Bitcoin IRA: How to Diversify Your Retirement with Bitcoin

What is Bitcoin?

The Bitcoin network is the first of its kind— a fully decentralized payment and savings network and a digital currency bundled into one. Developed in response to the 2008-2009 financial crisis by a group of programmers and activists, bitcoin is based on encryption technology that allows the creation of an immutable public ledger.

This ledger is much like a bank’s computer where account balances are stored, except that the ledger is publicly visible, and only the account owners can change their account balance. The authenticity of every transaction is guaranteed by mathematical formulas that allow the network to prove that you know your password, without actually revealing your password.

Unlike the US dollar and banking system, the issuance of bitcoin and monetary transfers all function without the need for any government or bank. Don’t worry— you don’t need to understand exactly how it works. You probably don’t understand how your phone works either. The important thing is that it works. 

This was all highly experimental in the beginning, but Bitcoin has now been running reliably for over 10 years without a single day of down time, and no signs of slowing down.

Why Are People Investing in a Bitcoin IRA?

Although Bitcoin is one of the most volatile assets in existence, a small but growing contingent of analysts and investors now regard it as a safe haven against financial and political crisis. Why?

Because bitcoin operates independently of any government and banks, it tends to perform well on news about political and economic instability. Bitcoin also stands to do to the banking system what email did to the post office, on a global level. 

Since demand is expected to continue rising, and bitcoin has a fixed supply, many analysts expect the price to continue rising. A growing number of large investment funds have started to include bitcoin in their portfolios, both to benefit from potential future price growth, and to hedge against uncertainty about the future. 

What is a Bitcoin IRA?

You’ve probably heard of an individual retirement account (IRA) before. This is a retirement account which allows certain tax advantages. A Bitcoin IRA allows you to invest in Bitcoin and other cryptocurrencies while still deriving the tax benefits of a traditional or Roth IRA.

A "bitcoin IRA" is a self-directed IRA that holds cryptocurrencies. A self-directed IRA allows investing in a number of alternative assets such as precious metals, real estate, and cryptocurrencies, but there is some additional bureaucracy associated with opening one. For this reason, it’s recommended to work with a qualified company that specializes in these crypto IRAs to facilitate setting up your account. 

What Are the Benefits of a Crypto IRA?

Bitcoin is still a relatively new technology, and personally managing bitcoin can be challenging. Many bitcoin owners have fallen victim to hacks or lost access to their funds. A bitcoin IRA allows you to benefit from price growth in bitcoin without having to worry about the technical challenges of personally acquiring and securing digital currencies in a tax-advantaged retirement account.

One of the biggest advantages of a Bitcoin IRA is that you can rollover or transfer a portion of your retirement directly into Bitcoin without the penalties usually associated with liquidating a 401k. This also applies to traditional IRA’s, Roth IRA’s, SEP IRA’s, SIMPLE IRA’s, some pension plans, and 403b’s.

Related: Ethereum Vs Ethereum Classic - What's the Difference?

How Do I Add Bitcoin to a Self-Directed IRA?

To invest in a Bitcoin IRA, you will need to choose a facilitator and custodian that specializes in setting up Bitcoin IRA accounts. The role of the bitcoin IRA specialist is to help:

• set up your account with an IRA custodian, 
• facilitate the transfer of funds into your new account,
• purchase the cryptocurrency,
• and arrange storage for your crypto. 

This is the general process, though specifics may vary slightly depending on the IRA company you choose to work with.

There are many qualified self-directed IRA custodians available in the market. Your bitcoin IRA dealer should be flexible and able to work with the custodian of your choice, but if you don't have a preference, you may want to work with their partner custodians. 

The reason? Your bitcoin IRA company may have negotiated lower custodial fees due to the amount of volume they send the custodian. Their relationships with these other businesses may help expedite the setting up and funding of your account. 

Check with a few bitcoin IRA specialists as they may offer financial incentives to working with their preferred partner custodians.

The same goes with storage for your bitcoin IRA. You should have flexibility in selecting your storage facility, but your specialist will likely recommend their preferred vault storage depository. They should offer state of the art security features and an insurance policy that covers the value of your crypto assets.

When you open a bitcoin IRA with BitIRA for example, they provide:

• Multi-sig wallet
• Personal, encrypted hardware device
• Cold storage wallet
• Fully insured through an all-risk policy
• CCSS compliant

More on storage below. Request information from a few of the top bitcoin IRA dealers and compare their storage options, level of security, and get all crypto IRA fees in writing.

How Do I Rollover My 401(k) or Retirement Account into a Bitcoin IRA?

Again, your first step is to choose a crypto IRA company to act as your facilitator. They will work with you to set up a self-directed IRA. This is usually done through one of their partner self-directed IRA custodians.

Your bitcoin IRA company will then contact the custodian of your current 401(k) or other qualifying retirement plan and arrange the rollover of funds into your new account. You can then work with your bitcoin IRA firm to decide on what cryptocurrencies you want to buy with your funds. 

Most of the larger Bitcoin IRA specialists offer a selection of cryptocurrencies as well as physical precious metals such as gold, silver, platinum, and palladium.

Related: How to Rollover Your 401(k) into Crypto - Q&A with BitIRA's Head of Sales, Jay Blaskey

What Are the Risks Involved with a Crypto IRA?

A self-directed IRA is fully under your management, so you are responsible for due diligence. This requires research on your part, so it’s important to understand the risks associated with investing in bitcoin and other cryptocurrencies. Below are some of the risks involved with bitcoin.

Quantum Computing

Bitcoin is secured by mathematical formulas which, if cracked, could compromise the security of the network. At present, it would take all of the earth’s supercomputers millions of years to actually accomplish this, but if there was an unexpected quantum leap in computing technology, it could render bitcoin obsolete.

Political Events and Instability

Trying to ban bitcoin would be kind of like trying to ban gold. The most a government could do is push it underground. For this reason, most forward thinking governments have chosen to embrace and regulate it rather than try to fight it. 

It is possible, however, that some governments could try to suppress bitcoin, most likely to promote their own digital currencies. Anti-bitcoin regulation in China, for example, has led to price swings in the past.

So far, these events have not seriously affected bitcoin’s overall growth, and it’s not likely that they will in the future. Bitcoin was designed as a counterbalance to government overreach, so repressive policies are likely to further increase its popularity. 

Furthermore, if one country tries to suppress bitcoin, there are many other countries that are positioning themselves to try to attract cryptocurrency entrepreneurs and their money.

Related (Free) Investor Guide: Diversify your retirement with a cryptocurrency IRA...

Market Preference Shifting to a Different Currency

A number of copycat and experimental currencies have emerged to compete with or complement bitcoin. Some observers think that one of these alternative currencies may gain more popularity due to superior technical features. 

Bitcoin’s main appeal, however, is ideological and not technical. Bitcoin proponents argue that bitcoin is akin to TCP/IP, the base layer of the internet, and that just like the internet, new technology will be built on top of bitcoin. Many talented developers are currently working on such applications.

For now, the momentum remains behind bitcoin, and there is a very strong support base that believes firmly in bitcoin’s design philosophy. This support base effectively ensures that bitcoin will not go to zero, which in turn reinforces bitcoin’s position as a trusted store of value.

What About Other Cryptocurrencies?

Some investors have had success investing in other cryptocurrencies, but generally other cryptocurrencies are more volatile and higher risk than bitcoin. Most cryptocurrencies closely correlate to bitcoin, but in the past, owning a basket of the largest cryptocurrencies has yielded higher returns than investing in bitcoin alone.

Some investors also see this strategy as a way to hedge against the risk of an alternate currency taking over some of bitcoin’s market share. Overall, Bitcoin is still considered the safest investment due to its established track record and market traction.

Here’s an introduction to some of the biggest alternate cryptocurrencies.

Litecoin

Sometimes called the “silver to bitcoin’s gold,” Litecoin is essentially a copy of Bitcoin with some slight modifications, including being a bit faster and having a larger supply. Litecoin is one of the oldest and most stable alternate cryptocurrencies.

Ethereum

Ethereum was first envisioned as a “world computer” powered by ether, a native currency. Theoretically, it has the potential to create a decentralized internet, but practically it has mainly been used only for speculation and gambling so far. 

There is a whole class of such coins, usually seeking to provide a platform for programs to run on a decentralized network, and depending on demand for that network’s currency to run the programs. Similar coins include Tezos, Cardano, EOS, and NEO.

Dash, Monero, Zcash

There are a wide range of so-called “privacy coins.” All Bitcoin transactions are public and can be traced, which has led to demand for anonymous and private currencies. There are dozens of such coins all vying with each other. 

Ripple, Stellar

Ripple and Stellar are two currencies designed specifically for interbank and international transfers. Rather than a fully decentralized network like bitcoin, they depend on a federation of institutions like banks and corporations for verification. 

They are much faster and cheaper than bitcoin, but the supply of the currency is controlled by a for profit corporation in the case of Ripple, and a non-profit corporation in the case of Stellar.

Can I Include Other Cryptocurrencies in a Bitcoin IRA?

Due to growing demand, most companies that specialize in crypto IRAs now support a selection of cryptocurrencies. A self-directed IRA invested in bitcoin is often referred to as a "bitcoin IRA," however that is just a generic term. You are not limited to just bitcoin.

The top bitcoin IRA companies are able to facilitate several of the more popular cryptocurrencies. Check with a few of these dealers to see which currencies they support. If there's a specific investment that you don't see listed on their website, they may still be able to secure it for your account.

Related: iTrustCapital Review - Best for Gold and Crypto IRAs?

How is My Bitcoin IRA Investment Secured?

Your cryptocurrencies are stored in a digital wallet, which is a combination of encrypted keys. This is based on a mathematical formula called “public key cryptography.” 

The safest way to store a wallet is offline, since it makes it impossible for hackers to access the data. This is called “cold storage” as opposed to a “hot wallet” which is connected to the internet. 

Cold storage may take the form of a hardware wallet, which looks like a USB drive, or a paper wallet, which is simply the keys written out on a piece of paper. Most custodians will store this in a vault, similar to precious metals. Some custodians also have insurance policies to secure their cryptocurrency holdings in case of theft. 

Another option offered by some crypto IRA companies is online multi-signature wallets. A multi-signature wallet means that the wallet has multiple keys, and withdrawing funds requires more than one key. For example, the custodian might have one key while you have another, with both keys required to move the funds.

It’s hard to say which is more secure. Cold storage could only be compromised by a physical heist, but multi-signature wallets could be stolen if an attacker is able to infiltrate the computers of all key holders. Both scenarios are quite unlikely.

How to Choose a Bitcoin IRA Company

It’s important to choose a highly reputable and licensed facilitator when setting up a bitcoin IRA. Different companies may be suitable for different needs. First off, you need to make sure they are registered with the IRS. You can also check their rating with trusted consumer protection organizations such as the Better Business Bureau (BBB) or TrustLink. 

You also want to consider fees, as bitcoin IRAs usually have both start-up and annual custodial fees as well as storage fees. And finally, you want to be sure that they have a knowledgeable staff that can answer questions, and help you navigate the entire process.

What Type of Bitcoin IRA is Best?

Self Trade or Managed

There are two types of bitcoin IRA that custodians may offer; self-trade and managed.

A self-trade IRA means that you can day-trade using the funds in your IRA, while a managed account is traded by the broker. Trading yourself is probably not the best idea. Many investors look at the crypto IRA as a way to buy cryptocurrencies long-term. Day trading is risky, and the majority of non-professional day traders end up losing money in the long run.

Traditional or Roth IRA

The main difference between a Roth IRA and a traditional IRA is that a Roth IRA's tax benefit is deferred until retirement, while a normal IRA gives you a tax advantage in the year you contribute to it. 

If you are rolling over a 401(k) into a bitcoin IRA and not planning to contribute anything more to it, a Roth IRA would make more sense. If you plan on adding more to it for a number of years, a normal IRA might make more sense. 

However, there is a good chance that bitcoin may see dramatic price growth in the future. If this is the case, the tax savings on future profits would be far higher than short term savings. If you are confident about the future of bitcoin, the Roth IRA is probably the way to go.

Discuss these options with your chosen crypto IRA company.

Top Bitcoin IRA Companies

As with anything else, with a bitcoin IRA, you get what you pay for. Prices vary between different providers, and more features and services come with higher fees. You may want to compare the different options and prices yourself before making a decision. 

We’ve looked at three different IRA providers here.

#1. BitIRA

#2. iTrustCapital

#3. My Digital Money

What are the Disadvantages of a Bitcoin IRA Compared to Just Buying Bitcoin?

If you buy bitcoin on an exchange you will have to pay a trade fee for purchasing it. You will also have to pay a fee for selling bitcoin, and usually there is also a fee for withdrawing funds. All these fees are still cheaper than the expense of opening a bitcoin IRA.

In addition to the one-time fee for opening a bitcoin IRA, there are some recurring maintenance fees. If it is worth it for you likely depends on how much capital gains tax you would need to pay later on and/or how much of a penalty you would pay for liquidating a 401k you intend to invest in bitcoin. 

Some conspiracy theorists prefer to manage their own bitcoin, because they fear that a totalitarian government will try to seize all the bitcoin when its value goes up. But these folks would probably never consider a bitcoin IRA anyway, because they’re probably planning on fleeing the country and moving to a bitcoin citadel in such a case. 

Stay Safe

Because of the high profits and unregulated nature of cryptocurrency, there are a large number of cryptocurrency scams out there. Whenever visiting a cryptocurrency website, be sure to deal only with reputable, registered services. 

Double check web addresses whenever visiting a website, as cybercriminals will sometimes create copies of well known websites to steal passwords. Beware of links to websites sent via email or instant messenger. And never, ever send cryptocurrency to anyone who you meet on the internet, unless you are not expecting to get it back.

Of course, these issues are why many people prefer to outsource the management of their cryptocurrency savings to professionals.