How Do Bitcoin IRAs Work

Richard Montana | October 25, 2022

If you’ve been around the digital currency market, there’s a lot of information about Bitcoin—the world’s first digital currency—that you must process. After all, this cryptocurrency enjoys the lion’s market share due to the opportunities it offers traders and investors.

Bitcoin IRA, as its name implies, allows you to hold Bitcoin as part of your investment portfolio. It’s also possible to add other cryptocurrencies, such as Litecoin and Ethereum, into this account.

They work as custodians of your portfolio since you cannot just add Bitcoin to your traditional IRA that holds other securities such as stocks, ETFs, bonds, or mutual funds. However, using Bitcoin IRAs requires opening or setting up a self-directed IRA (SDIRA) account with Bitcoin IRA companies. These transactional roadblocks follow tax considerations regarding cryptocurrency, which look at digital currency as property.

Suppose you’re looking to add Bitcoin to your portfolio. You can work with an IRA company, but you need to arm yourself with the information so you can get the most of your investment. Here’s how a Bitcoin IRA works.

  1. Sourcing An IRA Account

Setting up a Bitcoin IRA requires researching what type of account you want to place in your retirement plan. You have the option of owning a traditional IRA account or a Roth IRA that has varying contributions and tax deductions.

Bitcoin IRAs borrow from the traditional IRA, but its stipulations demand that you transact in cryptocurrency. You cannot participate or contribute to your Bitcoin IRAs directly as you would in the regular securities account. Therefore, it’s crucial to source an IRA account from reliable providers in the cryptocurrency community.

  1. Custodial Services

Your Bitcoin IRA holdings are the responsibility of intermediaries who handle everything per government rules and regulations. The custodians can provide a variety of cryptocurrencies to add to your portfolio or retirement plan, but you have to choose what goes into your Bitcoin IRA account.

For SDIRAs, you take full responsibility for what happens to your portfolio. The custodians will only handle the governance matters as required and will not suggest which cryptos to add or give financial advice regarding your investment.

Custodians charge service fees for handling your portfolio, which may vary from the IRA accounts you hold. Account management and trading are standard features that attract service fees to your portfolio. It’s prudent to learn what your provider charges before opening an account with them.

  1. Taxation On IRA

Bitcoin IRAs are subject to taxation since they have similar considerations to traditional IRA accounts. Capital gains and transactions realized in your holdings will require bookkeeping to ensure you adhere to government regulations.

The contributions and funds in your Bitcoin IRA account have tax obligations. For instance, traditional IRA accounts will deduct taxes when you contribute to your portfolio and withdrawals from your account.

For a Roth account, the distribution of your holdings will attract tax deductions as you continue to contribute to your retirement portfolio. This account allows you to keep the gains as the cryptocurrency market prices—Bitcoin, in particular—continue to expand.

  1. Retirement Portfolio Safety

Bitcoin IRAs offer a secure way to invest in your future. It provides a storage solution for your Bitcoin and other cryptocurrencies you add to your portfolio. Aside from safeguarding your retirement interests, Bitcoin IRA service providers can link your portfolio with lucrative exchange platforms offering promising cryptocurrency trading avenues.

Moreover, you can expand your portfolio by selecting more cryptocurrencies with higher market capitalization. It allows your portfolio to enjoy price fluctuations in the digital currency market.

  1. Profit And Loss

Bitcoin IRAs holdings experience market volatility and may incur profits and losses. Your IRA custodian cannot control the speculative market, and you can lose the gains realized over time. Also, you must know when to withdraw your retirement investment to safeguard your profits.

If the market swings low, you might want to hold and wait for the reversal during corrections. Otherwise, you’ll end up with a deficit in your retirement portfolio. Experts recommend due diligence before risking your portfolio.

  1. Retirement Fund Diversification

Diversification is a classic investment strategy that never gets old, even with Bitcoin IRAs. They can provide an alternative retirement investment solution to your retirement plan. However, retirement investments in Bitcoin IRA have tax obligations depending on government rules and regulations. You can benefit from the holding as the market grows and more people are joining the digital currency market landscape. But, cryptocurrency is volatile so it is also important to be aware of the potential drawbacks.

  1. Investment Minimum

Bitcoin IRAs have similar restrictions affecting your contribution to your retirement fund. The limitations also depend on the service providers or custodians you choose to entrust with your retirement funds. For instance, Bitcoin IRA custodians can allow a minimum of USD$3,000 in your account, and internal revenue services (IRS) recommend an annual contribution of USD$6,000. So, reviewing these parameters of investing in a Bitcoin IRA is crucial.

Bitcoin IRAs

Final Thoughts

Saving for retirement through a Bitcoin IRA is fast becoming an alternative way to expand your portfolio. It allows you to choose cryptocurrencies in the digital market and add them to your investment list. However, you must learn what tax implication your portfolio will incur in the hands of custodians. You’ll also incur charges for trading and maintaining your Bitcoin IRAs with a custodian of your choice. Invest in your future now with a Bitcoin IRA. This is not tax advice it is for educational purposes only. You should always seek a professional opinion.

About the Author

Avatar photo

Richard Montana
Richard has many years of experience in broker research, testing, analysis and reviews. He knows what to look for through years of trading himself with different brokers and listening to the feedback of others.

Review Methodology

For all of our broker reviews, we research, validate, analyse and compare what we deem to be the most important factors to consider when choosing a broker. This includes pros, cons and an overall rating based on our findings. We aim to help you find the best broker according to your own needs. You can read more about our review process.


Relevant Articles