Bitcoin investors believe in its long-term potential as a decentralized currency and as a growth investment. With the advent of Bitcoin IRAs, you can also include Bitcoin as part of your long-term retirement plan. Here’s a look at key IRA concepts, followed by the specific nuances of buying Bitcoin in your IRA. Finally, you’ll review three potential investment strategies for your Bitcoin IRA. The answer to your question: “Can I buy Bitcoin with my IRA” is a resounding yes.
What Is an IRA/Roth IRA?
Introduced in 1974, the Individual Retirement Account (IRA) has allowed millions of workers to fund a personal retirement vehicle. Even in the mid-1970s, company-funded pension plans were beginning to be phased out, and the IRA was a perfect replacement. Today, more workers are covered by IRA and 401k retirement accounts than by company pension plans.
With an IRA, you can elect to contribute a percentage of your adjusted gross income (AGI) into your account. You then deduct the IRA contribution from your taxable income at income tax filing time. The downside is that all capital gains and dividends earned in the IRA become taxable when the funds are withdrawn at retirement.
In 1998, Sen. William Roth introduced legislation that created the Roth IRA. The Roth IRA provides no tax deduction for your annual contribution. However, all capital gains and dividends are 100% tax-free when withdrawn at retirement. Your tax advisor can help you determine whether the traditional IRA or Roth IRA is most suitable for you.
Can I Buy Bitcoin with My IRA?
Yes, absolutely. However, you need to establish a self-directed IRA to be able to buy Bitcoin with it. You also need to establish an IRA limited liability company (LLC). Your LLC will be the entity buying and selling Bitcoin for your IRA account. You cannot transfer any Bitcoin you now own directly into your IRA LLC. You must sell it, transfer the funds into your IRA LLC and then it can buy and sell Bitcoin on your behalf. If you prefer a Roth IRA, the same general guidelines apply.
There are annual contribution limits for IRA accounts. Never exceed the limit or the IRS will penalize you. You could also be hit with a hefty early withdrawal penalty (usually 10%) if you withdraw funds from your IRA before reaching 59.5 years of age.
Bitcoin IRA Pros and Cons
Pluses of Investing in Bitcoin with Your IRA/Roth IRA May Include:
- Income tax savings. If Bitcoin is granted Section 1256 tax treatment, 60% will be taxed at long-term capital gains rates and 40% at short-term rates. This would be a huge tax benefit and is a good reason to include Bitcoin in all standard (non-Roth) IRAs.
- Portfolio diversification (Bitcoin, stocks, bonds, precious metals, and cash)
- Long-term growth potential of Bitcoin
- Adjustment of contribution amounts as your income changes
- Dollar-cost-averaging (DCA) strategies appear to be tailor-maid for IRAs
Negatives of Investing in Bitcoin with Your IRA/Roth IRA May Include:
- Bitcoin volatility, especially if Bitcoin comprises a large percentage of your IRA
- The potential for hacking of your IRA LLC. You need to invest in the best cold wallet available and also pay for a safe deposit box to store all account codes.
- The cost of creating and maintaining your IRA LLC. Might not be cost-effective if you have a small account balance
- Uncertainty regarding future government regulation of Bitcoin
Potential Investing Strategies for Your Bitcoin IRA
Generally, trading/investing in an IRA is long only but there is a way to get around that restriction. Here are some trading/investing strategies for you to consider:
- Dollar-cost-averaging (DCA). Buy a fixed amount of Bitcoin (or the Bitcoin ETF, when available) every month (week) and simply hold for the long-term. It’s best to begin a DCA strategy when you first start working, allowing 35-45 years for your coins to increase in value. If possible, begin your DCA strategy after a big 50-60% correction in Bitcoin, especially if you remain confident in its long-term growth potential.
- Trade a variety of Bitcoin trend-following strategies. These strategies seek big gains, but unlike a DCA, their use of stop loss and trailing stop protection helps limit losses and lock in profits. Swing trading (holding for 14 days or less) is not a good idea in any Bitcoin IRA account. This strategy may cause you to focus on quick profits rather than on the slow, steady growth that you seek as an IRA investor.
- If/when inverse Bitcoin ETFs become available, you’ll effectively be able to short Bitcoin in an IRA. Had such an ETF been available in December 2017, you could have bought the inverse Bitcoin ETF and profited from the ongoing bear market in Bitcoin. Only highly skilled traders should consider this strategy.
Decisions: A Bitcoin IRA or a Bitcoin Roth IRA?
Here are a couple of different scenarios that may help you determine if a regular IRA or a Roth IRA is a better fit for your Bitcoin investment plans:
- You’re envisioning steadily rising income for the next 20-30 years.
- You will max out your annual IRA contributions over the same timespan.
- You’ve assured yourself of Bitcoin price gains for at least 20-30 years (12-15% average annual gains).
In the above scenario, you may reap more rewards at retirement time with the Roth IRA. The reason would be the enormous capital gains on your Bitcoin, all of which would be withdrawn tax-free. Those capital gains will most likely dwarf the loss of the annual tax deduction that a regular IRA provides.
A regular IRA might make more sense in this scenario:
- Your income is modest and is not anticipated to steadily increase, or it might actually decline.
- Your annual IRA contribution is projected to remain static, or it might decrease.
- You’re hopeful Bitcoin will appreciate but expect a more modest average annual gain of 7-9%.
In this scenario, the annual tax deduction for your IRA contribution can help improve the quality of your life right now. You will pay taxes on all IRA earnings at withdrawal, but being a lower-wage worker, your low tax bracket will mean a small tax bill at retirement time. Have some of your cake now, and still have some to enjoy later.
IRA and Roth IRA accounts are your best options if you’re not covered by a company or union pension or 401k retirement plan. They are easy for you to create, fund, and maintain. If you desire to include Bitcoin in your retirement account portfolio, you’ll need to create a self-directed IRA and LLC which will be the legal structure that holds your IRA. Assuming you believe Bitcoin has decades of growth potential, including the coin in your retirement portfolio makes good sense.
Your job now is to plan out a diversified, non-correlated retirement portfolio, one that includes Bitcoin, precious metals, stocks, bonds, and cash. Your registered investment advisor can help to determine what percentage Bitcoin should comprise of your IRA portfolio.
Speculation in the financial markets involves substantial risk. You should only use risk capital when trading or investing. Always consult your licensed financial advisor before deploying risk capital into the financial markets.
Source: Coin Central