Menu Close

Retirement Funds to Buy Bitcoin – 5 Things to Know

retirement funds to buy bitcoin by IRA Financial

Using Your Retirement Funds to Buy Bitcoin

If you want to use your retirement funds to buy Bitcoin, know that it can prove quite volatile and risky. However, retirement accounts like an IRA or 401(k) can purchase Bitcoin. The IRS holds that cryptocurrencies are treated as property for federal income tax purposes. Like stocks and real estate, you can purchase cryptocurrency with your retirement funds.

Before you use your retirement funds to buy Bitcoin, here are five things you should consider:

1. Do your research

Do not use your retirement funds to buy Bitcoin or any cryptocurrency until you research. Unlike stocks, the cryptocurrency market is 24/7. Additionally, it’s important to understand the technology behind Bitcoin and other digital tokens, like Ethereum or Litecoin. Although somewhat complicated, it helps you make an educated decision about which cryptocurrency or cryptocurrencies to purchase.

Furthermore, it’s beneficial to understand how the cryptocurrency exchange works. This will aid you in how to buy, exchange or sell cryptocurrencies with your Self-Directed IRA or 401(k) Plan.

2. Understand the risks

Cryptocurrencies are extremely volatile. If you choose to use your retirement funds to buy Bitcoin and other digital tokens, beware of the financial risks of the investment. Understand that you can risk a potential total loss of your investment. Therefore, always proceed the cryptocurrency investment environment with caution.

3. Broker vs. “checkbook control”

You can purchase cryptocurrency in two ways. First, you can purchase through a Bitcoin IRA Broker/Custodian Controlled approach. The second way is the Wallet Control IRA LLC solution. Both structures have their advantages and disadvantages.

Bitcoin IRA Broker

With the Bitcoin IRA broker approach, when cryptocurrencies are purchased by the broker, they’re stored in a digital wallet. This wallet typically requires multiple signature verification. However, the IRA investor doesn’t control the cryptocurrency wallet or the private key that comes with it.

Additionally, you must deal with the broker to sell or exchange the cryptocurrency, and you cannot do it online. You will incur commissions on each side of the transaction.

Wallet Control IRA LLC

With the Wallet Control IRA LLC solution, the Self-Directed IRA is invested in a newly established LLC that the IRA owns and the IRA holder (you) manage. Next, the IRA LLC will establish a cryptocurrency exchange and link the exchange account to the new IRA LLC account. As manager, the IRA holder will have the power to purchase and hold cryptocurrencies online or through a digital or hard wallet.

Additionally, as manager, you have control over the private key that associated with the cryptocurrencies the IRA LLC owns.

The following are a few considerations to make before using your retirement funds to buy Bitcoin or other cryptocurrency.

4. Beware of excessive fees

If you choose the IRA Broker/Custodian Controlled approach, you must purchase the cryptocurrency through brokers associated with the Bitcoin IRA facilitator. Investors often make cryptocurrency purchased by phone and are limited to investing in crypto that the broker offers. Additionally, the broker often charges commissions between 10%-25%. This is for the purchase and sale of the IRA that owns the crypto.

Compare to the Wallet Control IRA LLC, where you, as manager of the LLC, has the ability to purchase and sell cryptocurrency on any exchange you choose. This allows you to have more control over the costs. Most cryptocurrency exchanges charge transaction fees between 0.15%-2%.

5. Control your own private key

In a virtual currency system, a user creates a “wallet”. A wallet is a digital computer file that contains information to send and receive units of a virtual currency. When the wallet is created, a random wallet address is created. This is a unique alphanumeric identifier, which is similar to an e-mail address in concept.

The wallet will have a public key and a private key. The public key is essentially the public address of the wallet. On the other hand, the private key is only known to the wallet holder.

Without the private key, you will not have access to the wallet and, thus, will not be able to access the cryptos in the wallet. On the flip side, anyone who has your private key essentially owns the content of the wallet. This is why it is so important to keep your private key confidential, safe and secure. Do not reveal it to anyone you do not wish to have access to your wallet. Think of it like your ATM card pin number.

By using a broker IRA approach, you will be giving up your Bitcoin private key to third-parties. You will have no control over the private key. Whereas, with a “wallet control” Self-Directed IRA LLC solution, you have control over the Bitcoin private key as the manager of the LLC. You will be able to control the cryptocurrency exchange account and decide how to hold or transfer the Bitcoin.

Q for You

How will you use your retirement funds to buy Bitcoin? Through a broker or with “wallet control”? We want to hear from you!

To learn more how to use retirement funds to purchase cryptocurrencies, such as Bitcoin, please contact a self-directed IRA specialist at 800-472-0646.

Share the knowledge
Posted in Self-Directed IRA