Bitcoin investing has captured significant attention ever since its remarkable surge in late 2017/early 2018. After experiencing a staggering drop, it eventually rebounded to surpass the $12,000 mark in the Summer of 2019. However, the landscape dramatically changed with the onset of the COVID-19 pandemic in early 2020, leading to a more favorable view of cryptocurrencies, including Bitcoin. Its value soared to approximately $64,000 in April 2021. Nonetheless, due to concerns within the industry, the price plummeted by fifty percent. Following its lowest point of just under $30,000 in July, Bitcoin reached new record highs, peaking at $69,000 on November 20.
Since then, Bitcoin has experienced more downturns than surges. At present, in January 2022, its value hovers around $42,600. Nevertheless, considering Bitcoin’s past performance, it is unlikely to remain at this level for an extended period. It is uncertain whether it will experience another rapid increase or undergo a significant decline. What we can be certain of is that cryptocurrencies are here to stay.
Buying Bitcoin with Retirement Funds
Retirement accounts have the freedom to invest in nearly anything, with the exception of specific restrictions imposed by the IRS. Such limitations encompass life insurance, various collectibles, and transactions involving disqualified individuals (which will be further discussed later).
Investing with retirement funds in alternative assets is considered advantageous for tax purposes and can provide better diversification of assets. The tax advantage aspect allows for the growth of gains to be deferred, and the diversification aspect expands your portfolio beyond the typical investments in stocks, bonds, and mutual funds.
By collaborating with a competent administrator or custodian such as IRA Financial, you attain absolute autonomy. Your financial choices are no longer restricted to the investments available through your bank or another institution. With checkbook control, there is no obligation to seek authorization for any investment decision. So, if investing in Bitcoin is your preferred endeavor, feel free to proceed without hesitation!
What is Bitcoin?
If you have gone through our website or read our previous blog posts, you would be aware that we possess a plethora of information regarding Bitcoin. In essence, Bitcoin is the initial and most widely accepted form of cryptocurrency. The presence of blockchain technology ensures the security of these digital currencies, without the support of any governmental authority.
Bitcoin transactions rely on decentralization, meaning the responsibility of monitoring them lies with the users. This is where the blockchain becomes crucial as it enables everyone to access a record of all transactions made with a specific Bitcoin. Once a transaction is authenticated, it is appended to the blockchain. This system ensures transparency, although some anonymity is still maintained within the realm of Bitcoin.
As the acceptance of Bitcoin grows among merchants for purchasing goods and services, it remains primarily valued as an investment due to its relatively early stage as an asset. The possibility of universal recognition and adoption of cryptocurrencies may either be imminent or never materialize.
Bitcoin Investing with Your Self-Directed IRA
Investors have the opportunity to invest in a wide range of alternative assets, including Bitcoin, through a Self-Directed IRA. Both traditional IRA (funded with pretax money) and Roth IRA (enabling tax-free withdrawals) can be used for this purpose.
In essence, Self-Directed IRAs can be categorized into two forms, namely Checkbook Control and Custodian Controlled.
Custodian Controlled Self-Directed IRA
There has been an increase in the number of financial institutions that have embraced self-directed approaches. This includes the provision of Self-Directed IRAs which permit alternative investments. However, it is important to note that there is one condition. The custodian must grant approval for your investment beforehand. Although a custodian-controlled Self-Directed IRA is more advantageous compared to a standard IRA, it does not grant you total freedom.
This structure is appropriate for numerous investors, but if you don’t make frequent investments each year, waiting for approval may not be a significant concern. Nonetheless, Bitcoin investing is distinct. The cryptocurrency markets operate continuously, and any delay in approval could impact your overall financial outcome.
Checkbook Control Self-Directed IRA
We have previously stated that IRA Financial provides its clients with checkbook control, which allows you to connect your bank account to your Self-Directed IRA and gives you full decision-making authority. IRA Financial is known as a passive custodian, which implies passivity in accepting and allowing events or actions without actively responding or resisting.
In essence, an LLC is established, of which the IRA is the owner. As the manager of the IRA, you have the authority to make all investment choices. Neither IRA Financial nor other custodians with passive roles will dictate your investment options. Their role is solely to establish the account, manage its maintenance, and ensure its adherence to IRS regulations.
Prohibited Transaction Rules
The only circumstance in which a Bitcoin transaction could be restricted is if it involves a disqualified person, which encompasses yourself, your ancestors and lineal descendants, and any entity in which you hold at least a 50% stake. This discussion does not pertain to investing in life insurance or collectibles.
To put it simply, any investments made must solely benefit the IRA. Personal gains from Bitcoin investment are prohibited for you and other disqualified individuals. The IRA already provides tax advantages, hence the IRS restricts additional benefits for you.
The IRS Stance on Bitcoin Investing
Bitcoin is not considered a currency for Federal tax purposes. Unlike traditional currencies such as dollars and euros, digital currencies are treated differently. According to Notice 2014-21 issued by the IRS, virtual currency is treated as property for US federal tax purposes. The same general tax principles that apply to property transactions also apply to transactions involving virtual currency.
Consequently, gains obtained from selling Bitcoin are regarded by the IRS as a capital asset, making them liable for short-term or long-term capital gains tax rates. As Bitcoin is classified as property, the IRS enforces thorough regulations for record-keeping and imposes taxes on its utilization.
Conclusion on Bitcoin Investing
Investing in Bitcoin is still a relatively recent and volatile venture. There is potential to earn substantial profits if timed correctly; however, the opposite is equally likely. It follows the basic principle of purchasing at a low price and selling at a high price. At IRA Financial, we remain intrigued by the cryptocurrency frenzy and, more significantly, the underlying technology it entails.
It remains vital to collaborate with an expert prior to engaging in Bitcoin investment, as there is no designated closing time in crypto investing; it operates round the clock. It is essential to evaluate the risks and potential rewards when entering the cryptocurrency realm.
Best Crypto IRA Platforms
Are you seeking methods to expand your portfolio and boost your retirement savings? Certain investors are contemplating the possibility of investing in Bitcoin using self-directed individual retirement accounts, including traditional or Roth accounts. Those aiming for long-term investment opportunities in Bitcoin are interested in entering this mostly unregulated sector. Let’s explore the process of purchasing Bitcoin through an IRA and determine whether it could prove to be a lucrative investment for you. The following options are highly recommended if you are considering investing in Bitcoin with a crypto IRA.
Best for Low Fees: iTrustCapital
iTrustCapital is a well-known trading platform for digital asset IRAs, offering costs that are up to 90% cheaper than other IRA providers. Their pricing is transparent and includes a 1% fee for trading cryptocurrencies, $50 per ounce above the spot price for gold, and $2.50 per ounce above the spot price for silver. Additionally, they charge a monthly account fee of $29.95 for services like:
- Setting up a new IRA
- All the necessary tax/IRS reporting
- Unlimited storage with institutional custody partners
- Facilitating contribution, rollover or transfer to fund your IRA
- The iTrustCapital platform support and maintenance
You have the ability to access your iTrustCapital account and conduct trades at any time of the day as one of their clients. All trades are executed within 2 minutes and finalized within 15 minutes. Additionally, if you decide to switch from another provider, iTrustCapital offers an In-Kind Transfer, allowing you to retain your cryptocurrency holdings without the need for liquidation.
The specialists will not only assist you in the transfer process but also communicate with your previous IRA provider to guarantee the successful transfer of all assets.
Best Full-Service Platform: Bitcoin IRA
Bitcoin IRA is a leading cryptocurrency IRA provider globally, offering comprehensive investment solutions. Setting up an account is straightforward as their specialists assist in creating and transferring funds from your current 401(k), traditional IRA, or Roth IRA. Once you have opened your IRA account, you can begin live trading anytime, as their services are available round the clock.
Bitcoin IRA offers top-notch security and custody services for your digital assets. Initially, your assets are securely kept offline through BitGo, utilizing BitGo Inc.’s technology, recognized as the leading processor of on-chain Bitcoin transactions. Additionally, all entrusted assets are covered by insurance provided by BitGo, up to a maximum of $100 million.
Other platforms often use complex IRA fee structures, which can be confusing. In contrast, the platform charges a one-time service fee that differs based on your investment amount. This fee includes various extensive services offered by the company, such as top-notch security storage, SDIRA setup, and retirement fund rollover.
Best for Diversifying Your Retirement Funds: My Digital Money
My Digital Money, a crypto trading platform situated in the United States, joins forces with My Equity Trust to offer self-directed crypto IRA products. With an initial setup fee of $50, you are eligible to invest using your IRA funds and enjoy tax-free or tax-advantaged profits, which enhance your retirement portfolio. Considering the service provided, this fee is quite affordable.
There are various types of IRA accounts that you can choose to open.
- Simple IRA
- Traditional IRA
- Roth IRA
- Simplified Employee Pension Plan (SEP) IRA
You possess exclusive authority over your IRA funds and have the option to trade crypto separately from your IRA using the same platform. Once you create an account on the MDM platform, it provides you with the capability to trade outside of the current markets, minimizing risk and enabling you to make purchases at the most favorable prices.
By utilizing limit orders, you have the ability to purchase or sell at predetermined prices or upon specific price fluctuations. This simplifies the task of setting targets for your portfolio, consistently achieving them, and monitoring your finances. Additionally, you can gather further information about crypto IRA options on the platform, seek assistance from the customer support team, or follow MDM’s prompts for guidance.
Best for Security: BitIRA
BitIRA offers a straightforward, efficient, and highly secure solution to set up an IRS-compliant digital IRA. With their experience working alongside major retirement account custodians such as Fidelity and Merrill Lynch, BitIRA ensures a swift and effective process to incorporate digital assets into your retirement savings.
BitIRA provides comprehensive security for your investments, offering complete insurance coverage for fraud, theft, hacking, and errors. By using reliable cold storage methods, your device remains offline and stored within highly secure Class III vaults, guaranteeing continuous protection.
The FDIC provides full coverage for cash deposits in your Preferred Trust account up to $250,000 or in your Equity Trust company account up to $3.75 million, depending on your custodian.
How to Add Bitcoin to Your Retirement Account
Purchasing Bitcoin through a regular retirement account is slightly more convenient compared to using your IRA, but the process is straightforward for both options.
- Opening a self-directed investment retirement account through an IRA custodian.
- Find a bitcoin facilitator or purchase Bitcoin yourself from an exchange.
- Fund your self-directed IRA through a transfer or rollover.
- Hold Bitcoin in the IRA until you’re 59 ½ years old, otherwise, you’ll pay a penalty for early withdrawal.
A self-directed IRA has identical regulatory obligations to a regular IRA, and you are unable to withdraw your funds until you reach the age of 59 ½. It is crucial to note that you maintain control over your investment choices with a self-directed IRA.
Retire Early with a Bitcoin IRA
A growing number of young investors are currently seeking to broaden the range of their retirement portfolios by including Bitcoin and other cryptocurrencies. Although it is undeniable that the emergence of cryptocurrencies might enable one to retire earlier, the instability of these assets may cause significant stress and strain during the process. Overall, Bitcoin IRA could serve as a beneficial option to obtain tax advantages and safeguard against inflation, especially for those who are making eleventh-hour decisions.
Make sure to consider the uncertain nature of Bitcoin, the guidelines for self-directed IRAs, and the ever-changing regulations concerning digital assets.
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