Bitcoin IRA: How to Save for Retirement Using Cryptocurrency

DucationTechnology has revolutionized the way we manage our savings and retirement accounts. Until recently, cryptocurrency was considered too volatile for inclusion in individual retirement accounts (IRAs). Though still plenty volatile, cryptocurrency is now considered too good to pass up. Suddenly, a bitcoin-based retirement account doesn’t seem like such a bad idea after all.

Bitcoin IRA: An Introduction

The bitcoin IRA falls under a much broader umbrella of digital IRAs that are becoming increasingly popular in American investment circles. Digital IRAs are also part of a broader category of self-directed retirement accounts investors can use to maximize their exposure to alternative assets.

A digital IRA – the kind that holds bitcoin, Ethereum and other cryptos – is a self-directed retirement account. Since cryptocurrencies are recognized as property by the IRS, they can be held as investments inside an IRA account. Access to a bigger pool of investments is one of the chief differentiators of the self-directed IRA. In addition to cryptocurrencies, self-directed IRAs offer exposure to real estate, precious metals and a host of other assets. Of course, they can also be used to invest in traditional stocks and bonds.

Self-directed IRAs can also help investors maximize their crypto holdings by offering unique tax advantages that otherwise couldn’t be realized had they purchased them through an exchange. By keeping your bitcoin inside an IRA, you won’t face any tax penalties on investment returns. Of course, this no longer applies when you take the funds out.

Naturally, there are plenty of misconceptions around bitcoin-based retirement accounts. Hacked.com recently connected with Jay Blaskey, digital currency specialist at BitIRA, to clear the air.

Common Digital IRA Misconceptions

Blaskey says there are at least five core misconceptions currently plaguing the market for digital IRAs. Investors should weigh these carefully before deciding to embark on a bitcoin-driven retirement account. More importantly, they should steer clear of bogus claims issued by investment managers.

Here are, in Blaskey’s own words, the five common misconceptions surrounding digital IRAs.

1. “A Bitcoin IRA from company X is unique in that it is fully IRS compliant.”

No company can claim that it has a unique offering simply because it offers a Bitcoin IRA that is IRS compliant. In reality, this is a capability that a small number of companies, including BitIRA, currently offer. In order for a Bitcoin IRA to be IRS compliant, you simply must ensure that you have set up a self-directed IRA with a qualified custodian and that you adhere to the rules of purchasing and storing your assets, so that you don’t run afoul of any IRS regulations.

2. “Company Y recently introduced a Bitcoin IRA which allows investors to roll over an existing IRA or 401(k) into a Bitcoin IRA.”

While this can oftentimes be correct, statements like this from some companies make it sound as though any IRA or 401(k) can be moved to a Bitcoin IRA. However, that is not always the case. For example, if you opened your 401(k) with your current employer, you likely cannot move it to a Bitcoin IRA. One exception is that those who are 59 1/2 years or older may be able to make this move without any penalties. The rules can be complex in some cases, so we often refer our customers to their accountants to fully understand their personal situation.

3. “You should set up an LLC to start a self-directed IRA.”

You don’t need to. It is possible to do it this way, but it will probably be a much more time consuming and complicated solution than going with a company like BitIRA, which does all of the paperwork administration that is required for you. Also if any mistakes are made in the setting up or annual filing, later auditing by the IRS could deem that you made a distribution. In such an event, you would be exposed to negative taxable events along with fines and penalties.

4. What are the rules and fees in place for self-directed IRAs, ie, maximum annual contribution of $5,500, requirement of a custodian, etc.

In terms of functionality, Digital IRAs have the same rules as any other IRA, with the same maximums and custodian rules. In addition, you can set up your Digital IRA as any other IRA – whether it be Traditional, Roth, SEP or SIMPLE.

5. “In order to open a Digital IRA, you must place all of your retirement savings in cryptocurrencies.”

You do NOT need to do this. A Digital IRA is simply a descriptive name for an IRA that contains some portion of digital currencies in your IRA. It falls under the umbrella of a self-directed IRA, which allows for a broad range of investment options within your IRA. Therefore, you can choose the allocation of digital currencies that you’re most comfortable with.

Several companies offer Digital IRA services. In addition to BitIRA, IRA Financial Group and Goldco subsidiary Coin IRA all offer cryptocurrencies. HonestBlock also offers alternative asset custody solutions dedicated to bitcoin.

Ways Forward

The cryptocurrency market is maturing at a rapid rate, with bitcoin and a handful of altcoins offering the biggest investment appeal. Cryptocurrency regulations have struggled to keep pace with the evolution of the market, but investors are generally in the clear when it comes to generating retirement savings via digital assets. In the United States, bitcoin is recognized as a commodity, making it

Although IRAs are only relevant from the perspective of U.S. investors, cryptocurrencies have clearly entered the discussion on retirement savings. Before integrating cryptocurrency into your retirement portfolio, it’s important that you get up to speed on all the regulations concerning digital assets in your jurisdiction.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock. 

Author:
Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi