How to Invest in Cryptocurrency with a Self-Directed IRA

Are you looking to invest in self-directed individual retirement account (IRA) cryptocurrency but aren’t sure how to go about it?

Investing in cryptocurrency is a relatively new and exciting way to generate significant returns on your investment. With the advent of self-directed IRAs (SDIRAs), you can now invest in cryptocurrency within an IRA account’s tax-advantaged structure to prevent future financial insecurity.

Notably, 19% of U.S. households have a self-directed Roth IRA, allowing them to hold SDIRA Roth cryptocurrency. Read on to learn more about investing in cryptocurrency with a SDIRA.

6 Steps to Investing in Crypto with a Self-Directed IRA

You must take specific steps to ensure transparency with the Internal Revenue Service (IRS) and compliance with IRS cryptocurrency investment rules.

Below are six steps to investing in crypto within a SDIRA account.

1. Research a reputable IRA custodian

A reputable IRA custodian is a financial institution that holds and manages assets in an IRA on behalf of the account holder.

When investing in cryptocurrency with a SDIRA, choose a custodian that has experience in handling digital assets and understands their unique risks and regulations.

Some reputable IRA custodians that offer self-directed options for investing in cryptocurrency include The Entrust Group and Equity Trust Company.

You can check reviews on sites such as Trustpilot for due diligence.

2. Open your self-directed IRA

A SDIRA is an individual retirement account that allows the account holder to make alternative investments independently rather than relying on a custodian to make investment decisions.

To open a SDIRA, you will need to find a custodian or administrator that specializes in self-directed accounts and is willing to hold alternative assets such as cryptocurrency.

Once your SDIRA is ready, you can use the funds in the SDIRA account to invest in SDIRA crypto.

3. Fund your account via a rollover, transfer, or cash contribution

You can fund your account through a rollover, transfer or cash contribution. A rollover is when you move money from an existing retirement account, such as a 401(k) or traditional IRA, into a SDIRA.

A transfer is when you move money from one IRA to another without taking possession of the funds. Taxable cash contributions occur when you contribute to your SDIRA using cash from your funds.

4. Form and register an LLC

The next step to investing in crypto with a SDIRA is to form and register a Limited Liability Company (LLC). To do this, file articles of organization with the state in which the LLC is based and pay a filing fee.

The LLC will be the entity through which the SDIRA will hold and invest in crypto assets. Start by choosing a name for your LLC that meets your state’s naming requirements and is not already in use.

Next, file articles of organization with your state’s business registration agency. The specific requirements and fees will vary depending on which state you form the LLC.

Obtain an Employer Identification Number from the IRS by filing Form SS-4 online or by mail. Once you have a LLC and SDIRA, you can transfer funds from your IRA into the LLC and use those funds to invest in crypto.

5. Setup a checkbook IRA with funds from IRA

A checkbook IRA is a SDIRA that allows the account holder to have check-writing capability and checkbook control over investments without requiring the consent of a custodian.

It enables the account holder to invest in alternative assets such as private mortgages, tax liens, private companies, and real estate.

6. Start investing in crypto using a crypto IRA company, private wallet, or crypto exchange

To invest in cryptocurrency with a SDIRA, you can use a crypto IRA company, a private wallet or a crypto exchange as the last step.

A crypto IRA trust company assists you in setting up a SDIRA and helps you navigate investing in cryptocurrency within the IRA.

A private wallet can store your cryptocurrency investments. Crypto exchanges aid in buying cryptocurrency.

What is a Self-Directed IRA?

A SDIRA is an IRA that allows the account holder to invest in a broader range of assets beyond traditional stocks, bonds, and mutual funds.

Blockchain technology is the underlying infrastructure of cryptocurrency exchange transactions and ensures the security of the transactions in a block.

These assets can include real estate, private companies, and precious metals. The account holder has more control over the investments within the account, but is still subject to the same income tax rules and contribution limits as a traditional IRA.

3 Best Self-Directed IRA Crypto Companies

Below are the three best SDIRA crypto IRA companies.

Bitcoin IRA

Bitcoin IRA is a trading platform helping individuals trade cryptocurrencies in their IRA. With the platform, you can buy and sell Bitcoin, the world’s largest and most widely-used cryptocurrency.

iTrustCapital

iTrustCapital is a digital asset investment platform that allows individuals to invest in precious metals, Bitcoin, and other cryptocurrencies.

The platform offers a variety of investment options, including gold, silver, and Bitcoin, and provides for easy buying, selling and trading of these assets.

Additionally, iTrustCapital provides resources and market analysis to help users make informed investment decisions.

BitIRA

BitIRA provides digital asset IRAs backed by cryptocurrencies, such as Bitcoin and Ethereum. BitIRA helps individuals set up and manage these accounts and offers a variety of resources to help customers understand the benefits and risks of investing in digital assets.

Benefits of Using a Self-Directed IRA to Invest in Crypto

Below are the benefits of using a SDIRA to invest in cryptocurrency.

• Tax-free investing: A SDIRA allows individuals to invest in alternative assets, such as cryptocurrency, within the tax-deferred structure of an IRA. Income earned on the crypto investments within the SDIRA will be subject to capital gains tax only after fund withdrawal in retirement.
• Capital appreciation: Capital appreciation means that the value of the assets held in the IRA, such as cryptocurrency, increases over time, resulting in a higher return on investment (ROI).
• Portfolio diversification: A SDIRA allows the individual to invest in a range of assets, including cryptocurrencies, in addition to traditional investments such as stocks, bonds and real estate. Diversifying one’s portfolio can spread risk and increase returns over time.
• 24/7 trading: Using a SDIRA to invest in cryptocurrency allows for 24/7 trading as the account holder has complete control and autonomy over their investments. It provides more opportunities to buy and sell at favorable prices and allows for more frequent trades.
• Custodial insurance: Using a SDIRA to invest in cryptocurrency provides the custodial insurance benefit of protection against theft or loss of the assets held within the account.
• 100% ownership: A SDIRA allows an individual to have complete control over their retirement funds, including the ability to invest in alternative assets such as cryptocurrency.

By using a SDIRA to invest in crypto, the individual can gain full ownership of the investment and the potential benefits of appreciation and dividends.

Risks of Investing in Crypto

Here are a few risks to consider when investing in cryptocurrency through an IRA.

• Cryptocurrencies are volatile: Cryptocurrencies are highly volatile, and their prices can fluctuate rapidly and unpredictably, making them a high-risk investment as the value of a particular cryptocurrency can drop significantly in a short period.
• Potential for hacks or theft: Cryptocurrency investing involves a higher risk level than traditional investments due to the market’s decentralized and largely unregulated nature. Hackers and thieves target exchanges, digital wallets, and individual investors to steal cryptocurrency through various means, such as phishing scams, malware and social engineering.
• Speculative investment: Investing in cryptocurrency carries a high level of speculative risk. The value of cryptocurrencies can be highly volatile and fluctuate significantly in a short time.
• Not backed by an asset: Investing in cryptocurrencies carries a high level of risk because tangible assets or government guarantees do not back them.

The supply and demand on the open market determine the value of a cryptocurrency.

Should I Invest in Crypto in with a Self-Directed IRA?

Investing in cryptocurrency with a SDIRA is an intelligent way to gain exposure to this emerging asset class while also taking advantage of the tax benefits offered by an IRA.

Conduct thorough research and consult a financial advisor before making a decision.

FAQs

Here are the frequently asked questions regarding SDIRA cryptocurrency.