An IRA will allow an individual to invest their money while receiving tax incentives on their capital. This permits individuals to benefit from compounding on their money as the profits get reinvested with the account, this acts as a powerful force that will help you grow your money exponentially over time.
IRAs make investing in other markets and assets accessible, allowing individuals to allocate capital in a wide variety of investment vehicles like real estate, stocks and even Cryptocurrencies like Bitcoin!
The year 2017 was probably one of the most important for the overall Crypto Market, not only their currencies grow in value like no other asset, but it also lets new players bring their money and their ideas into this new sector. The lucky ones that were able to invest early in the market saw their investment doubling in value almost every other week, something incredible to witness.
What many individuals forgot during the rush in the market was the fact that they would have to pay taxes on their investments, even if they were planning on holding the positions long term. This lead to an open discussion in terms of how to approach bitcoin investing in a cheaper and tax-friendly way. The result of this was the rise of companies offering individuals to manage their Bitcoin Investments as part of an IRA.
From a tax perspective, it is keen to understand that the IRS considers cryptocurrencies as assets, not currencies and for this reason, they have a completely different tax structure. It is important to understand that there is no such thing as a fully dedicated Bitcoin IRA, instead what is being offered in the market is the option to create a self-directed IRA with a custodian institution.
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If you are interested in diversifying a part of your retirement plan and your portfolio into Bitcoin, you may want to use this type of structure as it will make taxes and management easier. It is important to mention that while you can actively trade with a BitcoinIRA, it is key to understand that the volatility of the market makes it incredibly risky and difficult for new investors and traders.
This article will cover how a BitcoinIRA works and also the best providers available in 2020.
What is a Bitcoin IRA?
As mentioned above, many individuals commit the mistake of believing that a Bitcoin IRA is a dedicated type of retirement account. In reality, it is simply the name given to self-directed accounts that are used for Cryptocurrency investment and speculation.
The cryptocurrency market has proven to be a wild animal that does not follow traditional fundamentals and sometimes not even technicals, if you are planning on investing in a Bitcoin IRA (Self Directed Account) you should consider about all the risk associated with your investment. Even though there is a large number of firms and individuals lobbying for the adoption of bitcoin, it is still a very new technology and it still far away from reaching a massed adoption globally. Till this happens, it is very unlikely that we will see the market stabilizing with a true valuation, until then it will remain as the wild west for traders and Investors.
In an IRA you are talking about money that is needed for your retirement, if you do not have the experience, the time, or simply the knowledge to manage a portfolio properly then it would be better to aim for a fully managed account. Keep in mind that there are many other ways to learn about investments that do not incur in exposing your capital to unnecessary risk.
These are some of the most important pros and cons to remember before choosing a Self Directed IRA over another type of retirement account:
- Tax Incentives: The idea behind buying Bitcoin through an IRA is to be able to take advantage of the tax incentives offered by the US government for retirement accounts. This type of IRA will help you save money while letting your funds compound and build up over time. Imaging seeing your bitcoin investments rallying and rising in value, knowing that you would not have to pay a single dime of taxes until you retire.
- Possibility for Higher Returns: Cryptocurrencies are exotic assets, and they allow for the possibility of getting higher returns. But it is incredibly important to understand that just like profits can be higher, the risk will also be increased exponentially. Keep in mind that if you are using your IRA account for a fully speculative approach it is ok to add some extra layer of risk, on the other hand, if this is your retirement fund you should keep yourself out of the danger zone at all times.
- Wider Range of Assets: Even though a 401 allow for a higher level of contributions every year, the number of assets to invest in more narrow. While most individuals will only invest in traditional assets, it is important to understand the ability to invest anywhere else. Probably the two most peculiar asset classes would be Cryptocurrency and also Real State.
- Creditor Protection: One of the big differentiators between an IRA and a 401K is the fact that IRAs are protected against creditors. You can even declare yourself and bankruptcy without having to worry about your IRA savings being taking away from you. This acts as great insurance in case of things going south for business owners and regular individuals.
- Higher Cost than Traditional IRAS: It is not a secret that self-directed IRAs are more expensive than traditional accounts, the reason for this is that financial institutions lose their management fees and they tend to raise the other costs in order to compensate their revenue. This might sound like a shady practice but is really common in the market, and it has become the main script for companies offering Bitcoin IRAs.
- Lots of Fees: With a self-direct IRA you will have to get used to paying for absolutely every service that you receive. This might not be the ideal scenario for someone who is interested in preserving their capital but it is the way most financial institutions operate these accounts.
- Lack of Liquidity: Even though Bitcoin is actually a relatively liquid asset, the problem is that many of the exchanges that are used by these firms are not. You might have to wait even hours to get an order filled to buy and even more if you want to dump a position. This should be taken into consideration before choosing a provider.
Best Bitcoin IRA Providers:
1. BITCOIN IRA | Best for Beginner Bitcoin Investors
Bitcoin IRA is a peculiar firm because even though it offers custody of assets and also brokerage, in reality, the firm is only working as a middle partner between international custodian and exchanges. Keep in mind that this is not your traditional IRA, instead, you will be funding a kingdom trust with your Bitcoin.
This firm shines as a solid company with a great management team and also one of the best customer services available in the market. With BitcoinIRA you can sleep at night knowing that the custody of your coins will be in good hands.
Minimum Deposit: $5,000
One Time Fee: 10% of the account value
Annual Fees: 6% of the account value
2. COIN IRA | Overall Most Convenient
COIN IRA is another facilitator approved by the IRS to offer IRA services in the US. The firm has an agreement with some of the most important exchanges, banks, custodians and even BTC wallets in the world, this has facilitated business and grown a considerable fan base for the firm.
It is important to keep in mind that this firm is more sophisticated in terms of clients than BitcoinIRA, the reason for this is that the company is focused on wealthier individuals who are interested in investing some of their capital in Bitcoin.
This is a great company for anyone interested in starting a Trust IRA figure fully for Bitcoin and other Cryptocurrencies.
Minimum Deposit: $30,000
One Time Fee: 1% of the account value
Annual Fees: 2% of the account value
High-Risk Assets | Retirement Account
One of the basic principles of investing with retirement money is that even though you want your capital to grow, you should not take a high risk with it. I know it may sound like a contradiction but in reality, it is money that you can’t take the risk of losing. Working your whole life, saving money to get a proper retirement jus to blew your opportunity in a risky trade is simply not the way to go.
It is incredibly important to understand that even though cryptocurrencies are growing in followers and adapters, it is still a very new technology that is far from being fully adopted by the world. Just like investing in internet companies could have been a one in a lifetime deal with names like Amazon, it was also one of the worst possible ideas with hundreds of names disappearing due to bankruptcy.
Not only it is a fairly new technology but the overall market has resulted to be one of the most volatile environments ever seen in the financial markets. Imagine investing in an asset that can lose 82% of its value in a matter of months, just to see that same asset soaring 700% in a similar period of time. It is easy to see why it may sound like an interesting idea to try to catch that falling knife, but the chances of getting it right are nothing compared to the risk of losing your future.
If after all the disclosure you are interested in adding some bitcoin to your portfolio, it is key to understand that sizing will be your best friend. Try to invest the least as possible, enough that you will feel comfortable but at the same time a number that won’t damage your retirement in case it goes south.
Another point I would like to bring to the table is that there is no crystal ball in the market, for this reason, I advise individuals to stay away from trying to predict tops and bottoms in the market. Doing so will only help destroy your portfolio and burn your money faster than you can even imagine. If you believe in Bitcoin and the technology behind it, you may want to consider a buy and hold approach, as mentioned before the market is so volatile that an active trading model can be even more dangerous.
High Management Fees
Many individuals commit the mistake to think that Investing in Bitcoin through an IRA is cheap as trading the cryptocurrency in a traditional exchange. In reality, BitcoinIRA acts as a custodian, and for this reason, the firm is entitled to charge expensive fees for account management and for trading.
Fees and commissions can be as expensive as 10% of the value of the account in order to get everything settled and up to 5% a year just in management fees. If you take into consideration how much money you will be spending every year for simply having this IRA, its beauty and charm start to dissipate pretty fast.
If you have a financial advisor of your trust it is important for you to talk to them in order to clear any question but also to understand if this is a good idea based on your risk profile. As mentioned before, even with a very volatile market that can perform and provide great margins of profits, it can easily tank and wipe half of your money in weeks or even days.
With such a hype in the market surrounding all the cryptocurrencies, it is easy to see why so many individuals are starting to place part of their retirement funds in such a volatile asset. One of the most used strategies currently used is to simply buy and hold bitcoin in an account, for this it is only necessary for you to understand the risk of it and to be willing to accept losing your money. By taking out the factor of suffering the ups and downs you might be able to navigate through the bad times and cash out whenever the price surpasses your entry for a profit.
It definitely sounds easy but is it not a strategy for the weak of heart. Just imagine seeing your investment losing 82% in value, sell your positions and a week later being halfway back to an all-time high. It has happened before, and it is the reason why so many bets on it happening again.
From an investor perspective, the worst flaw of these accounts and providers is the fact that they have a really high minimum to open an account. This basically forces you to invest at least $5,000 into the market, keep in mind that you can always decide to invest less money in a regular Bitcoin Wallet and simply pay for your taxes on it. It might be a good way if you want some exposure without having to risk so much money in this erratic market.
Comments from the industry
During a recent conversation with LearnBonds.com, Chris Kline, the chief operating officer (COO) of Bitcoin IRA, explained that they are very bullish about the future of the cryptocurrency market.
Bitcoin IRA is a revolutionary company that offers cryptocurrency services and Individual Retirement Accounts (IRA) in digital assets.
In this interview, Mr. Kline has also talked about China and how Facebook’s Libra could disrupt global commerce as well.
1. There are just a few Bitcoin / Crypto IRA services in the market, how did you come up with this idea of creating Bitcoin IRA?
We have been in the alternative asset space for nearly 10 years. Previously we helped individuals invest in real estate, businesses, gold and other precious metals for their retirement account. In 2014 we started hearing the early groundswell of chatter around crypto. Bitcoin has similar qualities to gold as a store of value and many believe it can be a hedge against another economic meltdown so it made sense to expand our offerings into crypto. It took about 18 months to build the first turn-key solution that fit the individual retirement account (IRA) world, and we’ve been evolving and growing ever since our 2016 launch.”
2. Do you have any forecasts for how much the Bitcoin IRA industry will grow in the future?
“Market and regulatory conditions in 2018 really thinned out the crypto individual retirement account herd of 2017. It will be interesting to see who grows, who innovates and who carries this niche industry forward. Our goal is to be the continued catalyst of the product we created.”
3. How is Bitcoin IRA dealing with the large volatility inherent to the cryptocurrency market?
“Account holders self-direct their transactions through our technology platform. Battling volatility requires unlimited access for account holders. The launch of our 24/7 Self-Trader and its continued uptime gives our clients real control.
Also, the addition of instant cryptocurrency swaps in August eliminates settlement delays. A client wanting to swap from Bitcoin to Ethereum can now do it instantly 24/7.”
4. You have recently announced a new service that allows customers to lend their retirement assets for interest. What was the main reason that pushed you to launch this service?
“The cryptocurrency market must mature into a comfortable place for everyday folks. Banks pay (albeit very small) interest on deposits. People are used to this. Why not the same for their crypto? By building mainstream applications, our company can help drive further mass adoption.
Since we’re focused on retirement accounts where users typically hold for longer periods of time, earning interest during that period can be a windfall. We’re allowing people to earn on their crypto or cash positions and it’s an exciting new product.”
5. Bitcoin IRA processed over $350m in investments for more than 4,000 clients. Do you think you can reach $1bn and amass 10,000 clients in the near future?
“Most certainly. Our upcoming product rollouts and major crypto events like Bitcoin halving, China’s federal cryptocurrency and Facebook’s Libra on the horizon we see the future as very promising for our company and all crypto investors.”
6. Retirement funds are being affected by low interest rates imposed by Central Banks in different jurisdictions. Do you think a small allocation in Bitcoin could eventually help the pension system?
“I am not a financial advisor, but I am personally a big proponent of the “get off zero” movement that suggests every pension fund, endowment, money manager, private capital firm, individual, etc should at least consider a small position in crypto, especially given the returns we’re seeing. If crypto is a hedge against a market downturn too, then it can be a strong asset for a balanced portfolio strategy with traditional stocks, brokers and other investments.”
7. At the moment, you are offering support for Bitcoin, Ethereum, Ripple’s XRP, Litecoin, Bitcoin Cash and Ethereum Classic. Are you planning to add support to other cryptocurrencies in the future?
“We’re taking the conservative approach with adding new coins to our platform. We don’t want to offer smaller coins that may later be determined to be a scam, lose liquidity or have significant concerns by government regulators in the future. This is a sensitive space and we’re taking the cautious approach.”
8. Which are the main challenges that Bitcoin IRA is facing with regulators?
“The entire industry faced significant challenges from fresh regulation for the last couple years now. And it was important for long-term growth of the space.
We find ourselves in very collaborative relationships with regulatory entities. We’ve always been extremely transparent and available for their questions and requests. Over time, we’ve become a resource for them in this young and growing industry.“
9. You mentioned Facebook’s Libra, what is your opinion on it? Are you open to offer support to it in the future?
“Libra will be a major disruptor to global commerce. While it still needs to be vetted through regulators, expect it to create friction-less cross-border transactions at significantly lower fees for merchants and other participants.
Facebook’s active user base is more than 2 billion, larger than most countries, so it may provide sweeping change to our society. Bitcoin and other cryptos should see more inflows as users become familiar with the crypto ecosystem – bitcoin wallets, keys, bitcoin exchanges, etc. – and learn the benefits of decentralized money.
Will we offer it? Very likely.”
10. Which are Bitcoin IRA plans for the coming two years?
“We’re excited about our launch of interest-earning accounts which are rolling out now to select groups of our customers. This is an industry first for retirement accounts and a major benefit to our clients. Beyond that, we have a long roadmap of projects that focus on our core mission of helping Americans retire early.”
What types of IRA can be rolled into a Bitcoin IRA ?
Rollover into BitcoinIRA accounts is available for all IRAs, having said so you should take into account that ROTH IRAs will have a different treatment. Don't forget that there is a high cost associated with this rollover, it is important to be sure about the transition before incurring in such an expensive process.
Is there a minimum investment or account size?
Most Bitcoin IRA providers request a minimum capital of $5,000 to open an account. Take into consideration the fact that the maximum contribution to IRAs in one year is $6,000, opening a Bitcoin IRA won't leave much room to invest in other IRAs. Note that any Individual can own as many IRAs as desired, the only restriction would be in the total contribution made as a whole.
Are there other Cryptocurrencies offered for IRAs ?
Note that there are literally hundreds of new cryptocurrencies being created every month, you might not be able to find an ALTCOIN in most IRA providers but you will certainly get access to the top cryptocurrencies in the world. Some of the coins that are available are: Bitcoin Ethereum XRP Litecoin BitcoinCash Most providers are always updating their lists based on the market capitalization and the demand for specific coins.
How long do I have to wait to retrieve my funds?
IRA funds are not available for withdrawal until the age of 59½, after this age you will be able to withdraw as much money as you want without having to worry about paying a 10% penalty over your funds. It is important to mention that if you choose to use a ROTH IRA account, money contributed would be after-tax cash which means that it would be yours to withdraw at any time and at any age, the only restriction would be that you won't be able to cash out your profits until retirement age.
What is a Self Directed IRA?
A Self Directed IRA acts more like a custodian for your assets than a traditional retirement account, the reason for this is that the chosen firm will only provide you with a broker to buy and sell the instruments but it will be self-management. Even though the idea of managing investments and a portfolio by yourself tends to lure individuals into acquiring this types of accounts, it is important to be objective about the knowledge and skills required to survive the financial markets.