As a tax attorney and author of the leading book on Bitcoin IRA, How to Use Retirement Funds to Purchase Cryptocurrencies, I am often asked about the benefits of using a Self-Directed IRA or Solo 401(k) plan to buy Bitcoin or other cryptocurrencies.
If you’re a Bitcoin investor, you want to invest in Bitcoin and other cryptocurrencies without high commissions. It’s likely that you also want control over the private key, which is vital to the purchase and holding of cryptocurrencies securely.
Now there is a great way to invest in Bitcoin, reduce your Bitcoin IRA custodial fees and control your private key – simply reduce the middle man.
- Bitcoin and other cryptos still remain a popular alternative investment choice among retirement savers
- There are several ways you can use retirement funds to invest
- The direct exchange solution is the best way to lower Bitcoin IRA custodial fees
Bitcoin IRA Investors
The price of Bitcoin has fluctuated wildly since the start of COVID, and as of December 2022 sits at around $16,500. But Bitcoin isn’t alone – most cryptocurrency, such as Litecoin and Ethereum, have also fluctuated madly over the last several year. However, as a result of the fallout from the FTX cryptocurrency exchange and the ongoing crypto winter, many Bitcoin and crypto investors are waiting for the right time to jump back into the crypto market.
Many IRA investors understand that an IRA is able to purchase cryptocurrencies, such as Bitcoin without triggering the prohibited transaction rules. The IRS confirms that cryptocurrencies will be treated as property for federal income tax purposes as per IRS Notice 2014-21. As a result, just like stocks and real estate, you can purchase Bitcoin with your retirement funds.
So the question becomes, what are the best ways to lower Bitcoin IRA custodial fees?
There are generally three ways you can purchase Bitcoin with IRA funds:
- The broker/custodian controlled approach
- Wallet Control IRA LLC solution
- Direct Exchange Solution
Each structure has both advantages and disadvantages of using them.
1. Bitcoin IRA Broker/Custodian Controlled
With the Bitcoin IRA Broker/Custodian Controlled approach, you must purchase the cryptocurrency through brokers associated with a Bitcoin IRA facilitator. Typically, a cryptocurrency investor will open a Self-Directed IRA account with a custodian.
You, the IRA investor, will then transfer or rollover your retirement funds tax-free to the new IRA custodian. The custodian will then transfer the funds to a broker who will purchase the cryptocurrencies for the IRA investor. The cryptocurrencies are typically purchased by phone. In this structure, you will be limited to investing in the cryptocurrencies the broker offers.
When the broker purchases the cryptocurrencies, they are stored in a digital wallet, and that typically requires multiple signature verification. However, you do not control the cryptocurrency wallet or the associated private key.
Additionally, if you want to sell or exchange the cryptocurrency, this requires interaction with the broker. You cannot complete this online. Furthermore, you have to pay commissions on each side of the transaction.
Will this structure help lower your Bitcoin IRA custodial fees? Let us take a look at the advantages and disadvantages of using a Bitcoin IRA broker/custodian.
- Very Hands-off
- No need to interact with cryptocurrency exchanges
- High fees – commissions can range from 5%-15% of IRA funds invested.
- You have no control over the cryptocurrency wallet.
- No access to wallet private key.
- You lack the ability to trade cryptocurrencies 24/7, which is how the cryptocurrency market operates.
- All cryptocurrency trades must go through the broker, which is typically done by phone and only during business hours.
- IRA custodian fees are based on the value of the IRA assets invested.
If you wish to lower your Bitcoin IRA custodial fees, as you can see, the high fees associated with a broker or custodian make it an unpractical option.
2. Wallet Control IRA LLC
The Wallet Control IRA LLC allows you to establish an IRA account with a self-directed IRA custodian. You then roll over your retirement funds tax-free to the new custodian. The IRA assets will then be transferred to a newly established limited liability company (LLC) tax-free in exchange for 100% interest in the newly established LLC.
The LLC will be wholly owned by the IRA, and you become the manager. Since the individual retirement account owns 100% of the LLC, it is a disregarded entity for tax purposes. The advantage of this is that all income and gains from the cryptocurrency investment flow back to the IRA without tax.
You, as manager of the LLC, will then open a cryptocurrency exchange account at the exchange of your choice. Next, you will link the account to the IRA that the LLC bank account owns. The IRA LLC funds will then be wired to the cryptocurrency exchange account, which is to be opened in the name of the LLC. You now have the ability to invest in Bitcoin and other cryptocurrency, as well as trade the cryptos anytime. In addition, by using a Wallet Control IRA LLC solution you will be able to open an account at a foreign crypto exchange in the name of the LLC and purchase XRP and other cryptos not available on many U.S. exchanges.
Probably the biggest advantage of buying and holding cryptos in a Wallet Control IRA LLC solution is that you will have the ability to hold the cryptos you purchase inside a digital or hard wallet that you hold off the internet. You control the wallet, because you’re the manager of the LLC. In light of the FTX bankruptcy and some of the lingering macro crypto exchange problems surfacing, more and more crypto IRA investors are looking for a way to hold their crypto private keys for security purposes.
Let’s take a look at whether the Wallet Control IRA LLC structure will help reduce the cost of your IRA custodian fees.
- You can invest in all cryptocurrencies.
- Provides the ability to control costs by selecting cryptocurrency exchange of your choice.
- You’re in control of the cryptocurrency wallet and control over private key.
- Ability to buy, sell, or exchange cryptocurrencies at anytime, including XRP, through a PC or mobile application.
- Flat low annual IRA custodian fee – no asset valuation fees.
- LLC set-up cost
- There’s more involvement on your part – you must open the cryptocurrency exchange and control the crypto wallet
From a financial perspective, this structure is more preferable than using a broker or custodian. However, keep in mind that the LLC set-up cost can be as high as $1,000. If you’re willing to set up an LLC and wish to lower fees associated with Bitcoin investments, we recommend the Wallet Control IRA LLC over a Bitcoin broker or custodian.
3. Direct Exchange Solution
IRA Financial has a partnership with leading crypto exchange Bitstamp that allows our clients to have their IRA or 401(k) funds invested directly into the exchange without the need for a broker or LLC.
Bitstamp was founded in 2011 and aims to bring secure access to crypto to all corners of the world. Bitstamp supports 65+ cryptocurrencies.
Bitstamp operates under a payment institution license in the EU, BitLicense in New York, and we’re subject to regular audits by the Big Four, the four largest accounting firms in the world. Bitstamp is building the financial infrastructure of tomorrow through transparency for all. As others are keeping an eye on us, you don’t have to. 98% of Bitstamp’s assets are stored offline, crime insurance against theft or fraud, and 2 Factor Authorization.
Bitstamp is present in over 100 countries, with offices in UK, Luxembourg, USA, Singapore, and Slovenia. Now catering to over 4 million customers across the globe.
How Does the IRAFI-Bitstamp Crypto Solution work?
Best and cheapest way to buy
Step 1: Open an IRA or Solo 401(k) account at IRA Financial Trust.
Step 2: Move IRA or 401(k) funds to new IRA Financial account tax free.
Step 3: Funds are moved From IRA Financial to Bitstamp
Step 4: Begin buying and selling cryptos 24/7 on your own without the need for any broker or the use of an LLC on the IRA Financial app.
With the Direct Exchange Account solution, you control the purchase and sale of Bitcoin (and other cryptocurrencies) directly. In other words, you do not need a costly broker or LLC. In addition, the cryptos will be held in the name of the IRA custodian. This will be in the benefit of the IRA holder. As a result, it’s much cleaner from a tax reporting perspective.
- No requirement to use broker
- No requirement to use LLC
- Ability to buy, sell, or exchange cryptocurrencies at anytime through a PC or mobile application
- Flat low annual IRA custodian fee – no asset valuation fees
- You can only purchase the most popular cryptocurrencies.
- The cryptos must be held on the Bitstamp exchange.
Which Structure will Save You More?
If you want to use your IRA funds to invest In Bitcoin and other cryptocurrency, you have options. From a cost perspective, the Direct Exchange solution is seemingly the most cost effective solution to lower any Bitcoin IRA fees. However, if you want total freedom, the LLC solution may be the best way to invest.
Get in Touch
Do you still have question about how you can lower your Bitcoin IRA custodial fees that we did not cover in this article? Feel free to contact IRA Financial Group directly at 800-472-0646. You can also fill out a contact form to speak with a self-directed retirement specialist.