How to invest Bitcoin in IRAs for retirement

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To Matthew Roed, social security looks a lot less promising than the money he hid in his BitcoinIRA.

Roed is a registered nurse who lives in Golden Valley, Minnesota, and says he spent 16,000 hours researching everything related to Bitcoin. His conclusion? Investing in the cryptocurrency is key to a good retirement, and the best way to do it is with a tax-free, self-managed individual retirement account, or IRA.

“With Bitcoin legally classified as owned by the US government and my crypto being inside an IRA, I knew I would greatly reduce my taxable expenses due to the exponential growth,” said Roed.

At today’s prices, the risk has so far been worth it.

The MBA graduate, father and husband initially invested $ 30,000 in his BitcoinIRA. Right now he says his retirement portfolio is up to $ 250,000,

Even though it fell below its high of $ 500,000, Roed still feels vindicated in his belief that Bitcoin is the future.

“Nobody wanted to listen to me back then, not even my own family,” he said. “I got withdrawn and used my frustration to push more and more to get involved in this market.”

RN Matthew Roed of the Courage Kenny Rehabilitation Institute in Golden Valley, Minnesota.

Matthew Roed

BitcoinIRA

BitcoinIRA was launched in May 2016 and offers investors the tax benefits of an IRA as well as the returns of a risky and rewarding alternative asset class. It is similar in nature to other IRAs except that it is not funded by gold, cash, and bonds, but rather by Bitcoin.

The company has more than 100,000 individual account holders, including customers who are only 18 years old. But Chief Operating Officer Chris Kline tells CNBC that 75% of account holders are 45 and older. “It’s not a game for young children anymore,” he said.

BitcoinIRA doesn’t just trade in Bitcoin. It now has a long list of cryptocurrencies, including Ethereum and Litecoin.

Campbell Harvey at Duke University believes diversification is the right decision.

“Having a portfolio that is exposed to a single crypto like Bitcoin doesn’t make sense because while Bitcoin is currently the most important, its share of the total capitalization of cryptos has decreased over time. There are so many other tokens out there, “Harvey said.

When CNBC first profile BitcoinIRA in 2017, it was serving $ 6 million in transactions for 700 account holders. This month it exceeded $ 1.5 billion in all-time transactions.

There were also far fewer crypto-retired players. The market is now inundated with options.

A recent survey of financial advisors shows a clear shift towards cryptocurrencies. Of the 500+ financial advisors included in the report, 14% said they use or recommend cryptocurrencies to their clients now, up from less than 1% in 2019 and 2020.

The IRA custodian Kingdom Trust offers users the ability to diversify into 20 different cryptocurrencies. CEO Ryan Radloff tells CNBC that $ 2 billion of the $ 17 billion it holds for customers is now in cryptocurrency. That’s $ 350 million a year ago.

“The number of people interested in adding Bitcoin to their retirement plans … is growing exponentially,” said Radloff. “People don’t want zombie retirement accounts that only allow you to invest in three target funds. They want more choice in what to do with their hard-earned money, and they want access to hard assets that will increase “in value over the long term.”

IRA vs. Roth IRA vs. 401 (k)

Crypto-backed retirement portfolios may grow in popularity quickly, but there are still some major limitations.

For one, while there are several ways to invest your savings for retirement – be it an employer-sponsored 401 (k) or a Roth IRA – very few of these vehicles actually allow for an alternative asset like gold or crypto.

Because of this, self-directed IRAs are the primary retirement tool for holding crypto, explains Shehan Chandrasekera, CPA and head of tax strategy at crypto tax software company CoinTracker.io.

As the name suggests, you open an account with a custodian, make all investment decisions and your income is tax-exempt until you retire. Kingdom Trust and BitcoinIRA both follow this model.

“As for retirement accounts, Bitcoin is currently IRAs, IRAs, IRAs,” said Tyrone Ross, CEO of Onramp Invest. Onramp sells software that helps financial advisors track clients’ cryptocurrency investments.

“Because it’s considered property by the IRS … that’s why you see the IRA self-directed space explode,” Ross continued. “There are a lot of regulations that have to be met before you get into the 401 (k) room.”

There are exceptions. A small 401 (k) provider called ForUsAll announced last month that it is now allowing attendees to split up to 5% of their retirement savings into 50 different crypto assets, including Bitcoin, that are held and managed by Coinbase.

Companies like BitWage and Digital Asset Investment Management are also trying to incorporate crypto into traditional employer retirement plans.

But Chandrasekera says that “in general, 99% of the 401 (k) plans don’t offer bitcoin services,” so there is still a way to go before bitcoin hits mainstream retiree platforms.

For example, Fidelity tells its clients that retail brokers cannot buy or sell cryptocurrencies on Fidelity, although theoretically they can get into Bitcoin trading through crypto-related companies that trade in the public markets. The same goes for Charles Schwab.

Read more about cryptocurrencies from CNBC Pro

Volatility risk versus tax savings

Roed spoke to CNBC after completing a 14-hour night shift. In those hours after work, the rehabilitation staff nurse spends most of her time researching ways to invest in cryptocurrencies.

One reason he chose BitcoinIRA had to do with the company’s staking program. Roed lends his bitcoins to third parties in exchange for an annual percentage rate of return (APR) for the risk. “That’s about 2% a year,” he said.

This helps offset the $ 240 annual account fee plus the average transaction fees of 1% to sell and 5.5% to buy.

Kline says customers can get up to 6% annual percentage return on cash and cryptocurrencies, which helps offset fees.

Another important consideration? Bitcoin’s volatility.

The world’s most popular cryptocurrency trades at around half its value in April.

“We don’t see this volatility in the stock market, for example,” said Harvey.

“It is naive to believe that Bitcoin will just keep rising. There will be a limit and people have to think about that carefully, ”he said.

In addition to the risks of volatility, the Securities and Exchange Commission has also warned of the risk of fraud involved in participating in self-directed IRAs that trade in cryptos.

But Kline remains optimistic. He led CNBC through a case study of a customer who bought about $ 1.5 million worth of bitcoin in April 2020 when the token was trading at about $ 7,335. At today’s value, his investment is worth well over $ 6 million.

BitcoinIRA case study

date crowd Unit price Total bought Current unit value Current total value
April 9, 2020 193,295 BTC $ 7,335 $ 1,417,859 32,416 6,265,850

But ultimately, Kline says it’s the tax break that makes BitcoinIRA a slam dunk for those looking to trade cryptos.

If an average income taxpayer were to sell his Bitcoin today, he would not be paying taxes on the crypto in his BitcoinIRA. If it were in a Coinbase account, the same person would pay a short-term capital gains tax of 22% or a long-term stake of 15%.

“Pretty straightforward quantitative reasoning for putting an asset like Bitcoin in an IRA setting,” said Kline.

FIX: This article was updated to show that nurse Matthew Roed spent 16,000 hours researching cryptocurrencies, not 160,000 hours. It also clarifies that 75% of BitcoinIRA account holders are 45 years or older.

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