fiduciary responsibilities as traditional IRA brokers, meaning that your account may not be managed within best practice principles.

Not to mention the long list of risks associated with cryptocurrency investments, which you need to be fully aware of before making any investments.

How to Rollover Your 401(k) to a Bitcoin IRA

If you’ve changed jobs recently or need to reinvest your 401(k) for another reason, you may find that your new plan is charging higher fees, with a limited selection of funds to invest in.

In other words, you don’t feel that your existing retirement plan is working for you.  The good news is that you can opt for a 401(k) rollover into a Bitcoin Individual Retirement Account (IRA). So how does the process work?

First, you choose your 401(k) rollover destination, which would be your Bitcoin IRA. You would opt for a Roth IRA, which gives you tax advantages, favorable for high-income earners in particular.

Secondly, you need to choose an IRA provider, the custodian of your Bitcoin IRA, which will oversee the entire Bitcoin IRA rollover. Consult with them to conduct a direct rollover where your old 401(k) plan transfers your savings directly to your new account in a manner that avoids taxes and penalties.

The most prominent Bitcoin IRA service providers include: BitIRA, Bitcoin IRA, iTrustCapital, and Coin IRA.

Once you’ve found a reliable, trustworthy IRA service provider and you’ve completed your Bitcoin IRA rollover, it’s time to start consulting with your custodian about your investment options and how you’re going to structure your portfolio to yield the highest returns with as little risk as possible.

Bear in mind; this is a long-term investment! Instead, invest in more established, stable currencies like Bitcoin, Ethereum, and Ripple. The risk involved with investing in less established tokens is even higher than it is with the mainstays. 

Even though the rewards can be higher, the chances of an unheard-of cryptocurrency matching Bitcoin’s price in the future are astronomically low.

Is a Bitcoin IRA Rollover Worth The Risk?

Bitcoin IRAs are difficult to understand, and understanding the process of a Bitcoin IRA rollover can also be hard to grasp. However, if you understand the role that a custodian plays, the risks associated with it and find a well-established, reliable Bitcoin IRA service provider, your Bitcoin IRA rollover can be a relatively seamless process.

If you get it right, you can enjoy significant tax benefits, your investments could grow far faster than they ever did in your existing retirement fund, and you can secure your future.

Bitcoin IRA Rollover FAQ’s

How does a bitcoin rollover process work?

A Bitcoin IRA Rollover is a straightforward process. After you’ve already opened, a new Self-Directed IRA that allows for cryptocurrency investment.

You can decide to rollover as much or as little funds as you wish from your existing 401k or traditional IRA account. And with the assurance of your Bitcoin IRA custodian, purchase Bitcoin into the account.

What is a 401k plan?

We’ve talked about 401k plan in this article, this is what it means. Simply put, a 401(k) account In the United states pension account that is employer-sponsored which is defined in subsection 401(k) of the Internal Revenue Code, hence caller referenced as 401(k) plan. Employee funding comes directly off their paycheck and may be matched by the employer.

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When it comes to customer service, fees, safety, and overall customer satisfaction, Bitcoin IRA checks all of the boxes.