Last Updated on February 5, 2020
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 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 IRA Investors
Bitcoin is back in the news after surpassing $11,000 this week, the highest price for Bitcoin in 15 months – this is a $2,000 increase from last week. But Bitcoin isn’t alone – most cryptocurrency, such as Litecoin, has skyrocketed, which is likely due to the buzz surrounding Facebook’s upcoming cryptocurrency, Libra. Because “Bitcoin is Back”, many IRA investors are interested once again to invest their retirement funds in a potentially lucrative investment.
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 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 the 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 15%-25% 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. You now have the ability to invest in Bitcoin and other cryptocurrency, as well as trade the cryptos anytime.
Additionally, you will have the ability the hold the cryptos you purchase inside a digital or hard wallet. You control the wallet, because you’re the manager of the LLC.
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 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 Trust is the only custodian with a strategic partnership with a leading cryptocurrency exchange. This allows its clients to have the IRA funds invested directly into the exchange without the need for a broker or LLC.
The way the Direct Exchange solution works is as follows:
- The cryptocurrency investor will open a self-directed IRA account with a custodian.
- You will then transfer or rollover his or her retirement funds tax-free to the new IRA custodian.
- The custodian will then transfer the funds directly to a leading crypto exchange where the IRA holder has opened a crypto account. The account will be in the name of the IRA custodian for the benefit of the IRA holder. For example, John Doe is the authorized representative on the account, but the owner of the account is John Doe’s IRA.
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 control cryptocurrency wallet – control over private key
- 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.
- Again, you must have more involvement with the Direct Exchange Solution.
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.
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 the form to speak with a self-directed retirement specialist. If you’re interested in learning more about the Direct Exchange Solution through IRA Financial Trust, contact us today.