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Investing Bitcoin in Retirement Accounts

  • Investing Bitcoin in a retirement account increases the diversity and volatility of your portfolio
  • Individual retirement accounts that hold Bitcoin have different fee structures than brokerages or exchanges
  • Traditional IRAs and Roth IRAs have different tax advantages

Introduction

Adding Bitcoin to a retirement account can be advantageous for investors who can tolerate the increased volatility and are looking to diversify their retirement portfolio. Investing Bitcoin in an individual retirement account is also appealing to investors who believe Bitcoin will appreciate in the long-term. A growing number of custodians offer financial services and Traditional or Roth IRA that can include Bitcoin. However, the primary vehicle for including Bitcoin in retirement accounts is still a self-directed IRA (SDIRA).

Self-directed individual retirement accounts can accommodate assets not typically included in custodial accounts, including digital currencies and real estate. When utilizing an SDIRA, the account owner is their own custodian. This means that tax liability, due diligence, and asset management is the responsibility of the account owner.

Traditional IRA

Traditional IRA’s are one of the most utilized retirement savings accounts; over half of all IRA accounts owned in the US are Traditional IRAs. A Traditional IRA has a maximum contribution per year of $6,000 for individuals under the age of 50, and $7,000 for individuals over the age of 50. The Traditional IRA account owner is required to take a minimum distribution each year once they reach the age of 72.

A Traditional IRA account can be funded through many sources, and each option has specific benefits based on your individual investment goals. Some funding options include: Transferring funds from an existing Traditional IRA or 401(k) plan, transferring funds from a checking account via check or wire transfer, or rolling over an existing 401(k) plan into a Traditional IRA. Most funding options can be facilitated directly from trustee to trustee, simplifying the process, although there are processes that allow you to take possession of the funds yourself and then transfer them to your IRA trustee. However, there are serious tax penalties if this process is not completed, and is generally riskier than trustee-to-trustee fund transfers.

Contributions to a Traditional IRA’s save on current taxes through tax-deductible contributions. Investment earnings are not taxed while in your Traditional IRA account. However, growth within the account is taxed at your standard income tax rate when you make a withdrawal. Distributions from a Traditional IRA are taxed at the individuals standard income tax rate.

Roth IRA

Similar to a Traditional IRA, a Roth IRA has a maximum contribution per year of $6,000 for individuals under the age of 50, and $7,000 for individuals over the age of 50. Unlike a Traditional IRA, Roth IRA’s do not have required minimum distributions.

A Roth IRA account can be funded in almost the same way as a Traditional IRA. Some funding options for a Roth IRA include: Transferring funds from an existing Roth IRA or 401(k) plan, transferring funds from a checking account via check or wire transfer, or rolling over an existing 401(k) plan into a Roth IRA. Like a Traditional IRA, funding options can be facilitated directly from trustee to trustee, which takes the account owner out of the process. The account owner can take possession of the funds and transfer them to their IRA trustee, but it is generally riskier than trustee-to-trustee fund transfers.

The biggest difference between a Traditional IRA and a Roth IRA is how they are taxed. Contributions to a Roth IRA’s are after-tax dollars, meaning contributions are not tax deductible. Investment earnings are not taxed while in your Traditional IRA account. However, growth within the account and distributions from a Roth IRA are not taxed, so individuals who believe their income tax level will be higher in retirement than their contribution period often choose Roth IRA’s.

Warning: Roth IRA’s have income exclusions that make individual investors above a certain income ineligible to open a Roth IRA.
Single individuals with Modified Adjusted Gross Income (MAGI) equal to or higher than $140,000, or individuals who are married and file jointly with a MAGI equal to or greater than $206,000, are ineligible for Roth IRA accounts.

Fee Considerations

Adding Bitcoin to your retirement account carries fee obligations that are different from fees associated with brokerages or exchanges. Depending on the IRA provider, initial set-up fees can cost thousands of dollars. There are also recurring custody and management fees, as well as fees charged by the custodian’s trading partner any time you buy or sell Bitcoin in your IRA. Custodians often justify higher fees when including Bitcoin in a retirement portfolio because they are taking on added risk and have additional reporting requirements.

Notice: River Financial does not provide investment, financial, tax, or legal advice. The information provided is general and illustrative in nature and therefore is not intended to provide, and should not be relied on for, tax advice. We encourage you to consult the appropriate tax professional to understand your personal tax circumstances.