Bitcoin IRA Accounts: What Are They, How Do They Work, And What Options Are There

In a little over ten years, bitcoin has matured into a globally-accepted investment asset class. As a result, you can now even add bitcoin into your IRA as part of your retirement planning.

Learn how Bitcoin IRAs work, which providers offer them, and whether it’s a good idea to make bitcoin part of your retirement fund or not.

What is an IRA?

An IRA (Individual Retirement Account) is a popular investment method used for retirement due to specific tax benefits. The four main types of IRAs; Traditional, ROTH, SEP, and SIMPLE offer slightly different ways to invest in your retirement with the purpose of avoiding unnecessary taxes.

In most cases, individuals can invest up to $6,000 of earned income (not including capital gains, social security, child support, etc.) annually into an IRA. But it’s important to note that IRAs are not very liquid. The penalty for withdrawing funds from an IRA account before the age of 59.5 is 10%, so the vast majority of IRAs are based on a “set it and forget it” mentality.

Since 1974, Americans have utilized the benefits of IRAs to reduce taxes in the present while saving for the future. Interested investors can set up an IRA with the bank, brokerage, or credit union of their choice. The portfolio distribution is typically determined by the party offering the IRA unless it’s a “self-directed IRA.” Self-directed IRAs enable investors to choose asset allocation.

IRAs generally consist of widely accepted safe investments, including mutual funds, ETFs, bonds, and some blue-chip stocks.

Why Invest in an IRA?

The IRS promotes the use of IRAs because it’s ultimately a tax-advantaged financial product that helps Americans save for retirement. The foundation for financial security typically begins with baseline accounts like an IRA, but it should by no means be the only source for retirement income.

The average IRA returns 7-9% on an annual basis, but due to contribution limitations, early withdrawal penalties, and restrictions on earned income, it should remain largely untouched until the age of 59.5.

Since it hit the markets in the early 1970s, millions of Americans have taken advantage of the IRA to ensure their golden years are financially stable. In short, an IRA has few disadvantages if used for the sole purpose of saving and investing for retirement.

How Does a Bitcoin IRA Work?

As Bitcoin continues to purge through traditional finance, it has made a significant impact on the way in which we view retirement funds. Bitcoin IRAs have exploded onto the scene as retirement investment funds with a side order of increased risk. Having said that, the IRS has yet to create an IRA account that includes digital assets. So it’s up to individual custodians to create self-directed IRAs (SDIRAs) in order to include digital assets.

Self-Directed IRAs have been used to expand investments towards real estate, precious metals, notes, tax lien certificates, and more. As of late, SDIRAs have begun to include digital assets like Bitcoin, Litecoin, and Ethereum, all to be taxed at the same rate as “property”, according to the IRS.

The only type of IRA allowed to include digital assets is an SDIRA, but investors must still go through a custodian in order to start their retirement fund. The custodian, contrary to traditional IRAs, has no fiduciary responsibility to the client, which means choosing the right provider of your digital asset IRA is that much more important.

Although digital assets undoubtedly add risk to the overall portfolio, Bitcoin IRAs offer diversification and higher potential gains for those investors willing to back the digital asset revolution.

Best Bitcoin IRA Accounts

The analysts at Bitcoin Market Journal have comprised a list of the top Bitcoin IRA accounts currently available. A number of factors were included in the final score of each IRA, including launch year, number of supported assets, minimum investment, and more.

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Should Bitcoin Be a Part of Your Retirement Fund?

It’s well documented that digital assets carry more risk than stocks, bonds, mutual funds, etc. If an investor chooses a Bitcoin IRA versus a traditional IRA, they are taking on more risk in order to potentially generate higher returns.

As the old saying goes, if you want something done right you must do it yourself. Investors should conduct copious amounts of research prior to choosing a Bitcoin IRA as their primary retirement fund.

The success of the Bitcoin IRA will, at least in part, be determined by the overall adoption and value proposition of digital assets into the future. However, customizable Bitcoin IRAs allow investors to determine the contribution size of digital assets to their portfolio, which is a clever way to “get in on the action” while keeping a manageable level of risk.

Conclusion

Bitcoin IRAs are still a new financial products. Although many companies now offer a variety of digital asset-based IRAs, there is still plenty of work to be done. For example, the vast majority of Bitcoin IRAs require hefty upfront fees, a cost that, if using traditional IRAs, would not exist. Furthermore, volatility in the digital asset market has persisted through the years with no signs of slowing down in the near future, which means that your IRA would be subject to that same volatility.

When saving for retirement, safety is paramount, but that does not mean investors cannot make space for digital assets in their Bitcoin IRAs. Using a Self Directed IRA, along with the help of a custodian, will give investors more options when it comes to the allocation of their funds. A number of companies offer IRAs with anywhere from one to eight different digital currencies.

If you believe Bitcoin IRAs fit your retirement goals, assess the upfront costs and additional fees prior to opening an account. However, at this point in time, it might be best to wait for future products with lower entry fees.

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