Think twice before buying digital gold in your golden years.
Updated Feb 15, 2023
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Retirement
Crypto
Tax Advantaged
The year is 2018. Bob spends his days tending the garden, solving crossword puzzles and walking his dogs in the local park. Bob worked long hours at a job he hated for 20 years until he heard about Bitcoin IRAs.
In the heat of that moment, Bob opened a Bitcoin IRA and rolled 100% of his retirement savings over to it. And when the price of Bitcoin hit $16K, Bob cussed out his boss, quit his job and retired early.
Ah, life is good.
Except, when Bob checks in on his Bitcoin IRA months later, he’s shocked to see that all of his crypto gains have been erased.
“Oh shit.”
Don’t be like Bob.
First off: no, it’s not a gang of Irish tech nerds. Let’s start from scratch and build our understanding up—bit by bit.
Understanding self-directed IRAs
An individual retirement account (IRA) is an investment account people use to grow their retirement savings in a tax-advantaged way. When you open a regular IRA, you can invest in traditional assets like stocks, bonds and mutual funds with it, but most IRA custodians don’t let you invest in alternative assets.
That’s what self-directed IRAs were made for. With these accounts, you can invest in a broader selection of investments including real estate, precious metals, commodities, cryptocurrencies and more.
Bitcoin IRAs: a type of self-directed IRA
Bitcoin, as you may well know, is the most time-tested and valuable cryptocurrency in the world. The IRS considers Bitcoin to be a type of property, which isn’t supported by regular IRAs.
Hence, the Bitcoin IRA. This is a self-directed IRA that lets you hold Bitcoin in a retirement account. Most Bitcoin IRA custodians also allow you to invest in other cryptocurrencies like Ethereum, Cardano and XRP.
A Bitcoin IRA works just like any other self-directed IRA, where the specific advantages and conditions depend on the type of IRA you choose to open. We’ll focus on the two most popular options.
| Traditional IRAs | Roth IRAs |
|---|---|---|
Description | Let you make tax-deferred contributions to your account | Let you make after-tax contributions to your account |
Income Limit | None | Single taxpayers have to make less than $140K as of 2021. For joint filers, the limit is $208K |
Annual Contribution Limit | $6,000 if you’re younger than 50 and $7,000 if you’re 50 or older (as of 2021) | $6,000 if you’re younger than 50 and $7,000 if you’re 50 or older (as of 2021) |
Withdrawal Conditions | You can withdraw your money penalty-free starting at age 59½, which you then have to pay taxes on. Early withdrawals incur a penalty of 10% of the amount withdrawn | Withdraw your money at any time, for any reason, with zero taxes and penalties |
Traditional IRAs are suited to those who believe that they’ll be in a lower tax bracket in retirement, having to pay fewer taxes on their savings.
Roth IRAs are suited to those who believe that they’ll be in a higher tax bracket when they’re retired and don’t want to give up most of their gains to taxes. So, if you believe that Bitcoin’s price is going to explode before you retire, this is your best option.
Normal IRAs function as all-in-one platforms for buying, selling and storing your investments. Bitcoin IRAs, however, require three solutions that may all operate independently:
When you crunch the numbers on your retirement accounts you might conclude that you won’t have as much as you'd like to have by the time you retire. Bitcoin IRAs are risky, and you can lose a lot of money—but you can also earn a lot of money, fast-tracking your trip to retirement.
Upside potential
As of March 2021, Bitcoin was hailed as the best performing asset of the decade with an annualized return of 230%. That’s 10 times higher than the US Nasdaq 100.
Tax advantages
If you’re trading cryptocurrencies with a normal account, you’ll have to pay taxes on all of your capital gains. But with a Traditional or Roth IRA, you’ll be able to delay or avoid these taxes altogether.
Diversification
Cryptocurrency is uncorrelated to traditional asset classes like stocks and bonds. And since the Federal Reserve’s money printer is still going “Brrrr”, Bitcoin could also act as a hedge against inflation.
Self-directed IRAs are inherently riskier, and Bitcoin IRAs even have a few unique downsides of their own. These include:
High volatility
From late 2017 to early 2018, the price of Bitcoin dropped from $20,000 to about $3,000. People who bought in at the height of the market had to wait 2 years for their investments to recover. Someone close to retirement doesn’t have that kind of time on their side.
Realized losses
With taxable investment accounts, you’re able to deduct your losses. So, even a bad trade has its benefits. The same isn’t possible with tax-advantaged accounts like Bitcoin IRAs.
High fees
While normal IRAs typically let you set up your account and invest for free, self-directed IRAs tend to surprise you with hidden fees, including:
High investment minimums
Compared to regular IRAs, Bitcoin IRAs can have high investment minimums of up to tens of thousands of dollars.
Great responsibilities
While Bitcoin IRA custodians administer your account, they are totally hands-off when it comes to investment advice. This means that you, as the account holder, are solely responsible for research, due diligence and asset management.
Not necessarily. Follow these rules of thumb if you’re considering opening a Bitcoin IRA:
If you’ve settled on opening a Bitcoin IRA, the next step is choosing a custodian. Some Bitcoin IRAs are one-stop shops for opening an IRA, buying crypto and securely storing it.
With other custodians, you’ll need to find your own crypto exchange and storage solution. Evaluate custodians by:
Here are a few of the most popular Bitcoin IRA providers:
| Alto CryptoIRA | Bitcoin IRA | IRA Financial Trust |
|---|---|---|---|
Description | All-in-one, low-cost Bitcoin IRA with the broadest selection of investments | Highly insured, all-in-one Bitcoin IRA with over 100,000 users | Low-cost Bitcoin IRA with the highest insurance coverage |
IRA Types | Traditional, Roth, SEP | Traditional, Roth | Traditional, Roth |
Available crypto(s) | 80 | 9 | 50+ |
Insured | N/A | $100 million custody insurance | $200 Million coverage via Gemini |
Supported exchange(s) | Coinbase | Built-in exchange | Gemini |
Investment minimum | $0 | $3,000 | $0 |
Fees | $0 setup and custody fees, 1.5% per trade, $50 account closure fee, $25 outbound wire transfer fee. | One-time service fee based on your investment amount plus a custodian and security fee, must call representatives for exact fees. | $75 quarterly flat account fee, no transaction fees, $15-$200 in wire transfer fees. |