Crypto is blowing up. And traditional retirement accounts simply aren't equipped to handle the excitement.
Cryptocurrencies (like Bitcoin, Litecoin and Ethereum) are a popular alternative to government-backed currency—especially if you want to conduct transactions quickly and anonymously.
The global crypto market cap has been more than $2 trillion for much of 2021 so far. The market cap of Bitcoin (crypto’s biggest star) hit $1.2 trillion in April.
Looking to get in on the action? The Self-Directed IRA (SDIRA) is the best tool for leveraging your retirement savings to invest in digital currencies.
The SDIRA also offers major tax advantages, leaving you with more capital to invest in cryptocurrencies and other non-traditional assets.
Since Bitcoin and other digital currencies are intangible, they can be difficult for many traditional real estate investors to wrap their heads around.
However, investors who fully grasp how cryptocurrency works and wish to invest in this alternative asset through their retirement plans may do so with accounts that give them "checkbook control."
Steps To Take
Here are the steps you'll follow to invest in crypto using your SDIRA:
Establish and fund an SDIRA (Start with our investor quiz if you need help getting started and we'll take it from there.).
Register an LLC that is 100% owned by the IRA. This gives you the same tax-advantaged status as the IRA. The income and expenses related to the assets will flow through the IRA LLC in accordance with Internal Revenue Service requirements. Note: Cryptocurrency is considered property for federal tax purposes, but because the assets are owned by a retirement account, gains are tax advantaged.
Open a business checking account. You'll do this using funds from the IRA. An IRA LLC is also referred to as a “checkbook IRA.” The checkbook puts the account owner in full control of the transaction (checkbook control). The funds in the IRA LLC’s business checking account are solely for investing in the digital assets (or any other alternative assets allowed with self-directed accounts).
Open an account on a cryptocurrency exchange. You'll do this using the name (and tax number) of the IRA LLC. In addition to being purchased or traded on exchange platforms, digital assets may also be purchased through brokers or by investing in a fund that holds various digital currencies through private placement. In effect, the IRA purchases shares or directly invests as a limited partner.
Family Office Can Keep You Compliant
It's important that you get the right structure in place before you make a move in crypto or any other non-traditional asset. Royal Legal Solutions helps investors use an LLC (limited liability company) to incorporate cryptocurrency into their retirement accounts. If you don't have a LLC and a Self-Directed IRA for real estate investors structure set up already, let's talk about it.
We'll review your real estate investment options and business structures to ensure they are up-to-date, compliant, and bulletproof against whatever the future holds.
Once you're set up, you can become a Family Office member to ensure ongoing compliance with your state and local laws and tax requirements. We meet with our Family Office members every quarter to give them actionable steps to take, making sure their asset protection plans are up-to-date.
Self-Directed IRA Bitcoin Investing
Bitcoin is constantly making headlines. We're getting a little sick of hearing about it, to be totally honest.
As Bitcoin becomes mainstream, we hear stories of the crypto-savvy investor buying Bitcoin in its early years and becoming a millionaire. Which leaves more investors asking, “Why not me?”
In 2021, IRA investors are increasingly diversifying with Bitcoin and other cryptocurrencies. Self-Directed Bitcoin IRA investing can deliver high yields along with the tax benefits of non-digital investment.
Here’s a brief primer on Bitcoin and three steps investors can take to start making their own Bitcoin investments using a Self-Directed IRA-owned Business Trust.
Bitcoin Basics
With cryptocurrencies, encryption is used to make new currency units and perform transactions. All this is done in a decentralized system and records are kept in a blockchain, which is a type of digital ledger.
Bitcoin, released in 2009 by Satoshi Nakamoto, is one of thousands of cryptocurrencies but is easily the most popular. Bitcoin must be stored using an online digital wallet or in a personal computer. Due to hacking concerns, some owners use a hardware wallet (a USB-like device protected with a PIN code).
Bitcoin Gets Attention From Investors
Bitcoin turned heads in the investment world by going from a price of under $1 in 2011 to $40,111 on January 14, 2021. The highs and lows have attracted headlines, as in December of 2017, when prices doubled in a matter of weeks. As I write this, its current U.S. value is $33,626.60.
Bitcoin’s wider adoption and impressive gains led to the “Bitcoin IRA," bringing the flashy new investment into the stodgy world of traditional retirement accounts.
Bitcoin Meets the IRA
A traditional IRA (individual retirement account) doesn't permit alternative investments such as Bitcoin and other cryptocurrencies. They're not really known for trying new things.
But what about the Self-Directed IRA (SDIRA), with its more flexible structure? The IRS doesn’t list Bitcoin as a forbidden investment (only list life insurance and collectibles are specified as non-permissible IRA investments). Check out our article, Our 3 Most Popular Self-Directed IRA Investments, to see what else is (and is not) permitted.
How to Invest in Bitcoin Using a Self-Directed IRA
#1 Do Your Research
The information I’ve provided about Bitcoin is a good primer, but is by no means a substitute for doing your own due diligence. Be prepared for the uncertainty that surrounds Bitcoin as a new investment.
Also, since Bitcoin isn’t under a regulated system don’t expect the same type of publicly available financials you’d find with traditional stocks or mutual funds.
Traditional IRA custodians won't even think about it, but if you're in the market for the self-directed version, you'll need to make sure your IRA custodian is IRS-approved and allows Bitcoin investments. Still, you probably won’t enjoy true checkbook control over your account.
Your SDIRA is self-directed (as the name says), but it isn’t “self-managed.” This means you can’t write a check out yourself for a Bitcoin transaction without a custodian approving the transaction. The processing time can hurt you when you're trying to buy or sell quickly. Also, the fees can add up when choosing this route.
This doesn’t mean you should give up on Bitcoin investing with a Self-Directed IRA. Royal Legal Solutions may be able to help you eliminate the custodial overhead. Many of our clients are Bitcoin investors who enjoy direct control over their IRA investments. Start with our investor quiz to see if you can take advantage of our custodial services.
#3 Choose a Good Cryptocurrency Exchange
Once your Self-Directed IRA is setup and you have direct access to your funds, you’re ready to purchase Bitcoin. Choose a reputable exchange and understand its fee structures. More importantly, be aware of any security flaws and hacking issues. Currently, Coinbase and Kraken are some of the most reputable exchanges.
#4 Choose a Good Cryptocurrency Wallet
For those new to cryptocurrency, this step may seem like the hardest to understand. A cryptocurrency wallet isn’t a physical wallet, although it can take physical form as a hardware digital wallet. Wallets are accessed via a private key, which is a hexadecimal code that you should guard just as you would a security box key. Like a bank account, the wallet holds your balance and a reference to all transactions. It’s also where you can send and receive currency. Think about security when choosing a wallet. Online wallets are convenient and usually offer a mobile version. However, they are susceptible to hackers. Hardware wallets are more secure because they hold the private key in an offline, unhackable device.
#5 Keep Your BTC Investments in Compliance
The “self-dealing” rules that apply to other alternative assets also apply to Bitcoin. For instance, an investor can’t sell Bitcoin to his own IRA nor can any of his family members. This can disburse the IRA or lead to a taxable event. Also, be mindful of annual reporting requirements which require market valuations similar to real estate properties.
#6 Enjoy Tax-Deferred Earnings
With a Self-Directed IRA you can apply the tax-deferral benefits enjoyed by other alternative investments towards Bitcoin. Bitcoin investments can grow unhindered as taxes aren’t applied till funds are disbursed, which can mean decades of growth.
#7 Explore Other Cryptocurrency Investments
Bitcoin is the most widely-known cryptocurrency. However, once you’ve gotten your feet wet in Bitcoin investing, you can expand towards others currencies such as Ethereum and Litecoin. Like Bitcoin, Litecoin has enjoyed tremendous growth. It’s second to Bitcoin in market capitalization, followed by Ethereum and Ripple.
When expanding your Self-Directed IRA, consider what advantages rival currencies have as an alternative to Bitcoin. For instance, Litecoin enjoys faster transaction times and a larger coin supply limit of 84 million compared to Bitcoin’s 21 million.
Start Investing Today
Like any other investment, investors should complete their due diligence, choose the right custodian and be aware of custodial fees. Check out our Using Your IRA to Invest In Crypto (4 Steps) article while you're at it.
Lastly, keep Bitcoin investments in compliance with IRS regulations. The unique steps Bitcoin investors need to make may be overwhelming at first. They include choosing a cryptocurrency exchange and digital wallet. However, once investors get their feet wet, they’ll be a step ahead in expanding their Self-Directed IRA towards other cryptocurrencies. For now, investors could start off with Bitcoin and other private investments using a Self-Directed IRA.
Can I Buy Bitcoin within a Roth IRA?
Cryptocurrencies made their debut in2009 with the introduction of Bitcoin. Created by Satoshi Nakamoto, this form of digital currency is used as a means of trade medium in virtual exchanges.
Individual retirement account (IRA) holders who monitor trending investment options have asked us about the merits of Bitcoin. Below, we discuss the legality and options available when it comes to Bitcoin investments.
Bitcoin Investments
At present, the Internal Revenue Service (IRS) treats Bitcoins as a “property.” As such, it is an allowable investment option for those with a self-directed IRA (SDIRA). For tax purposes, the property aspect helps prevent Bitcoin investments from having to pay penalties or other special IRS tax fees.
In 2017, Bitcoin sawrecord high investment returns; a lucky few saw $1 billion returns on their Bitcoin investments. If you use your SDIRA to invest in Bitcoins, pay close attention to trends. Make sure your account custodian has years of experience and can spot potential investment bubbles. They should also be able to quickly identify trades that may violate IRS regulations and cause you to be penalized.
Most individuals opt for an SDIRA over a typical IRA for two reasons:
The potential for a much more diverse portfolio protected from economic fluctuations
The ability to see much higher potential returns.
As stated above, there are potentially high-returns that can be gained through Bitcoin investments making it an ideal SDIRA investment opportunity. SDIRAs exist as both Traditional or Roth IRAs. While a traditional SDIRA will allow you to invest in Bitcoins with pre-tax dollars, a Roth IRA may be the better choice. Roth IRAs use post-tax dollars for investments. This means the taxes have already been taken out and you are absolved of having to pay them again.
So what does this mean regarding Bitcoin investments? If you use these post-tax dollars to invest in Bitcoins, the capital gains taxes are completely eliminated. (By comparison, Traditional IRAs are only tax-deferred – meaning you will have to pay taxes on your gains once you begin to pull funds out upon your retirement.)
An IRA LLC may be your best means of Bitcoin investment. A qualified trusted custodian can assist you with setting up an LLC and explaining how it works for your account and meets your specific needs.
Use a Trusted Custodian
For an SDIRA, the custodian is simply an agent trusted to act solely on your directions. You are the account owner and the one who makes all decisions regarding your SDIRA account.
Not all SDIRA custodians allow for alternative investments in items like Bitcoins. As such, you need to make sure you look for a reputable, specialized firm, like Royal Legal Solutions, who will. If you need help, start with our investor quiz and we'll take it from there.
Your custodian cannot provide financial direction but can help you to understand the regulations and explain anything you have questions about. Bitcoin is relatively new to the investment scene with very little input from the IRS. Overtime, laws may change. If you are considering using your Roth IRA to invest in Bitcoins, hire a custodian who understand the nuances of IRS regulations and Bitcoin trends.
Steps To Take
Bitcoin Basics
Start Investing Today