Did you know that picking the right fee structure to make your Self-Directed IRA or Solo 401(k) cryptocurrency investments can literally make a six-figure difference.  For example, paying a Self-Directed IRA custodian a flat annual fee versus a 1% annual valuation fee can cost you hundreds of thousands of dollars over the years.

Even though Bitcoin is labeled as a “cryptocurrency”, from a federal income tax standpoint, Bitcoin and other cryptocurrencies are not considered a “currency.”   On March 25, 2014, the IRS issued Notice 2014-21, which for the first time set forth the IRS position on the taxation of virtual currencies, such as Bitcoin.   According to the IRS Notice, “Virtual currency is treated as property for U.S. federal tax purposes.” 

Now that you know you can invest in cryptocurrencies with your retirement funds let’s examine the most common fees associated with IRA or 401(k) related investments.

1. Flat Annual Custodian Fee.  Most IRA custodians have some form of an annual IRA custodian fee relating to services involved in administering the IRA. However, IRA Financial is one of the few Self-Directed IRA custodians that does not have any transaction or asset valuation fees.  For example, IRA Financial flat annual IRA custodian fee is $400, and does not include any transaction fees or wire or check fees.
   
2. Flat Annual Custodian Fee + Transaction Fees. The majority of all self-directed IRA custodians have a flat annual custodian fee, which also includes transaction fees.  For example, fees such as an asset purchase fee, wire or check fee, are common.
   
3. Annual Custodian Fee based on Asset Value.  Numerous Self-Directed IRA custodians impose an annual asset valuation fee based on a percentage of the value of the IRA assets.  For example, a 1% annual asset valuation fee based on the value of the IRA account.  Furthermore, it is quite common for many Self-Directed IRA custodians to impose an annual fee as well as an asset valuation fee on a Self-Directed IRA account.

Impact of Self-Directed IRA Fees on Crypto Investments

Investments in Self-Directed IRA accounts are meant to be long-term investments.  For example, one cannot take a distribution from an IRA account until the age of 591/2 without paying a 10% early distribution penalty.  Accordingly, many investors view cryptocurrency investments as a smart investment for retirement account holders because they of the long-term growth potential.  Because many believe that the real value of cryptocurrencies will not be unlocked for some years and IRA investments are intended to be for the long-term. making crypto investments in an IRA quite logical. Coupled with the fact that retirement account owners do not pay tax on any crypto gains, using a self-directed IRA to invest in cryptos makes tax sense.

The amount your Self-Directed IRA or Solo 401(k) plan can have a significant impact on how much your investment grows over the years.  This is especially true about cryptocurrencies.

For example, assume Jen sets-up a self-directed IRA with IRA Financial and pays $360 a year flat for 20 years with no asset valuation fees. Also, assume Jen was able to generate a 10% annualized rate of return and the one-time commissions paid to buy the cryptos were the same in both cases. On an investment of $100,000, after 20 years Jen would have paid $7,200 of fees irrespective of the value of the cryptos.  Whereas, if Jen elected to work with a Self-Directed IRA custodian that charged a flat annual fee of 1%, and assuming, a 10% average annual rate of return, after 20 years, Jen would have lost $117,428 in fees.

Since the fee is based on the value of the cryptocurrency investment, as the crypto investment goes up so does the fees paid.  For example, after year 7 when Jen’s crypto account is worth $200,000, she would owe $2,000 in fees, whereas, with IRA Financial, her flat fee would not change based on the underlying asset value. Furthermore, an argument can be made that charging a Self-Directed IRA an asset valuation fee for an investment made and directed by the client is somewhat unethical, since the IRA custodian provided no investment or asset management services.

Furthermore, charging asset valuation fees on self-directed IRA investments can be viewed as a conflict of interest on the part of the custodian since they are requesting the client to provide a fair market value of the account each year for IRS form 5498 purposes.  Charging fees on that value could cause some clients to under-report their IRA asset values.

Conclusion

Fees matter.  Choosing the wrong Self-Directed IRA custodian for your cryptocurrency investment can end up costing you tens of thousands of dollars over the long-term. Hence, it is important to do your research when searching for a Self-Directed IRA custodian for your cryptocurrency investments.  Below are a few tips to keep in mind:

• Make sure the Self-Directed IRA custodian is a member of RITA – the Retirement Industry Trust Association
• Does the Self-Directed IRA custodian charge asset valuation fees based on a percentage of your account value?
• Does the Self-Directed IRA custodian charge transaction fees on your investment?
• Does the Self-Directed IRA custodian allow you to hold the cryptos in a cold wallet?

Investing in cryptocurrencies with your Self-Directed IRA or Solo 401(k) plan can be risky because of the market volatility.  However, working with the wrong Self-Directed IRA custodian when investing in cryptocurrencies can significantly impact your cryptocurrency investment returns.

Did you know that there are different types of Crypto IRAs you can open? Learn more: Types of Self-Directed Crypto IRAs