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Bitcoin in your IRA

It's true! Investors can now choose to put money into Bitcoin as part of a retirement investment portfolio. While the possibility of exponential gains is certainly exciting, investing in Bitcoin still involves a high degree of risk and should thus only represent a small percentage of a diversified portfolio.

Perhaps investing in Bitcoin as a way to work towards retirement seems like a foreign concept to you, even though it’s now been around for 11 years. That’s okay! Everybody comes to Bitcoin on their own timeline and in their own way. If you’re ready to learn now, you’ve come to the right place to get started.

Don’t worry if you’re completely new to the world of cryptocurrencies and blockchain technology. This post aims to explain all of that and put it into the context of retirement investing. Once you’ve considered what blockchain technology means for the future and how getting ahead of the game and investing can impact your long-term plans, you’ll feel more confident about it. That’s all a good investment opportunity should ever make you feel.

What is Bitcoin?

Bitcoin is a decentralized peer-to-peer payment network. It’s not owned by any central authority. No private companies or governments have a say in how wealth is distributed or how transactions take place. Bitcoin can also be taken across borders and although it is illegal in some countries, accessing and interacting with the Bitcoin network cannot be censored by anyone.

Bitcoin’s value may not be represented by old school dollar bills or backed by a government, but it still maintains the basic properties of money:

  • It can be traded for goods and services, meaning it’s a medium of exchange.
  • It acts as a unit of account.
  • It's a store of value, meaning it won’t be costly to use it later vs. now.

Whether or not Bitcoin holds the above three properties is always a hotly debated topic. Here’s the thing, it takes time for a new currency to prove it meets the above conditions. Adoption strengthens the belief that the above three properties hold true when it comes to Bitcoin.

The bottom line is, Bitcoin is fungible, meaning it can be traded for another currency, including traditional dollars and other digital currencies. It’s also durable, divisible, portable, and acceptable and it’s available in limited supply. That means it’s just as much a valid form of money as traditional government-backed currency is.

So if it’s possible for a currency to have all of these properties without any central authority governing its use, what’s the mechanism that makes it work? Blockchain technology.

What is a Bitcoin IRA and How Does it Work?

A Bitcoin IRA is just like a more traditional Gold IRA. Both are self-directed IRAs aimed at allowing investors the ability to invest in alternative assets. Traditional IRAs and 401(k)s don’t allow this. It’s for this reason that anybody opening a Bitcoin IRA or Gold IRA needs to work with a company that uses a custodian that can facilitate transactions related to alternative assets.

Further down in this post we will go over the different Bitcoin IRA providers and the respective custodians they work with. Each partner’s with a custodian, trustee, wholesaler and a depository in order to facilitate all kinds of alternative investing.

What is Blockchain Technology?

A blockchain is a decentralized database. In the context of Bitcoin, it's used to display all transactions on a public ledger that anyone can see. Outside of currencies, blockchains can store data securely and efficiently, whether its user data on a social media site, information related to a company’s supply chain, proof of ownership on a real estate deal or anything else.

A blockchain can be both private (owned by a company) or completely public. While Bitcoin represents the first use case for a blockchain, it’s certainly not the only one, as noted.

Even in meeting all the basic principles of what constitutes money and finding a new innovative way to monitor transactions, validate them and make them publicly transparent in a way traditional financial institutions don’t, Bitcoin has had to fight over the last 11-plus years to prove that it’s a viable investment. It’s also why more and more investors are looking to the future and considering Bitcoin as a valid option for building towards retirement.

Why Invest in Bitcoin for Retirement?

Every year, Bitcoin achieves higher lows on its trading charts. The fundamental value of a blockchain is also now a proven commodity. Again, that’s not just in the finance space. But there are many other reasons to include Bitcoin in a retirement portfolio.

For one, other governments are planning to digitize their currencies anyway. China is already working on patents to do this with the Chinese Yuan. The country may not have the best track record from a human rights perspective but China does represent one of the world’s leading economies and they plan to have citizens do everything through mobile apps and smartphones when it comes to transacting. That said, China’s plans won’t result in a national, government-backed cryptocurrency, but it will accomplish something much more important.

It will show the world that paper money is no longer necessary. It will only be a matter of time before the average person realizes that Bitcoin may come a lot closer to being an everyday store of value in the long run. Essentially what this means is the gap between the average person understanding the use case of a digitized national currency and a blockchain-based currency (and more importantly how the two differ) will get smaller and smaller. This leaves the door open for even the most blockchain skeptic individual to consider using Bitcoin and other digital currencies.

Other Reasons to Invest in Bitcoin

Bitcoin is often called digital gold. Scarcity is built into the blockchain’s algorithm, which means that the supply of bitcoins available will continually go down year after year. Whenever supply goes up demand almost always increases. Those new to cryptos should invest because they’re going to make money in the long term, especially as adoption of digital currencies accelerates.

Another more philosophical reason to invest is that the Bitcoin network gives people total control over their own financial value again. It’s also the leader of an entirely new asset class and despite the fact there are over 2,500 different cryptocurrencies available for trading on the open market today, Bitcoin is still by far the most valuable cryptocurrency in the world.

How Do You Add Bitcoins to Your IRA or 401k?

Whenever it comes to investing no matter what the vehicle, product or service, an investor always has two options. To do it themselves or to get help from somebody else. Investing in Bitcoin as part of a long-term retirement plan is no exception. The majority of IRAs are managed by custodians or trustees. The sections below contain a list of them.

An IRA can hold stocks, bonds, and certificates of deposit as their investment vehicle. These vehicles can be held within several different types of accounts including a traditional IRA, Roth IRA, a Simplified Employee Pension IRA and a Savings Incentive Match Plan for Employees (SIMPLE) IRA. Each of these account types has been around for a long time and they all have their own unique advantages and disadvantages.

However, outside of these traditional accounts there are a variety of other options, including promissory notes, tax lien certificates, private securities, gold and of course Bitcoin and other digital currencies. Remember, choosing the right investment mix for one’s portfolio all comes down to assessing risk tolerance, retirement goals, life stage, income and many other factors.

Still, it’s important to know that different options are out there and that there are many options specifically within the Bitcoin IRA space for those that do choose to include digital currencies in a well-diversified portfolio.

Bitcoin in a Roth IRA versus a Traditional IRA

Roth IRAs and traditional IRAs are two of the more popular investment accounts to register and open when it comes to retirement. Just because they aim to accomplish the same goal, doesn’t mean they go about it in the same way. There are actually a few key differences between Roth IRAs and traditional IRAs. All investors should consider them closely before making a decision on which account to register.

With a traditional IRA account, investors benefit from their investments now and pay the taxes on them later. The traditional account type is tax deferred. This means the investor gets the benefit of any income tax deductions for contributions at the present moment and faces the income tax disadvantages later on in life.

A Roth IRA does the reverse. The investor pays the taxes right now and gets to withdraw profits tax free at retirement. This is specific to traditional IRAs.

Traditional IRAs function like a pension in that they offer considerable tax breaks to the investor but they also restrict and dictate under what conditions the investor can have access to their funds. In other words investing in retirement through a traditional IRA means being pretty well committed to the long-term future and potentially not touching most of one’s wealth until investments mature and access to the IRA is appropriate.

In considering these differences investors will have to weigh their annual income now and their expected income over the life of their career versus the expected tax implications that go along with all of this. That’s the best way to choose the right IRA account. Below is a chart comparing the most important features of both traditional and Roth IRA accounts to help break it all down:

COMPARING TRADITIONAL AND ROTH IRAS
RulesRoth IRATraditional IRA
2019 Contribution Limits$6,000; $7,000, if age 50 or older.$6,000; $7,000, if age 50 or older
2019 Income LimitsEligible are single tax filers with modified AGIs of less than $137,000 (phase-out begins at $122,000); married couples filing jointly with modified AGIs of less than $203,000 (phase-out begins at $193,000).Anyone with earned income can contribute, but tax deductibility is based on income limits and participation in an employer plan.
Age LimitsNo age limitations on contributions.No contributions allowed after the taxpayer turns 70½.
Tax CreditAvailable for “saver’s tax credit.”Available for “saver’s tax credit.”
Tax TreatmentNo tax deductions for contributions; tax-free earnings and withdrawals in retirement.Tax deduction in contribution year; ordinary income taxes owed on withdrawals.
Withdrawal RulesContributions can be withdrawn at any time, tax-free and penalty-free. Five years after your first contribution and age 59½, earnings withdrawals are tax-free, too.Withdrawals are penalty-free beginning at age 59½.
Required Minimum DistributionNone for account owner. Account beneficiaries are subject to the RMD rules.Distributions must begin at age 70 ½ for account owner. Beneficiaries are also subject to the RMD rules.
Extra BenefitsAfter five years, up to $10,000 of earnings can be withdrawn penalty-free to cover first-time home-buyer expenses. Qualified education and hardship withdrawals may be available without penalty before the age limit and five-year waiting period.Up to $10,000 penalty-free withdrawals to cover first-time home-buyer expenses. Qualified education and hardship withdrawals are also available.

 

*Chart courtesy of Investopedia.com

Bitcoin IRA Custodians

Investors sold on going the Bitcoin IRA route as a long-term investing strategy should consider these four main providers:

Regal Assets ranks best in class, and of the four providers is the only one serving an  international customer base. The other providers above only cater to American customers. Each provider above also offers a different third-party custodian providing security to all assets. Regal Assets uses New Direction IRA. Bitcoin IRA uses Kingdom Trust. BitIRA uses Preferred Trust. Noble Bitcoin is the only provider that allows customers to choose between several different custodians.

Regardless of the specific custodianship provider offered by each of the above IRAs, know that they are all legitimate and that each provider has a strong customer base and reputation to go along with that.

Bitcoin IRA Fees & Costs

Comparing the cost of bitcoin trading fees across different platforms is very difficult, even if we're only talking about acquiring a small amount or being a small time day trader, much less investing in a long-term solution for retirement. It’s like comparing apples to oranges. Some bitcoin exchanges charge a premium in fees because they offer instant transactions and more convenience. Others charge much less but it takes longer to get in the game and it can sometimes be cumbersome to register and do all the necessary things that go along with setting up an account, such as completing a risk tolerance survey, providing identification and getting advice.

When it comes to Bitcoin retirement investing specifically, fees are structured in multiple different ways depending on how the investor chooses to customize their IRA and the different options they are given. Some providers charge an initial setup fee, others charge a monthly or quarterly maintenance fee, and others still charge trading fees for individual transactions or a combination of all of the above.

The fee for setting up a $50,000 self-directed bitcoin IRA account for instance can cost as much as $6,000 in initial setup fees depending on the provider selected.

Another important thing to also consider is that each trade also incurs its own fees from trading partners and the custodian. As an example, one of the custodians noted in the section above, Equity Trust, charges 3.5% per transaction and 1% per sale. Bitcoin IRA has a repurchasing fee of 5% and its custodian provider, Kingdom Trust, charges $150 per sale.

Being aware of these fees is crucial because the stakes are so high when it comes to retirement. Investing in a nontraditional asset like Bitcoin means paying nontraditional fees. That’s why it’s important to think critically and make the right choice the first time when choosing a Bitcoin IRA solution.

Should You Invest in Bitcoin for Retirement?

In general there’s nothing wrong with putting a little bit of one’s nest egg into a riskier investment. While Bitcoin specifically and the world of cryptocurrencies in general is maturing as an asset class, the amount that someone should invest in Bitcoin IRAs really comes down to the individual investor.

Yes the potential for a big return in the long run is certainly there, but the fees and tax implications of using a Bitcoin IRA can also have very real consequences. The best thing to do is conduct thorough research, consult an experienced financial advisor and allocate assets based on sound logic and with individual risk tolerance preferences in mind.

While doing all of this may seem overwhelming, reading reviews of each Bitcoin IRA provider is a great first step. Doing some due diligence at the very least allows investors to be able to ask the right questions so that they can find their own answers.

There’s never a bad time to review one’s retirement portfolio and decide whether digital gold will help you get through your golden years.