Using Your IRA to Invest In Crypto (4 Steps)

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."

Using Your IRA to Invest In Crypto (4 Steps)Steps To Take

Here are the steps you'll follow to invest in crypto using your SDIRA:

  1. Establish and fund an SDIRA (Start with our investor quiz if you need help getting started and we'll take it from there.).
  2. 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.
  3. 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).
  4. 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. 



Can I Buy Bitcoin within a Roth IRA?

Cryptocurrencies made their debut in 2009 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 saw record 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.

You may be interested in our article, Using Your IRA to Invest In Crypto (4 Steps).

Why use a Roth IRA?

Most individuals opt for an SDIRA over a typical IRA for two reasons:

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.