What Are Bitcoin IRAs: Combining Cryptocurrency and Retirement

As of 2024, there are over 20,000 cryptocurrencies available, but Bitcoin is still the industry leader with a market cap (the total value of its tokens) of nearly $1.3 trillion.

While cryptocurrency is relatively new, more established tokens like Bitcoin can be tempting. In fact, a Pew Research Center survey found that 17% of U.S. adults have invested in, traded in, or used cryptocurrency.

For those thinking about investing in Bitcoin, a Bitcoin Individual Retirement Account (IRA) allows you to invest in the cryptocurrency in a tax-advantaged retirement account. However, Bitcoin IRAs are quite different from Traditional or Roth IRAswith several security concerns and commissions.

What is a bitcoin IRA?

The price of Bitcoin in June 2020 was around $9,600. Today, its price is around $60,000 per token, an increase of around 575% in four years. To put this performance in perspective, consider that the S&P 500 Index is up about 72% over the same period.

“When you look at it [Bitcoin’s performance] “Over a longer period of time, the price appreciation really outpaces other assets,” said John Haar, CEO of Swan, a Bitcoin IRA platform.

Past returns and price increases are no guarantee of future returns. However, such an impressive price increase can be tempting to people, so it is not surprising that more people are considering investing in Bitcoin.

“Investors are constantly looking for a way to defer taxes on assets they believe have significant upside potential,” said Ian Weiner, a certified financial planner (PCP) and lead planners with tailored wealth solutions. “With Bitcoin’s meteoric yet volatile growth over the past decade or so, it’s no surprise that many investors are looking for ‘loopholes.'”

Especially for those looking to maximize their pension savingsBitcoin may seem like an attractive alternative to traditional stocks and bonds.

Traditional and Roth IRA accounts do not allow investors to invest in alternative assets such as precious metals or cryptocurrencies; you can only hold stocks, bonds, mutual funds, or exchange-traded funds (ETFs). However, opening a Self-directed IRAa different type of account that requires a custodian, you can invest in cryptocurrencies or other assets within a retirement account.

The same rules that apply to traditional or Roth IRAs apply to Bitcoin IRAs; for example, they have the same annual contribution limits and are subject to the required minimum distribution rules.

How to Buy Bitcoin in a Self-Directed IRA

Opening a Bitcoin IRA and invest in Bitcoin It’s relatively easy, but it does require a little more work than a traditional or Roth IRA. To get started, follow these steps:

• Choose a supplier: With a Bitcoin IRA, you need to find a cryptocurrency exchange, the platform to buy and sell your cryptocurrency holdings, a custodian to hold your assets and meet IRS regulations, and storage for your Bitcoin. Some platforms, like Swan and BitcoinIRA, facilitate every part of the process for you, making the process simple.

• Open an account: Once you’ve identified a provider, enter your personal information: You’ll need to provide your legal name, address, Social Security number, and bank account information to fund your account.

• Fund the account: Before you can purchase Bitcoin, you need to fund your Bitcoin IRA. You can do this by transferring money from your bank account or by rolling over an existing retirement account.

• Place an order: Next, decide how much you want to invest in Bitcoin. Through the investment platform, enter the dollar amount you want to purchase.

• Store your tokens: Once you own the tokens, you need to store them safely. With Bitcoin IRA, your investment platform will likely recommend a custodian that meets IRA standards.

Risks of investing in bitcoin IRA

Although the price of Bitcoin has skyrocketed in recent years, there are some substantial risks to be aware of before opening a Bitcoin IRA:

Commissions

Self-directed IRAs, including Bitcoin IRAs, require additional documentation and require a custodian to manage your assets for you. As a result, they tend to be more expensive than traditional or Roth IRAs.

“Rates vary [by provider]but there tend to be a lot of them,” Weiner cautioned. “Transaction fees of 1% to 2% are common, platform fees of $20 to $30 a month, and some custodians charge a 1% custody fee and others charge security fees on top of everything else. All in all, these are not cheap transactions.”

Below are the pricing structures of the three major providers:

Volatility

While there is a risk of losing money with any investment, the price of Bitcoin can be particularly volatile. For example, in November 2021, its price reached $65,000. Within a year, its price plummeted to $15,500 in November 2022. If you are approaching retirement age, such volatility could put your future at risk.

Safety

Since Bitcoin is a digital token, there is a risk that security breaches and cyber attacks will cost you money. In fact, the Commodity Futures Trading Commission has issued a warning about self-directed IRA accounts that invest in digital currency, warning consumers that their digital wallets could be hacked and that, if their assets are stolen, there may be no way to recover their investment.

When choosing a Bitcoin IRA platform or provider, security should be a priority.

“You want to do your due diligence,” Haar said. «How long have they had? [the prospective platforms] been around? Have they ever had a safety incident? How many assets do they hold in terms of number of tokens, but also in terms of dollar value? Do they have any type of fraud and abuse insurance policy?

Asking yourself these questions can help you avoid vulnerable platforms that could put the safety of your money at risk.

The takeaway

If you want to invest in Bitcoin, using a tax-advantaged account like an IRA could be a potential option. You could add the digital currency to your portfolio and take advantage of the potential returns.

However, Bitcoin can be volatile and there is no guarantee of future returns. Additionally, Bitcoin IRAs come with additional fees that can reduce your returns.

In general, investment experts recommend keeping 2% to 5% of your portfolio allocation in cryptocurrencies like Bitcoin; this allocation will allow you to benefit from the performance of cryptocurrencies while limiting the level of risk.

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