What Is a Bitcoin IRA?

Bitcoin IRAs allow for investing in various cryptocurrencies using retirement savings. It acts as a “self-directed IRA" provided by a few financial institutions in the U.S. which allow alternative investments for retirement savings. Essentially, one can keep other retirement accounts with traditional investments, and separately engage in the self-directed option for cryptocurrency investments.

Understanding Bitcoin IRAs

In a standard Individual Retirement Account (IRA), individuals can keep their investments in traditional securities like stocks, bonds and money market funds. Bitcoin IRAs provide an additional option for investing in cryptocurrencies like Bitcoin.

Though most such IRA accounts tend to carry the name “Bitcoin” owing to the brand value linked with the most popular cryptocurrency, they also allow investments in other cryptocurrencies like Ethereum, Ripple, Litecoin , Bitcoin Cash, and Ethereum Classic.

Such Bitcoin IRA accounts are covered by custodians who manage the self-directed account and allow for virtual currencies to be among the required alternative investments. However, the custodians may not have any fiduciary responsibility to the investor for such investments.

High Risk, High Cost Linked with Bitcoin IRA

While such cryptocurrency IRAs are gaining traction owing to the hype around cryptocurrency valuations and allow for a good level of diversification, they come with their own perils. Cryptocurrency valuations are hit with wide price swings making it a very risky venture for retirement savings.

For instance, the most popular bitcoin cryptocurrency zoomed from levels of $1,000 in February 2017 to the all-time high of around $19,600 in December 2017, before tanking to $6,252 by February 2018. Imagine mistakenly investing your retirement funds at the peak and then seeing them lose around two-thirds of their value over the next two months. Essentially, one should make cryptocurrency investments only after thoughtful consideration of the impact on one's retirement needs and risk tolerance.

Another issue with Bitcoin IRA accounts is that they come with high fees. Typically, a firm may charge a minimum monthly account fee, say $20, and a percentage of the account balance as a holding fee. There are additional charges linked to the account opening, to asset purchases, and fees for fund transfer which the investors should be aware of as they can be very high. This contrasts with the standard IRA accounts which don’t have any annual or monthly maintenance or account opening fees, and transaction charges are also very small.

One should also keep the investments within the IRA contribution limits—$6,000 a year for those under the age of 50, and $7,000 for those 50 or older as of 2020. More details on contribution limits are available from the Internal Revenue Service (IRS).

Investors should also note that they cannot buy cryptocurrencies on their own and move them to an IRA account. One needs to utilize the services of a designated firm, like Bitcoin IRA or BitIRA, to make the purchase as mandated by the necessary compliance rules adding to the cost. Such third-party involvement also impacts during periods of extreme volatility. Due to the 24/7 trading nature of cryptocurrencies, their valuations may change significantly within a few hours. However, holdings in such Bitcoin IRAs can be liquidated only during standard market hours on business days.

As cryptocurrencies are considered as property by the IRS, the investments are taxed at the applicable capital gains rate for long or short term. Yes, there are taxes on bitcoins.