How You Can Open A Bitcoin Based IRA
Did you know that stocks, bonds, mutual funds and ETFs are not the only assets you can own as part of an IRA? People have also been buying gold and silver over the years and using that to balance out their portfolios, and now even cryptocurrency is an option. Cryptocurrency isn’t usually the first asset mentioned when discussing IRA options, but it can be similar in some ways to precious metals and has some properties that are even better than fiat currency. You can add it to your portfolio and even cash out on it later on when you’re ready to withdraw. But there are a few guidelines you should follow for investing in it.
Why Should You Consider Investing In Bitcoin?
One reason investors may stay away from Bitcoin, ethereum or other cryptocurrencies is that they are not as well known as gold, or other alternatives to stocks and bonds. Also, the technology that controls it and the means of understanding its underlying structure can get a little complicated. However, it’s possible to use it without totally knowing all of its inner workings. What’s attractive about bitcoin is that it’s like an alternative to cash because it’s used with a digital wallet. Bitcoin is also not like regular currency because it is not managed by a central bank, and it has a few secure features about it that make it difficult to hack. That doesn’t mean that you have complete data privacy with bitcoin, but there’s less chance that it’s stolen due to highly secure algorithms.
What makes it similar to gold is that there is a finite supply of it, and at some point it’s set so that you can no longer mine it. Bitcoin mining is one way Bitcoins can be created with miners in a pool sometimes splitting the profits. But most investors who want to purchase it will buy it from an exchange where they’ll buy a certain amount using a bank wire transfer, a debit card or a credit card. Some bitcoin exchange networks allow you to buy it in cash using a bitcoin ATM and the QR code of your bitcoin wallet. Now when it comes to an IRA that uses bitcoin, the rules change a little bit, but you also need to consider whether bitcoin is worth a long-term hold.
Is Bitcoin Reliable For The Long-term?
Considering your IRA will need to be a long-term investment with assets that you can look at as fairly reliable for years down the road, this is an uncertainty and risk that comes with bitcoin. A bitcoin IRA could see some major price swings because bitcoin prices have swung a lot over short periods of time. For example, at the beginning of 2017, bitcoin was valued at $1,000. By the end of the year, it had risen sharply to $19,600 and had become a hot new investment. Unfortunately, it dropped off in the following year to $6,252 though it has become a little more stable since. But it is something to be aware of in that unlike stocks which can be a little easier to predict where they go due to being tied to companies and the markets, cryptocurrencies are much harder to predict and there’s a lot less certainty about where they will go.
What Are Limits On Purchasing Bitcoin For An IRA?
Like all other IRAs, a bitcoin IRA has to be managed by a custodian who must execute the purchases for you and hold your cryptocurrency assets so that you don’t touch them until you are at the legal age to do so. This is a little like a gold IRA in that when you purchase physical gold for your IRA, it has to be transported to an IRS approved depository and managed by a custodian who holds or sells it on your behalf until you are legally able to withdraw it. Only instead of a physical depository, your Bitcoin will be held in a digital wallet that’s part of your IRA custodian’s management services.
Who Allows Setting Up A Bitcoin IRA?
Finding an IRA provider who authorizes bitcoin investments can be a little trickier. Many IRAs limit investments to more traditional assets, but if you look for self-directed IRAs that allow for alternative investments, these IRAs usually allow for assets like precious metals and cryptocurrencies to be purchased. But be aware of other things such as fees. Some crypto IRA services have pretty hefty transaction fees such as account monthly maintenance fees, crypto purchases, trades and other things that you don’t find with other IRAs. You’ll want to look carefully over any fee schedules and do your research to make sure you go with a provider that won’t gauge you on bitcoin holdings. Also, many IRA custodians will tell you that they don’t assume fiduciary responsibility in the event bitcoin prices crash or cause significant loss of investment.
Other IRS Rules On Bitcoin IRAs
In addition to not being able to cash out on bitcoin in an IRA until you reach 59 1/2, you also need to be aware of contribution limits. Like other IRAs, you cannot contribute more than $6,000 in a year to your IRA if you’re under 50, and $7,000 if you’re older than 50. Also, you need to be careful how you are funding your bitcoin purchases. The funds must be already in your IRA account and some experts even recommend opening your digital wallet under an LLC registered name depending on your custodian’s policies. You may need to consult an accountant or attorney if there are potential legal issues on IRA funding or an LLC. And of course, if you liquidate your bitcoin holding you pay capital gains tax.
The bottom line is investing in bitcoin can certainly be profitable, but you need to be careful about short-term gains as these don’t necessarily mean it will be profitable in the long term. Also keep in mind that it can be expensive to make bitcoin trades in an IRA, so you’ll need to consider whether these are worth the cost. But if you can manage the risks, you can get started investing with a reputable self-directed IRA provider.