How to Invest in Bitcoin Within a Tax Advantaged Retirement Account
Note that the following does not constitute investment advice. Investing in cryptocurrency is high risk speculation. Never invest more than you can afford to lose, past performance is not indicative of future results, insert other standard disclaimers here. Also, I have no relationship with the companies mentioned in this guide other than as a paying customer.
In December 2013 I was excited to hear that Fidelity was going to allow their customers to invest in SecondMarket’s Bitcoin Investment Trust from within an IRA. The idea of holding cryptocurrency that could appreciate in value tax free was highly appealing to me. Unfortunately, it was quickly made clear that Fidelity was not going to support it.
I didn’t give up hope, however, and continued my research into holding alternative assets within a tax sheltered retirement account. I eventually came upon the concept of a self-directed IRA and found Broad Financial was offering to set up new clients with self-directed IRAs and 401Ks. After I went through this process myself, it appeared that I was not alone because Broad Financial shortly thereafter began touting a “Bitcoin IRA.”
The process of setting up my self-directed Roth IRA took me about a month from start to finish, around $1,500 in fees, and several dozen pages of paperwork. I’ve also heard of business owners who have used this method to open a self-directed 401K to achieve the same results. Note that in order to maximize your tax savings, you’ll want to use a Roth IRA (as opposed to a Traditional IRA) so that you can withdraw distributions after you retire without paying taxes on the gains. The process is as follows:
- Contact Broad Financial (or a similar company offering setup of self-directed IRAs) and tell them that you want to open a self-directed IRA so that you can invest in alternative assets such as Bitcoin.
- Broad Financial will send you a number of forms to fill out and return. Broad Financial will use them to incorporate an “investment” LLC of which you are the manager and a company called IRA Services is the sole member.
- You’ll also receive forms for funding this new IRA, either by transferring money from a pre-existing IRA or by making a new IRA contribution (by sending IRA Services a check or wire transfer.)
- Once your new IRA is funded, send an Investment Authorization form to IRA Services directing them to “invest” in your LLC. IRA Services then cuts a check made out to your LLC and sends it to you.
- Once you receive this check, take it to the bank of your choice along with all of your LLC documents from Broad Financial. Use this to open a business checking account for your LLC.
- Now you can send the money from this business checking account to a Bitcoin exchange and purchase bitcoins.
- Now you own bitcoins that will (hopefully) appreciate in value tax-free!
There are several important considerations that you need to keep in mind:
The most important part is that your personal money must remain separate from your IRA / LLC’s money. Think of IRA Services as the gatekeeper for the money flow between yourself and your LLC. If you wish to invest in cryptocurrency, you must send your money to IRA Services to turn it into ‘custodial cash’ and then instruct them to invest that cash into your LLC. On the other hand, if you wish to withdraw money from the LLC, the LLC must send a check / wire to IRA Services, after which you can then instruct IRA Services to make a distribution to yourself or send the money to a different IRA custodian. Similar logic applies to your bitcoins — you should not hold your LLC’s bitcoins in the same wallet as your personal bitcoins — it would be an accounting nightmare.
Also, note that there are certain “prohibited transactions” and “disqualified persons” when it comes to operating a self-directed IRA. One consequence of these restrictions is that it would be illegal for you to take cryptocurrency that you already own and “move it” / “sell it” to your newly created LLC. “Self dealings” such as this are not allowed and could result in severe penalties.
Take care that you maintain the minimum balances in whatever new accounts you set up. IRA Services requires a minimum balance of $300 in custodial cash at all times. Your business checking account may also require a minimum balance, depending upon the financial institution.
I also recommend making a recurring calendar event to remind yourself each December to make an out-of-pocket deposit that reimburses you for all of the account fees you’ve paid throughout the year. This way your account fees aren’t continually eating away at your IRA contributions.
Also, you might want to be careful about which bank you choose to open your business checking account. In my experience, credit unions tend to be the most Bitcoin-friendly. There’s a list of friendly and hostile banks being maintained on this BitcoinTalk thread.
One of the most common questions I receive about this plan is if it means this requires one to believe that Bitcoin is still going to exist when they reach the age of 59 ½ and can finally withdraw money from the IRA without paying a penalty. The answer is no, not necessarily: you can sell your LLC’s cryptocurrency holdings at any point in time for dollars and as long as the dollars are kept in the possession of the LLC, you are simply performing permitted transactions.
Finally, it’s also worth noting that there are grey areas when it comes to investing in cryptocurrency within a retirement portfolio. Antonis Polemitis recently published an excellent presentation about some of the unresolved issues.