Self-directed individual retirement accounts have been around since the 70s, but a Bitcoin self-directed IRA (SDIRA) gives a new shine to this time-tested investment tool.
As the name suggests, a Bitcoin IRA allows you to hold BTC investments in an individual retirement account, becoming captain of your own financial destiny. But some providers allow other cryptocurrencies within the IRA as well.
Given the significant tax advantages available in some situations, a Bitcoin self-directed IRA may be the most cost-effective way to build your stack. However, there are some limitations, and an IRA may not be the best vehicle for all investors. In other cases, a Bitcoin IRA may be just one piece of the puzzle in a larger investment strategy.
What Is a Self-Directed IRA, Anyway?
A self-directed IRA is a type of individual retirement account that allows alternative investments.
Conventional IRAs limit your options to a handful of asset types:
- Mutual funds
- Exchange-traded funds (ETFs)
- Real estate investment trusts (REITs)
Notably, Bitcoin didn’t make the list above, nor did real estate holdings or precious metals. But you can invest in these asset classes through an IRA. You’ll just have to use a self-directed IRA rather than a conventional IRA.
Individual retirement accounts utilize a custodian, which is the financial organization that provides custody for the assets within the IRA. The IRA custodian also decides which assets are available as investment choices within the IRA.
Conventional IRAs allow conventional investment options. Self-directed IRAs allow additional asset types but still may not provide access every available investment. For example, Swan Bitcoin offers a Bitcoin self-directed IRA focused on BTC only.
Why Buy Bitcoin in an IRA?
IRAs offer several benefits over a standard account with an exchange, and these advantages can help you grow your investments faster, whether you’re investing in Bitcoin or any other asset.
In the case of a traditional IRA, you’re investing with tax-deferred earnings. The amount you contribute is exempt from federal taxes at the time you make your contribution. As you buy and sell within your IRA, those trades are also exempt from federal taxes. You won’t pay the IRS for the activity in your IRA until you begin to withdraw from the IRA. Even then, you’ll only pay taxes on the amount you withdraw. This structure allows your earnings to grow tax-free and defers taxes until a time when you may be in a lower tax bracket.
When using a Roth IRA, you invest after-tax money in your IRA. With a Roth, you won’t pay any taxes when you take a distribution from your IRA because you’ve already paid taxes on the money you invested. This structure allows your earnings to grow without tax headwinds, letting you put your money to work more effectively.
In the context of a Bitcoin self-directed IRA, an individual retirement account allows you to buy and sell BTC as needed without any tax liability on the investment or earnings until you begin to withdraw. In a Roth IRA, you won’t pay any taxes on earnings unless you run afoul of the account restrictions, such as exceeding contribution limits or withdrawing before eligible.
Types of Self-Directed IRAs
Just as custodians may limit the types of investments available, they can also limit which types of IRAs they offer. While there are several types of Self-Directed IRAs, the provider you’re considering may only offer one or two of these IRA types.
You might need to shop around to find the right combination of IRA types offered, asset classes allowed, and fee structure to fit your needs.
A traditional IRA uses a deferred tax structure to maximize the amount you can invest. In effect, you can defer taxes on a portion of your income which you then invest in your traditional IRA. No taxes are due on gains until you begin to withdraw or conduct a transaction that the IRS deems to be an IRA distribution.
Higher incomes won’t affect your ability to contribute to a traditional IRA, but households with higher incomes may not be able to deduct the full (or any) contribution amount. If you or your spouse are covered by an employer-sponsored retirement plan, that might also affect your ability to deduct contributions to your IRA.
A Roth IRA takes a different approach. Rather than deferring taxes on IRA contributions, a Roth IRA uses after-tax contributions and allows tax-free withdrawals once you reach retirement age. Roth IRAs can be advantageous if you expect to be in a higher tax bracket when you withdraw.
One disadvantage to a Roth IRA is eligibility for people with higher incomes. The amount you can contribute to your Roth is reduced for single filers with incomes north of $129,000 based on current IRS contribution rules for Roth accounts. At $144,000 per year or higher, single filers become ineligible to contribute to a Roth IRA. For married couples filing jointly, eligibility is affected for households with joint incomes of $204,000 or higher.
Both traditional and Roth IRAs impose a (10%) penalty for early withdrawals. However, for traditional IRAs, this penalty applies from the first dollar of early withdrawal. Roth IRAs allow you to withdraw up to the amount you’ve contributed without paying an early withdrawal penalty. In some cases, you can even withdraw earnings from a Roth IRA before age 59 1/2 without paying taxes or a penalty.
Designed for small businesses and business owners, a Simplified Employee Pension (SEP) IRA allows employers to make contributions for themselves as well as their employees.
SEP IRA contribution limits are generous, particularly for high-income workers, capping at up to $61,000 for 2022 earnings. However, contribution limits are capped at 25% of pay (up to $305,000 considered compensation).
Short for Savings Incentive Match PLan for Employees, A Simple IRA allows IRA contributions by both employers and employees. Popular with small employers because they are (comparatively) easy to manage, Simple IRAs offer tax-deferred savings and employer-match contributions, with the possibility of tax credits for both employers and employees.
Of the common types of IRAs, traditional and Roth IRAs are the most common offerings from financial organizations that support Bitcoin and cryptocurrency as investment options. But you’ll also find providers with options for SEP IRAs and other IRA types, or even self-employed 401(k) offerings.
Rollover an Existing 401(k) or IRA to a Bitcoin Self-Directed IRA
If you have an existing IRA or a 401(k) from a previous employer, you may be able to roll your account into a Bitcoin self-directed IRA. Contact the IRA account provider you’re considering to learn more about the process.
In almost all cases, you’ll need to bring cash over to the new account, meaning you’ll have to sell the assets in the old account to fund the rollover.
Do your research beforehand. Once you sell the assets of an existing IRA or 401(k) and withdraw, you’ll only have 60 days to roll the funds over to another qualified plan. After the 60-day window closes, the IRS considers the withdrawn funds to be a distribution, potentially setting off a minefield of tax-event explosions.
If considering a Bitcoin self-directed IRA, spend invest some time learning about your options before taking any money out of your existing 401(k) or IRA.
Start a New Bitcoin Self-Directed IRA
Starting a new Bitcoin SDIRA doesn’t come with the 60-day time restraint associated with rollovers, but there are still several considerations to weigh before signing up.
First, you’ll want to decide which type of IRA best fits your investment needs. You’ll also need to check your eligibility. You should also study the fee structure for the Bitcoin self-directed IRA. In the end, you’re buying a commodity that you can buy from any number of sources, but trading and account fees can affect your investment performance.
Self-Directed IRA Fees
Buying Bitcoin is easy, and there are even a few ways to buy BTC without trading fees.
But to benefit from the tax advantages of a Bitcoin self-directed IRA, you may have to pay monthly or annual fees, often called maintenance fees, custodial fees, or administration fees. Some Bitcoin IRA custodians charge a flat fee, such as $20 monthly, while others charge a percentage-based fee or even a hybrid that uses a minimum monthly fee or a percentage, whichever is higher.
Not all custodians charge a maintenance fee, however. For example, iTrustCapital currently does not charge a monthly maintenance or custodial fee.
Some IRA custodians may also charge a setup fee, which can be significant if the fee is a percentage of the investment amount.
Lastly, expect to pay trading fees. In many cases, you’ll pay between 1% to 2% of the trade amount when buying or selling in a Bitcoin self-directed IRA.
Bitcoin IRAs may also have other miscellaneous fees, but these might not apply to everyday trading, so weigh their importance as these fees relate to the way your trade.
- Domestic wire
- International wire
- Check/Cashier’s check
- ACH fee
- Late fee
- Roth conversion fee
- Termination fee
- Returned check or stop payment
- Offline (cold) storage fee
As with all financial products, it pays to read the fine print to understand the true potential costs before investing in a Bitcoin self-directed IRA.
Which Providers Support Bitcoin Self-Directed IRAs?
Although fairly new as a retirement investment vehicle (circa 2016), Bitcoin SDIRAs are becoming more common than you might expect. Several companies have a Bitcoin IRA solution ready to go, while others are putting the finishing touches on their offering.
We swoon for Swan’s Bitcoin savings plan at Coinsurgent, so it was great to learn that Swan Bitcoin also has a Bitcoin IRA in the works. For now, you can join Swan and receive $10 in Bitcoin. Then join the waiting list for Swan’s upcoming IRA, which will support traditional and Roth IRAs.
You’ll enjoy Swan’s low fees for Bitcoin, currently at just 0.99%. Swan’s Bitcoin IRA does not support other crypto assets (Bitcoin only) and has a $20 per month flat administration fee.
Established in 2016, Bitcoin IRA was first to market with a Bitcoin-powered IRA. Bitcoin is just one of over 60 cryptocurrencies on tap, making Bitcoin IRA among the most flexible options you’ll find for investing in crypto assets through a tax-deferred account.
Bitcoin IRA is also the largest custodian in the space, trusted by over 150,000 users and highly rated by Google users and reviewers on ShopperApproved. Offline storage for crypto assets and up to $700 million in custody insurance demonstrate Bitcoin IRA’s focus on security.
Bitcoin IRA strives to make getting started easy, handling all the account setup tasks, including IRA transfers. This service comes at a price, however. Expect to pay a percentage-based setup fee. Trading fees are 2%. Bitcoin IRA also charges a monthly account fee of 0.08%.
With 4 years of track history and over $4.5 billion in transaction volume, iTrustCapital has carved out its place in the Bitcoin self-directed IRA market by putting its focus on transparency. While many investment programs make you read the fine print to find fees and potential costs, iTrustCapital lays it bare.
You’ll pay 1% on crypto transactions (but no monthly fee). And you can transfer from another crypto IRA without liquidating your assets, at no charge. If you need to convert a traditional IRA to a SEP or Roth, however, you’ll pay a $75 one-time fee.
iTrustCapital offers dozens of crypto assets, including Bitcoin, and also offers investments in gold and silver. Get set up in just 1 to 3 business days.
Not your keys, not your coins, right? That’s the common wisdom gained by crypto mishaps dating back to the Mt. Gox hack in 2014. But Bitcoin IRAs require that the custodian holds the assets, typically including the keys. The focus then becomes on which IRA custodians can do this in a secure manner.
BitIRA bills itself as the “most secure digital currency IRA,” taking several steps to ensure the safety of your assets. After transactions are complete, BitIRA moves the funds into cold storage, disconnected and hidden from the internet, and kept locked down in guarded grade-5 nuclear bunkers. That last part sounds made up, but it isn’t. BitIRA takes security to a new level.
Choose from 18 crypto assets currently available for investment in four types of IRAs. There’s no setup fee and no monthly fee, but there is a $5,000 minimum deposit to get started.
If you’re familiar with precious metals investing, you’re likely also familiar with Lear Capital. As the cryptocurrency division of Lear Capital, BlockMint leverages the expertise of a well-established IRA custodian within the relatively new space of Bitcoin IRAs.
BlockMint isn’t the least expensive IRA custodian, but most fees are clearly disclosed, allowing investors to make an informed decision. Expect to pay a $195 annual fee for maintenance as well as a minimal (0.05%) storage fee. Larger fees can come when buying or selling, although BlockMint does offer discounts from its standard 15% transaction fee based on volume.
You’ll need $10,000 to get started, making BlockMint well-suited to rollovers of your existing IRA, 401(k), or similar qualified plan. The BlockMint team confirms eligibility for tax-free and penalty-free transfers.
If you’re looking for a crypto IRA that lets you spread your investment wings, give Broad Financial a closer look. Broad Financial gives you the freedom to invest in any cryptocurrency and choose any exchange for trading. In fact, you’re not even limited to cryptocurrencies. Broad Financial allows any nearly alternative investment, with the exception of life insurance and collectibles.
Getting started, you’ll pay a one-time setup fee of $1,195, which covers document preparation, obtaining a Federal ID Number, and onboarding support. There’s also a one-time custodian setup fee.
After onboarding, Broad Financial handles fees a bit differently. You’ll pay a quarterly maintenance fee of $95, regardless of trade size or account balance. But transaction fees on your buys and sells are determined by the exchange you choose. For example, if you choose Binance.US, you can trade Bitcoin with no fees. Alternatively, you can pay a flat monthly fee for any and all crypto trades on Coinbase One.
Trade over 50 types of crypto assets in a Gemini trading account owned by your IRA. With six account types to choose from, including an innovative crypto health savings account (HSA), Directed IRA puts you in the driver’s seat for your financial future.
Account fees are straightforward with Directed IRA. New accounts pay a one-time fee of $50 to get started. Crypto IRA accounts also pay an annual fee of $295. Trading fees come in two parts, however. Directed IRA charges 0.50% per trade, while trades on Gemini qualify for the ActiveTrader fee schedule, currently up to 0.20% per trade. If you choose cold storage, Gemini charges 0.40% per year, billed monthly.
Directed IRA brings the freedom of multiple savings structures and the ability to choose from dozens of crypto assets. Of note, Directed IRA also offers a solo 401(k), which allows much higher contributions compared to an IRA and may be a viable option for self-employed individuals with no employees.
With Alto CryptoIRA, you can trade your traditional, Roth, or SEP IRA on Coinbase without forming an LLC. Choose from over 200 coins or tokens available on Coinbase, all with no monthly account fees and a low $10 minimum trade.
Alto’s trading and account fees are easy to understand. There’s no setup or maintenance fee for your IRA. There isn’t even an account minimum. You’ll just pay an affordable 1% trading fee for each transaction.
Coinbase stores more than 98% of crypto deposits offline in cold storage and carries insurance to protect online assets.
From simplicity to affordability, there’s a lot to like about Alto Crypto IRA. Consider Alto for your shortlist if your plans include a SEP, traditional, or Roth IRA.
Founded in 2009, Regal Assets shares a birth year with the grandaddy of cryptocurrency, Bitcoin itself. Although started with a precious metals focus, Regal now allows investment in nearly two dozen crypto assets, including market-leading Bitcoin and Ethereum. Interestingly, you can mix hard assets (gold, silver, platinum, and palladium) with your favorite cryptocurrencies to diversify your alternative asset Regal IRA.
Fees for Regal IRA include a 1% transaction fee for crypto trades along with an annual 1% storage fee. Precious metals IRAs also require a $100 annual administration fee.
Regal encourages interested investors to request an investors kit.
Risks of Bitcoin IRAs
Where there’s a reward, there’s always a risk as well.
Volatility risk: Earlier in 2022, Terra Luna, once a top-ten cryptocurrency by market cap, collapsed to nearly zero. Bitcoin, regarded by many to be among the safest crypto assets, has shed as much as 70% of its value in the past year. Luna hasn’t recovered. Bitcoin might yet hit all-time highs. Crypto is risky business, and even the safest coins within this new investment class can cause financial devastation if the value falls at a time when you need to access the funds.
Security risk: In addition to risks intrinsic to the asset class itself, there may also be risks related to breaches or hacking. While most custodians offer cold storage for your Bitcoin self-directed IRA, there’s no way for an account owner to know if the keys are kept safe. In the crypto world, the private keys to a crypto wallet control access to the assets themselves, allowing the keyholder to send the crypto anywhere they choose.
Liquidity risk: An asset that trades actively today might slow to a trickle of trades by the time you need to withdraw. This, of course, can affect your exit price and the speed with which you can exit your position. Experienced crypto investors are aware of liquidity risk, sometimes having learned the hard way, but the concept may be foreign to someone accustomed to index funds or other high-liquidity assets.
Fees: The costs to run your Bitcoin self-directed IRA can take a significant bite out of your investment. However, some custodians offer simple plans with low fees, helping your investment dollar go further.
Disadvantages of Bitcoin and Crypto IRAs
Bitcoin IRAs bring access to crypto investing with tax advantages, but these retirement accounts aren’t a perfect fit in every situation.
- Higher investment minimums: With standard IRAs that invest in stocks, bonds, mutual funds, and ETFs, it isn’t difficult to find a provider with no account minimum or a low account minimum. By contrast, some alternative investment IRAs require a larger investment of $5,000 or $10,000.
- Fees: The death-by-a-thousand-cuts fee structure of some SDIRAs can drain your account performance, sometimes without it becoming obvious that your portfolio is slowly dwindling. Study your options before making a commitment. Setup fees, in particular, can make it pricey to switch companies.
Who Benefits from a Bitcoin Self-Directed IRA?
Standard conventional IRAs have become commonplace, giving investors no shortage of choices. But conventional IRAs only allow a small group of asset types. By contrast, a Bitcoin self-directed IRA or any other type of SDIRA expands access to some asset types that may define the economy of tomorrow.
Investors who want exposure to cryptocurrencies while still enjoying the tax advantages of an IRA can realize both of these goals with a well-designed self-directed IRA. In some cases, these specialized accounts are best for those with more to invest, particularly if there are higher account minimums. However, a growing market brings solutions for investors at any level.
Is a Bitcoin Self-Directed IRA Right for You?
For many of us, the first step in deciding if a self-directed IRA is the right choice revolves around two questions.
First, is there a need for alternative investments in your portfolio? Crypto assets can go from hero to zero in a hurry. Consider how big a role crypto should play in your retirement strategy.
Secondly, it makes sense to take a closer look at the requirements and structures unique to self-directed IRAs. Fees, in particular, can make an SDIRA a much pricier way to invest compared to conventional IRAs.
On the other side of the equation is the possibility of outsized earnings. Every investment has some risk. When it comes to retirement savings, it’s important to consider the risks and rewards of each asset type and allocate accordingly.
Frequently Asked Questions
What other assets can a Bitcoin IRA hold?
Which assets a self-directed IRA can hold are determined by the custodian. Some Bitcoin IRAs only allow Bitcoin or other crypto assets. Others may allow the mixing of Bitcoin or crypto with precious metals or other alternative investments.
Do I need an LLC for a Bitcoin IRA?
Some crypto IRAs require a separate LLC to hold your IRA assets, but this step isn’t always required. Some custodians can set up the IRA in a way that doesn’t require a separate LLC.