Investing in Bitcoin through Self-Directed IRA
How gold, bitcoin, and other cryptocurrencies can diversify your retirement portfolio.
If you are like me – a mid-level corporate America professional, your exposure to retirement investing most likely comes to employer-sponsored qualified plan, commonly known as 401 (k). In addition, some of us investing in 529 plans, which facilitate accumulating savings for children’s education payments. There are also individual retirement accounts (IRA) – traditional and Roth.
Traditional IRA is similar to a 401 (k) account in that it allows you to contribute your pre-tax dollars and pay taxes at the time of the retirement. Roth IRA allows you to contribute after-tax dollars and pay taxes only on earnings. These plans provide ample opportunity to invest in mutual funds, exchange-traded funds (ETFs) and sometimes even in individual stocks and bonds.
Until recently it was enough for me. But then I started to follow Max Kaiser on Twitter.
Max Keiser talks about fiat money and Bitcoin
Max is a host of the RT’s “Keiser Report”. He’s been talking about gold, fiat currencies (currencies backed by government promise) and bitcoin for a quite some time. His message got me thinking – how long will fiat-based currencies hold their value? I have to diversify my investments into non-fiat assets: gold and Bitcoin. In addition to not being a fiat currency, Bitcoin showed incredible growth: it grew from $700 to $19,000 in 2017. Many respected investors believe that bitcoin may grow up to $100,000. How can I invest in bitcoin, was the first thought that came to my mind? I want to diversify my portfolio and also want to capture the unbelievable upside potential.
Coinbase has more customers that Charles Schwab
After a quick research on the web, I understood that the most common way for the average person to get exposure to bitcoin is through Coinbase. Coinbase allows you to buy bitcoins and other cryptocurrencies with cash and then store it in the Coinbase wallet. An article in New York Times describes the increase in a number of accounts at Coinbase during recent Bitcoin rally. “The number of people with Coinbase accounts has gone from 5.5 million in January to 13.3 million at the end of November, according to data from the Altana Digital Currency Fund. In late November, Coinbase was sometimes getting 100,000 new customers a day — leaving the company with more customers than Charles Schwab and E-Trade”.
Coinbase works fine with after-tax dollars. What if I want to add Bitcoin to my retirement portfolio with before-tax dollars? Like many of us, I have much more funds accumulated in my 401(k) plan.
Self-Directed IRA allows you to invest in non-traditional investment types such as precious metals, real estate, tax liens, cryptocurrencies, etc. SDIRA is for those investors who wish to have greater variety in their overall retirement portfolio. In a typical IRA, you can invest in mutual funds and ETFs that are offered to you with the preselected choice of funds and fund families. This adds additional scrutiny in investment selection and provides additional controls against fraud and other risks. In Self-Directed IRA alternative investments provide higher potential returns but also carry additional risks. Therefore, Self-Directed IRA suits more financially savvy investors.
But by its nature Self-Directed IRAs (SDIRA) is same as traditional or Roth IRA and regulated similarly. The difference is the type of investment it holds, it requires more paperwork and has higher fees.
Here are 6 steps you should take to open a self-directed IRA.
1. Create a list of several self-directed IRA providers.
My Google search gave me the following companies:
1) Broad Financial
2) Equity Trust
3) Strata Trust Company
4) Madison Trust
5) Pensco Trust
6) Kingdom Trust
7) Regal Assets
8) Advantage Gold
9) Bitcoin IRA
10) Entrust Group
2. Short-list providers that allow Bitcoins
Here are some that do accept bitcoin: Bitcoin IRA, Regal Assets, Pensco Trust Company
3. Check whether you meet their minimum investment amount requirement
Many companies require a minimum investment. Typically, this information is not advertised on their websites. Here is what I found from secondary sources: lowest minimum investment was offered by Advantage Gold $5,000 and Regal Assets, largest was with Bitcoin IRA $20,000.
4. Consider IRAs reputation and history in business
Many IRA providers are affiliated with larger financial institutions, for example, Pensco is part of OPUS bank. Other companies are relatively young, but already established a solid reputation in the industry. For example, Regal Assets was established in 2009. It does have an A+ rating with Better Business Bureau.
5. Consider fees
Self-directed IRA administrators and custodians have various fees associated with accounts: account opening fees, maintenance fee. Fees start from $400 and sometimes are waived for the first year. As you see Self-directed IRA fees vary from company to company. Usually, there are bookkeeping charges, transaction fees, statement fees, account opening and termination fees, etc. Fees can be based on a number of various assets you have and/or on the value of your portfolio. Altogether it may come to several hundred dollars per year.
6. Fund your IRA
The last step would be to rollover funds from your 401 (k) or IRA into the Self-Directed IRA. You will have to contact your existing plan provider with instructions as to where they should mail the check. Make sure it is a rollover and the check is payable to the custodian for the benefit of you.
Consider custodian’s credibility and specialization
When looking for a custodian I looked at several factors – what standing does it have with Better Business Bureau (BBB) – are there any complaints what kind of complaints there? Is there a recurring theme that can be observed? I also looked the company history – how long has it been in the industry, how and by whom has it been established. I’d also search on Google to see what kind of talk goes around those companies.
Create a Limited Liability Company (LLC)
Having funds directly with a custodian allows you to invest in a broader array of investments, however, it requires significant paperwork for each transaction and usually is time-consuming. To overcome this complexity, you would need to create a Limited Liability Company (LLC) and have you appointed as a non-compensated manager of the LLC. This is the typical arrangement nowadays, called a checkbook IRA. The LLC uses funds from the IRA, and the manager (You) writes an LLC check to acquire assets needed. This process expedites the asset purchase, while the funds used are still qualified dollars. You will need to work with an attorney to establish the LLC for the SDIRA. Many custodians can recommend you one. But you can definitely choose your own. (Write more about LLC attorneys).