Retirement Growth Opportunity With Cryptocurrency
For many investors with individual retirement accounts (IRAs), they hold the most conventional of assets, such as stocks, mutual funds and bonds. That’s because most don’t know that they can hold a wide array of assets in their IRA, including real estate, precious metals, private companies, and more, in what’s called a Self-Directed IRA (SDIRA). Most recently, there are now even companies that specialize in trading digital assets, such as Bitcoin, within such accounts.
This article will focus on holding cryptocurrency in an SDIRA, the benefits of this strategy, and the Self-Directed IRA rollover process. While we may refer in the article to Bitcoin, almost all of these principles apply to other cryptocurrencies like Ethereum, Litecoin, Bitcoin Cash, and others.
Why a Self-Directed IRA?
Self-Directed IRAs have been part of the investment landscape for over 40 years (since 1974, to be exact). Other types of IRAs restrict investors to holding the most conventional of assets, such as stocks, bonds, and mutual funds. While these traditional assets have proven to appreciate over long periods of time, some investors still prefer to diversify beyond them. Diversification is a top reason why some savers choose to rollover into an SDIRA, which gives an individual control over their own asset allocation (though with the attendant risks).
Another reason why SDIRAs are popular with investors is the potential for higher returns. If you are convinced that particular assets — perhaps Bitcoin — will grow faster than stocks and bonds, an SDIRA allows you to buy and hold them (with some exceptions).
You can rollover your existing retirement account into a Self-Directed IRA, which itself can take one of several forms. An SDIRA can be one of the following types:
- Traditional IRA. Contributions are not taxed up front and grow tax-free. Distributions taken out in retirement are taxed.
- Roth IRA. Funds are taxed when contributions are made to the IRA. They then grow tax-free and are not taxed upon distribution.
- SEP IRA. This is a Simple Employee Pension IRA. A small business owner or freelancer can open such a retirement account (read more about SEP IRAs here).
- SIMPLE IRA. This is a Savings Incentive Match Plan for Employees IRA. It offers small-business owners a simplified process for contributing to retirement plans.
For more information about Self-Directed IRAs in general, see this article.
Self-Directed IRAs (SDIRA) with Cryptocurrency
Bitcoin and other cryptocurrencies have unique advantages when held in an IRA. These types of Self-Directed IRAs are called Digital IRAs (or Bitcoin IRAs). Some of the benefits of Digital IRAs include:
Tax deferral. Funds grow tax-free in an SDIRA and are only taxed upon distribution (Traditional IRA) or contribution (Roth IRA). If you expect Bitcoin to experience major growth, purchasing coins in a Roth IRA means that any of your gains from this asset will be withdrawn tax-free in retirement.
Simplified reporting. Neeraj Agrawal, a virtual currency advocacy leader, said this about IRS laws for trading cryptocurrency outside of a retirement account: “Currently, a user needs to calculate capital gains on every stick of gum they buy with cryptocurrency.” Tracking cryptocurrency trades is significantly simplified if trading currencies within a Bitcoin IRA, since taxes are only calculated upon initial contribution or retirement distribution.
Safe and secure storage. Qualified Digital IRA custodians (more on this below) usually go to great lengths to protect digital assets in storage, beyond what an individual investor can do. Custodians often hold an investor’s Bitcoin in a cold hardware wallet, store it in a secure vault, follow a stringent process of accessing funds, and also insure digital assets against theft. Read more about cryptocurrency storage security here.
“HODL” strategy. Typically, Digital IRA custodians offer only the top cryptocurrencies for holding as retirement investments. Risks from initial-coin offering (ICO) scams and impulse transaction mistakes are reduced because the Digital IRA process encourages investing for the long term.
Wealth protection and transfer. According to bankruptcy law, in the event of a bankruptcy, assets held in a Self-Directed IRA are exempt from being confiscated. Also, certain SDIRAs allow wealth to be transferred to designated beneficiaries after death without having to pay taxes.
With a Digital IRA, though you are entirely responsible for investment decisions, law requires that you work with a qualified custodian (just like with other types of retirement accounts). A custodian is simply a financial firm that purchases and holds an investor’s assets for safekeeping.
Important Things to Know About SDIRAs
There are a few things to know before deciding to rollover to a Self-Directed IRA. Here are some important considerations for holding assets in an SDIRA:
Prohibited transactions. Not all types of assets can be held in an SDIRA since retirement accounts are intended to avoid speculative or fringe investments. Assets like life insurance policies, personal loans, and collectibles are not allowed in an SDIRA. Read the following article for more information about limits to SDIRAs.
Due diligence. With greater freedom comes greater responsibility. Unlike conventional 401(k) and IRA accounts, the burden is on the investor to abide by all IRS regulations for Self-Directed IRAs. This is most relevant, perhaps, for real estate investments, since IRS law prohibits personal use of an asset that is held in an SDIRA.
Lack of liquidity. Withdrawing money from any IRA account before retirement is usually heavily penalized (and highly discouraged by most financial advisors in all but the most extreme emergencies). Holding a Bitcoin IRA is a long-term investment strategy, and, while cryptocurrency can be exchanged for other types of assets in an SDIRA without incurring a penalty, funds should rarely be withdrawn from any retirement account for immediate use.
If you’ve taken all of these factors into account and have decided to invest in cryptocurrency within a Self-Directed IRA, you will need to rollover funds from your current retirement account into a Digital IRA.
BitIRA Makes the Rollover Process Easy
BitIRA specializes specifically in cryptocurrency investments within an IRA. Here is how a rollover into a Digital IRA works:
- Request a free guide about Digital IRAs on the BitIRA website.
- Review your rollover options with a Digital Currency Specialist over the phone.
- Create a Digital IRA account with BitIRA’s qualified custodian partners, either Equity Trust Company or Preferred Trust Company.
- Rollover assets from qualifying retirement account(s) into the new Digital IRA.
- Choose which crypto coins to purchase for your Digital IRA (e.g. Bitcoin).
- Stay up to date on the value of the cryptocurrencies in your Digital IRA, and make any necessary trades on an ongoing basis.
BitIRA offers the world’s most secure Digital IRA solution. All digital assets are stored on personal hardware devices (multisignature wallets), held in cold storage, and are fully insured from theft, fraud, mistakes, and hacking. These key security measures offer peace of mind to investors that their digital assets for retirement are fully protected.
The rollover process requires reviewing your options, making investment decisions, and completing paperwork. BitIRA makes this process easy by assisting customers along every step of the way and offering support on more purchases or trades in the future.
If you are interested in holding Bitcoin and other cryptocurrencies in your IRA, BitIRA is the resource for you. Request a free guide about Digital IRAs today to learn more!