First introduced in 2008, Bitcoin was initially dismissed as a fad for “tech junkies,” mysterious and misunderstood by the average person. Fast forward 13 years, after a wild ride of steadily increasing optimism, and Bitcoin is a mainstream financial instrument, mentioned at the top of headlines next to blue-chip stocks.
But can you use your IRA to buy Bitcoin?
You can purchase Bitcoin as part of a self-directed IRA. Sometimes referred to as “Bitcoin IRAs,” self-directed IRAs are simply a means for investors to contribute to alternative asset classes–with Bitcoin an increasingly popular choice among IRA investors.
It is important to note that traditional IRAs are not typically self-directed, with an asset manager usually in charge of directing your pre-tax funds and choosing the best instruments for retirement growth.
However, with the burgeoning popularity of fintech platforms and the democratization of finance, more institutions are feeling the pressure to make self-directed IRAs an option.
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Can You Buy Bitcoin With an IRA?
Yes, you can buy Bitcoin with an IRA, as long as the IRA is of the self-directed variety. Self-directed IRAs allow the account holder to invest in alternative assets, such as Bitcoin, at their discretion.
The Retirement Industry Trust Association (RITA) estimates that between 2-5% of all IRAs are invested in alternative assets.
How to Buy Bitcoin With an IRA
The process for purchasing Bitcoin as part of your IRA will differ between providers. However, it may be a bit more complex for the account holder and require a more active degree of account management than for purchasing traditional assets, which are generally just a click away within the account interface.
When purchasing Bitcoin in a self-directed IRA, any or all of the following components may be required:
- Custodian – this is the role played by most traditional IRA providers. The custodian protects your account and ensures that it adheres to all IRS and federal regulations
- Exchange – sometimes referred to as a digital currency exchange (DCE), this is the party that allows you to make Bitcoin transactions. Some self-directed IRAs partner with crypto exchanges to make crypto trades possible from your IRA account; others will direct you to a DCE separate from the IRA provider
- Secure storage solution – this protects your Bitcoin from theft. Most Bitcoin IRAs include proprietary self storage methods to keep your coins safe; if not, secure storage is likely included as part of the crypto exchange you use
Advantages of Including Bitcoin in Your IRA
With the hordes of people adding Bitcoin to their self-directed IRAs, it is clear that there are many advantages to adding it to your retirement portfolio.
Diversification
The key to any successful retirement portfolio is diversification, spreading your money out among a variety of asset classes to increase the likelihood that when one sector is down, another is up.
This helps mitigate the risk during a bear market and keeps your portfolio trending in the right direction.
Bitcoin adds an exciting layer of diversification to a retirement portfolio. In addition to the staples such as stocks, bonds, real estate, and precious metals, Bitcoin and other cryptocurrencies allow for diversification into an entirely new sector that could do well when other parts of your retirement portfolio struggle.
Possibility of High Returns
Skeptics will argue that Bitcoin is past its phase of explosive growth. To a certain extent, this is true. Ten years ago, Bitcoin was trading at $3.50 per coin. Today, it is trading at $55,000 per coin.
Even the most ardent Bitcoin bulls realize that another 15,000x return is not possible over the next 10 years, which would put Bitcoin at nearly $1,000,000,000 per coin.
However, there is no shortage of forecasts that put Bitcoin in the $500,000 to $1,000,000 range within the next 10 years. Obviously, the ride will be bumpy, and there is no guarantee that Bitcoin hasn’t already reached as high as it will ever get.
However, the distinct possibility of a 10x return over 10 years is something not offered in the other asset classes.
Tax Advantages
Finally, one of the biggest headaches for Bitcoin traders is monitoring their gains and losses on trades. With a Bitcoin IRA, investors can get in on the crypto action and enjoy the same tax advantages of IRAs.
In a traditional IRA, this means that you can watch your Bitcoin grow and not worry about having to pay any taxes on it until you make withdrawals at retirement.
Disadvantages of Including Bitcoin in Your IRA
While there are definite upsides to including Bitcoin as part of your IRA portfolio, there are a handful of downsides that investors should consider before coming to a decision on whether to jump into this alternative asset class.
Volatility
While the possibility of exponential gains makes Bitcoin an exciting addition to an IRA, the potential losses can be a bit unnerving. Bitcoin has crashed multiple times throughout its history, shedding over 50% of its value in a matter of weeks.
For retirement investors who need a steady, stable source of income in their post-work careers, this kind of downside could put them under serious financial strain.
Fees
Normal IRAs typically allow you to invest your pre-tax dollars for free. However, self-directed IRAs usually carry a higher amount of fees. From set-up fees to management fees, expect it to cost more to hold an account that permits Bitcoin purchases.
Exchange Limitations
Those investors looking to add Bitcoin to an IRA have likely already dabbled in the cryptocurrency world. However, the provider you choose for your Bitcoin IRA may not support the crypto exchange you currently use, opting to go with only affiliated DCE platforms.
As a result, getting your crypto into your IRA may be a bit of a challenge without the proper research.
Can You Buy Bitcoin with a Roth IRA?
As long as it is a self-directed IRA, Bitcoin can be purchased for both traditional (pre-tax contributions, taxed at withdrawal) and Roth (after-tax contributions, tax-free withdrawal) IRAs.
The maximum contribution limit of $6,000 ($7,000 after age 50) still applies when adding Bitcoin to your portfolio.
The Bottom Line
You can use your IRA to purchase Bitcoin. However, it must be from a self-directed IRA. Given the recent democratization of finance, more and more providers are offering self-directed IRAs, making Bitcoin contributions a potentially exciting addition to your retirement portfolio.