What Is a Bitcoin IRA?

Bitcoin IRAs allow for investing in various cryptocurrencies using retirement savings. Bitcoin IRAs act as “self-directed IRAs" provided by a few financial institutions in the United States that allow alternative investments for retirement savings.

Essentially, an individual can retain other retirement accounts with traditional investments and separately engage in the self-directed option for cryptocurrency investments.

Key Takeaways:

  • Bitcoin IRAs are cryptocurrency investments. They are considered an alternative investment for retirement.
  • Bitcoin IRAs offer diversification to a retirement portfolio, but they are considered high risk and often involve additional fees and costs.
  • Such bitcoin IRA accounts are covered by custodians who manage self-directed accounts.
  • Bitcoin investments are subject to significant price swings, which adds to their risk.

Understanding Bitcoin IRAs

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

Although most such IRA accounts tend to carry the name “bitcoin” because of the brand value linked with the most popular cryptocurrency, investments in other cryptocurrencies such as Ethereum, Ripple, Litecoin, Bitcoin Cash, and Ethereum Classic are possible.

Bitcoin IRA accounts are risky because the custodians may not have any fiduciary responsibility to the investor.

Such Bitcoin IRA accounts are covered by custodians who manage self-directed accounts 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

Cryptocurrency IRAs are gaining traction due to the hype surrounding cryptocurrency valuations. These IRAs also provide diversification although they come with their own perils. Cryptocurrency valuations are hit with wide price swings making these IRAs a 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. Investors should explore cryptocurrency only after thoughtful consideration of the impact on their retirement needs and their risk tolerance.

Another Drawback to Bitcoin IRA Accounts

Another drawback to Bitcoin IRA accounts is that they come with high fees. Typically, a firm may charge a minimum monthly account fee, $20 for example, and a percentage of the account balance as a holding fee. There are additional charges linked to establishing an account, purchasing assets, and fees for fund transfers that the investors should be aware of as they can be significantly high.

This contrasts with standard IRA accounts that do not have any annual or monthly maintenance fees or account opening fees. Transaction charges for standard IRA accounts also tend to be small.

Limitations

Any bitcoin investments should be 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.

Investors should also note that they cannot buy cryptocurrencies on their own and move them to an IRA account. Investors must use the services of a designated firm, such as Bitcoin IRA or BitIRA, to make the purchase as mandated by the necessary compliance rules. Using such a firm adds to the cost.

Additionally, third-party involvement has an impact 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 Bitcoin IRAs can be liquidated only during standard market hours on business days.

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