A Bitcoin IRA (individual retirement account) is a self-guided retirement account that holds Bitcoin in its portfolio. Typically, most IRAs invest in stocks, bonds, mutual funds, and ETFs. A Bitcoin IRA invests in Bitcoin, and perhaps several different types of cryptocurrency.
What is a Bitcoin IRA
The term “Bitcoin IRA” simply refers to an IRA that includes Bitcoin. There is no official designation for a Bitcoin IRA or Bitcoin Roth IRA by the IRS or any other regulatory agency.
How Does a Bitcoin IRA Work?
A cryptocurrency IRA works much like any other IRA. It’s a retirement account that invests in Bitcoin. The main difference for most customers is they will likely be interacting with three different entities:
1. Bitcoin IRA Service Providers: These are the companies an individual will deal with when they want to add Bitcoin to their IRA. They are the financial rails through which assets will be converted into Bitcoin.
2. Self-Directed IRA Custodians: These may be banks, trust companies, or any other entity approved by the Internal Revenue Service (IRS) to act as an IRA custodian. Traditional IRAs invest in stocks and bonds, but self-directed IRAs may allow alternative assets such as real estate, promissory notes, tax lien certificates, or cryptocurrency.
3. Custody or Wallet Providers: Typically, a Bitcoin IRA service will have a partnership established with a trusted wallet provider or custody solution that securely holds the private keys to a customer’s Bitcoin funds.
Can You Invest a 401(k) in Bitcoin?
The answer to this question is “maybe, but probably not.”
Until recently, 401(k) plans didn’t allow for the direct purchase of cryptocurrency. But some companies, like ForUsAll, BitWage, and Digital Asset Investment Management are starting to offer Bitcoin and other cryptocurrencies in 401(k) plans. Of course, since 401(k) plans are employer-sponsored, interested investors may be limited by what their particular company offers in terms of options. A self-employed individual seeking out a solo 401(k) may find they have more options.
There are other potential ways to roll over a portion of your 401(k) plan into Bitcoin, but the easiest way might be to use a traditional IRA.
Pros and Cons of Using a Bitcoin IRA
There are plus sides and down sides to including Bitcoin in your IRA planning. Here are some major points worth noting.
Pros of a Bitcoin IRA
A cryptocurrency IRA could provide some unique benefits, including offering overall portfolio diversification, and potentially large price appreciation.
Bitcoin provides a unique way to diversify an individual’s overall investment portfolio.
Given Bitcoin’s performance it’s often said that Bitcoin is “uncorrelated” with the rest of the investment world. While that trend was upended in early 2020 as Bitcoin experienced a positive correlation with the S&P 500, some investors still consider it a more volatile investment.
Given that cryptocurrency is an uncorrelated asset class and exists outside the control of any single centralized authority, some investors have wondered if it could be a reasonable retirement option.
That said, past performance is never a guarantee of future returns. Bitcoin has also seen some big drops, most recently falling 12% in just 10 days from January 1 – January 10, 2022.
Cons of a Bitcoin IRA
There are also potential drawbacks to holding investments in a Bitcoin IRA, including both volatility and fees.
Bitcoin has shown extreme volatility at times. This is one of the main reasons that cryptocurrencies are considered a risky investment.
While the list of large corporations (like PayPal, Square, and MicroStrategy) and self-made billionaires announcing large investments in Bitcoin continues to grow, volatility could be a big drawback for investors with low risk tolerance, as well as people who are close to retirement. Seeing investment funds fall by 10 or 20% (or more) in a single day can be too much for some people.
Perhaps the biggest and most assured drawback of investing in a Bitcoin IRA is the fees involved.
Aside from initial deposit minimums that are typically in the thousands, investors in Bitcoin IRAs can expect to pay fees including account setup fees, monthly platform fees, yearly administrative fees, transaction fees, and cold storage fees. Additionally, in some cases there are trade minimums, and there may be additional fees in excess of 1% per trade.
And as with other IRAs, withdrawing funds before retirement normally results in additional fees and taxes.
Taken together, the final taxes and fees could eat into a portion of the profits and tax advantages earned by a Bitcoin IRA.
How to Invest in a Bitcoin IRA
The main way to invest in a Bitcoin IRA is to use a trusted service provider that helps investors establish IRAs that hold Bitcoin.
There are some companies that have partnered with Bitcoin custodial services like BitGo, for example, to help safeguard funds for investors — although these companies cannot guarantee against loss. The specific process for starting a Bitcoin IRA might vary according to which provider an individual chooses.
A Bitcoin IRA provider can help investors buy cryptocurrency to add to their portfolio while also safeguarding the funds for them.
Get up to $1,000 in stock when you fund a new Active Invest account.*
Access stock trading, options, auto investing, IRAs, and more. Get started in just a few minutes.
*Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
Is a Bitcoin IRA Account Safe?
The safety of a Bitcoin IRA account depends largely on how a Bitcoin IRA company stores the private keys to an investor’s crypto.
It is widely acknowledged that to be truly safe, keys must be held off-line in cold storage and secured using some kind of multi-signature (multi-sig for short) method. This ensures that the funds can’t be accessed by any hacker on the internet, and that multiple access methods are required to retrieve any funds.
Multi-sig works kind of like a safety deposit box, where there are two physical keys — one held by the bank and one held by the customer. There must be at least two means of user verification before funds can be accessed. A basic example would be a customer having to answer emails from two separate email accounts. More complicated methods might involve some kind of photo or voice identification in addition to multiple emails and an additional key held by the custodian of the funds.
Is Bitcoin Investing Safe?
There is no situation in which Bitcoin investing is “safe” — there is always a risk of loss with the current state of volatility in Bitcoin and cryptocurrency in general.
As far as investment gains or losses are concerned, investors will have to decide for themselves whether or not long-term Bitcoin investing falls within their comfort level and their goals.
That said, the prospect of incredible returns seems to sway more and more investors. Since 2009, the price of one Bitcoin in U.S. dollar terms has risen well over 1,000,000%, making Bitcoin the best performing asset of the decade — and in history.
While past performance is never a guarantee of future outcomes, if this trend were to continue, it could potentially mean substantial returns for investors over the long term.
Are Bitcoin IRAs Right for You?
As with any retirement planning, it’s important to take into consideration your time horizon (how many years it will be until you retire) as well as retirement goals, budget, and other personal factors. For individuals who feel comfortable with the general volatility of cryptocurrency in general, and Bitcoin in particular, a Bitcoin IRA might be one way to bring an additional layer of diversity to a retirement portfolio.
But for investors with low risk tolerance, a Bitcoin IRA is more financially risky than opening a traditional IRA composed of stocks and bonds.
A Bitcoin IRA is an IRA that can hold a variety of assets like gold, real estate, or Bitcoin.
In recent years, several service providers have stepped in to fill the market need for people wanting to add Bitcoin to their retirement accounts.
SoFi Invest refers to the two investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA(www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of SoFi Digital Assets, LLC, please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Bank, N.A.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Stock Bits is a brand name of the fractional trading program offered by SoFi Securities LLC. When making a fractional trade, you are granting SoFi Securities discretion to determine the time and price of the trade. Fractional trades will be executed in our next trading window, which may be several hours or days after placing an order. The execution price may be higher or lower than it was at the time the order was placed.
2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.
First Trade Amount