Tag: Self Directed IRA

Bitcoin IRA? – Slow Your Roll…

Bitcoin IRA?

A lot of people new to crypto are starting to ask if rolling their IRA into a Bitcoin IRA is an easier, safer way to invest. Of course, brokers like to advertise this, but buying crypto through an IRA involves more red tape and expenses than their ads reveal. Admittedly, the cryptocurrency space can be intimidating. However, investing in it through an IRA will not make understanding crypto any easier. In case you were thinking that using an IRA to invest in crypto would be an easy way to pick up some Bitcoin, let?s dispel that assumption right away.

There?s no such thing as a Bitcoin IRA

First of all, understand that a “Bitcoin IRA” doesn’t really exist. In order to hold Bitcoin in an IRA, you must enroll in a Self Directed IRA that handles Bitcoin. Self Directed IRAs are their own special creatures altogether and are normally sought after by those who are already investing. If you don?t really know what a Self Directed IRA is, check this quick overview Self Directed IRA – Is It For Me?

There are generally two types of Self Directed IRAs in which you can hold Bitcoin or cryptocurrencies:??

  • Custodial Self Directed IRA
  • Self Directed IRA LLC

Custodial Self Directed IRA

In a custodial Self Directed IRA, your broker does not manage your investments for you. You are the one who has to direct the purchases and trades. So you need to study cryptocurrencies in the same way that you would study a company before deciding to purchase its stock. Simply put, if you’re not interested in the technology and use cases of crypto, invest in something you’re interested in instead. If you are interested but are new to cryptocurrency trading and investing, welcome to a crazy, fun and extremely risky space. Get ready to do some research. You can start with this overview, but at?the end of the day, you’ve got to ask yourself a serious question:? am I willing to risk my hard-earned retirement savings on a highly speculative investment?

An IRA does not free you from the responsibility of studying your investment.

After you set up your custodial Self Directed IRA and roll your funds into it, you tell your broker what coins you want to buy. Your broker takes your order and then executes it through a third party. So, you talk to your broker, and your broker talks to someone else who buys the crypto. This adds additional steps. As cryptocurrency prices change in seconds, it?s quite possible that a coin you want to buy changes in value before your order can be executed. This would make trading crypto through a custodial IRA extremely frustrating.?

In addition, many Bitcoin IRA custodians hold both your digital wallet and your private keys. This means you don’t have direct control over them. You have to go through your custodian to access your funds. If you know anything about the history of Bitcoin, you will see the irony here. The very first sentence of Satoshi Nakamoto’s Bitcoin whitepaper from 2008 reads:

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. – First sentence of?Satoshi Nakamoto’s Bitcoin whitepaper

Custodial Self Directed IRAs aren?t cheap. Most charge a 15% brokerage fee on your assets in addition to other fees. Many Bitcoin brokers like to point out that crypto exchange fees of 1.5% to either cash in or cash out from fiat currency on exchanges would already take 3% of your cut, and they will absorb that for you. But we?re comparing 3% to 15%. On an IRA valued at $100,000, that?s a $12,000 difference.

Self Directed IRA LLC

Alternatively, you could open a Self Directed IRA LLC. In this case, you would set up the IRA with a custodian and step up an LLC. You direct your custodian to use your IRA to purchase the LLC. The IRA then holds the LLC, and the LLC holds the assets. Your IRA becomes the Sole Managing Member and you control the checkbook to the LLC’s business account. It’s from this account that you can purchase and trade cryptocurrencies within your IRA. This is why some call the Self Directed IRA LLC a Checkbook IRA.

A Self Directed IRA LLC allows you complete control over your investment choices and executions. You also hold your own wallet and secret keys. But…with more control also comes more responsibility. It would be wise to seek legal counsel for both setting up your LLC and making sure that your investments are done within the scope of the IRS Rules and Regs, or your IRA could be disqualified, your assets taxed and you could face additional penalties. The IRS is very touchy with retirement funds.

Brokers generally charge a flat fee and an annual yearly fee for a Self Directed IRA LLC. This can be a lot cheaper than a percentage of your assets over time if your crypto makes big gains. However, in addition to those fees, you’ll need to pay the annual fee to the Secretary of State where you incorporated your LLC, and the fees for legal counsel to make sure you are drawing within the lines. Account holders must provide an accurate annual valuation of their holdings. This could be especially tricky with crypto.

Why hold crypto in an IRA at all?

Taxes. Like a traditional IRA, you will not have to pay capital gains taxes on your assets. This allows your assets to grow more because there is more to grow. When you’re 59 1/2 years old, you can pull from your IRA and it will be taxed as income which is generally at a lower rate. You could also choose a Roth IRA in which case you would be taxed on your contributions now rather than later, and be able to pull your money out tax-free.?

Who would benefit from a Bitcoin IRA?

Most people would not benefit from a Bitcoin IRA. It’s expensive and volatile.

But, savvy investors who already have enough assets in their IRAs to risk alternative investments, and who are interested in the crypto market, could save big on capital gains.

  • Custodial Self Directed IRAs are expensive and would be better for long-term holders who believe the gains can outpace the fees than for traders who need complete control of their trades.?
  • Self Directed IRA LLCs?are for people who already know what they’re doing?and have the money to do it.

If you still want to roll your retirement savings into this, remember to diversify. Cryptocurrencies are extremely volatile. This IRA should only be a small?part of your portfolio -?the high-risk part. How much of your portfolio should be high risk? That depends on your age and risk tolerance. But in general, no more than 5% of your total liquid net worth should go into high-risk, speculative investments.

So, slow your roll, take your time and research. If you’re looking at this but haven’t played with crypto yet, buy a bit of coin with money you can afford to lose?(seriously, it can go up and down by 50%+ in a day) and learn what it?s about first.

If you’re not interested in the technology, or you don?t understand it, why would you put your nest egg in it? ????

Retirement tip😕 Got a 401k? Make sure you understand your investment.

Photo by?Andre Francois

What the lawyers make us say: Well Wallet is an informational platform for personal finance, and unless specifically stated otherwise, the content is provided to you without charge. Well Wallet is not a financial planner, broker, or tax advisor. We cannot provide any advice for your specific financial situation. Our goal is to help you understand how to better manage your finances and how your finances affect your life goals, but we can never make any guarantees about your financial future (or present).?The material here is meant for informational purposes only.? It should not be considered legal or financial advice.? See our Terms & Conditions for more information.

Tags: , , , , , , , , , ,

Self Directed IRA – Is It for me?

What is a Self Directed IRA?

A Self Directed IRA is like a traditional or Roth IRA, but it allows you to invest in different things like real estate, precious metals, debt, businesses, and even racehorses and Bitcoin.?Since your investments are up to you, you need to know what you are doing. Because the investment options are so broad, there are a lot of rules that you have to follow to avoid getting in trouble with the IRS. If you violate these rules, you could be subject to tax penalties that eliminate any tax advantages that a Self Directed IRA offers, or even lose the balance of the IRA.

PROS
  • Flexibility and diversification.
  • Gives you the opportunity to pursue assets that have the potential for higher gains than traditional IRAs.
  • Can offer tax advantages for high-net worth individuals who have specific investment goals in investments that they understand.
  • May offer asset protection for bankruptcy.
CONS
  • Not offered at most traditional brokerage firms.
  • The companies that specialize in them have higher fees.
  • Requires research and investment experience.
  • Tricky tax and legal regulations may require the additional expense of professional tax and legal professionals.
  • Certain investments such as businesses are hard to value. (You are required to report the value of your IRA annually.)
  • You can be exposed to more risk than traditional IRAs.
  • If not structured properly, you could lose your tax advantage status with the IRS and be on the hook for penalties.
  • Self Directed IRAs are subject to Unrelated Business Income Tax. If your IRA holds a business, you could be subject to this.

Who is it for?

Self Directed IRAs are clearly not designed for the average individual. In fact, you may have a tough time finding a custodian that will even open one for you with your $5,500 annual contribution. Usually, they are sought after by those who already have enough assets in their IRAs to risk alternative investments. In short, Self Directed IRAs require a lot of cash and investment savvy. This does not necessarily mean you have to be rich to pursue a Self Directed IRA, but you do have to understand what you are doing to the extent that you can clearly see how a Self Directed IRA might or may not benefit you.

How do I start?

If you think you have a good reason to look into a Self Directed IRA, your first step is to find an IRA custodian that offers them. You can’t just put assets you already own in a Self Directed IRA. A custodian must purchase them on your behalf. Your choices of custodians are somewhat limited because Self Directed IRAs require extensive research, legal and IRS paperwork that most brokers don’t want to deal with. Here is an updated list of custodians that offer Self Directed IRAs.

You need to remember that the custodian does not make decisions for you. They can’t offer investment advice. You will also want a professional legal or tax advisor to help you make sure you are following the rules. If you don’t follow the rules, not only could you lose the tax advantage, but you could even lose the balance held in the IRA. Keeping this in mind, the actual steps to opening a Self Directed IRA are relatively simple.

  1. Choose a custodian.
  2. Fill out their paperwork and pay their fees.
  3. Rollover and/or contribute funds to the IRA.
  4. Start investing.

Alternatively, you can open a Self Directed IRA LLC. This type of IRA allows you complete control over your assets directly. You set up an LLC and direct your custodian to use your IRA funds to purchase the LLC. The LLC then holds the assets and you control the checkbook. This type of Self Directed IRA is often called a Checkbook IRA. If you see an investment you want in your IRA, you can write a check for it from LLC business account.

While a Checkbook IRA gives you more freedom and makes investing quicker and easier, it can also get investors in trouble for exactly those same reasons. In most cases, you will need to hire an attorney to advise on the creation of the LLC and the IRA. And because there is no custodian to review your investments, you’ll probably need to consult legal counsel from time to time to make sure you are keeping it clean, as well as to help you submit the annually required valuation of the IRA’s assets. If you violate the IRS Rules and Regs knowingly or unknowingly, you can be subject to fines and penalties.

The bottom line?

If you believe that a Self Directed IRA could benefit you, be prepared to do your research. Make sure that you have clearly defined goals that prove how using this IRA can bring you prosperity in the future, rather than complications. Decide how much control you want and how much counsel you should hire to protect yourself from costly mistakes. For certain investment strategies, the Self Directed IRA could be quite lucrative. But there is nothing done-for-you about it. And it costs a bit change to set up.


Retirement tip😕 Got a 401k? Make sure you understand your investment.

Photo by?Ahmad Ossayli

What the lawyers make us say: Well Wallet is an informational platform for personal finance, and unless specifically stated otherwise, the content is provided to you without charge. Well Wallet is not a financial planner, broker, or tax advisor. We cannot provide any advice for your specific financial situation. Our goal is to help you understand how to better manage your finances and how your finances affect your life goals, but we can never make any guarantees about your financial future (or present).?The material here is meant for informational purposes only.? It should not be considered legal or financial advice.? See our Terms & Conditions for more information.

Tags: , , , , ,