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The Fundamentals Of Bitcoin IRAs Under The Guidance Of A Custodian

iPhne on a clipboard with 2021 printed on it with scattered bitcoins

Bitcoin is a way to diversify a retirement portfolio with the potential for high returns, albeit the chance also for exceptional volatility and risk. Technically speaking, there isn’t a designated “Bitcoin IRA,” but instead a self-directed IRA in which you can hold bitcoin or other types of cryptocurrencies. 

A self-directed individual retirement account is a much more flexible account because an investor can carry alternative holdings like precious metals and property for which cryptos and bitcoin have the designation. In order to set up one of these plans, a custodial service provider is necessary for the plan set up, purchase, and security of the Bitcoin IRA in storage. Some firms specialize in these.

Finding a reputable, trusted custodian is critical as investors can be subject to scams in the industry since the field is relatively new. The handful of reputable firms are few, meaning research is necessary to find the right company to guide you in the most beneficial direction for your retirement future. The thing to remember is even the best custodian can offer no guarantees.

The Fundamentals Of Bitcoin IRAs Under The Guidance Of A Custodian

Under a self-directed IRA canopy, if you will, investors have the freedom to select from a vast array of alternative asset classes from which to purchase, including gold and other precious metals, real estate, and cryptocurrency like bitcoin. These are items excluded from a Traditional IRA plan.

Choosing these alternatives diversifies a retirement portfolio and has the potential for enhancing gains. Still, it also puts the portfolio at a much higher risk, particularly with bitcoin due to the extreme volatility.

In general, the self-directed IRA holding bitcoin operates in the same way as a standard account, but the investment of your funds is in bitcoin as opposed to stocks or mutual funds. The option is available for you to select from either a Roth or a Traditional self-directed plan with the same tax-associated advantages and capped contribution limits – $6000 / $7000 50+ for 2021. Go to

Those who are self-employed or own a small business can take advantage of the SEP or Simple accounts or a 401k solo plan. These all offer much higher limits for contribution funds. There’s even the potential for rollovers from standard IRAs into self-directed accounts.

These accounts might appear in many ways to operate vastly similar to a regular IRa. Still, it’s essential to discern the differences that play key roles, especially since these are not necessarily something for which you can do your business all in one place. 

That is generally the case with a brokerage firm allowing the setup of the conventional accounts plus security buying/selling all in one firm. There might be more self-involvement with bitcoin. Some factors to be mindful of:

The Custodial Firm

A requirement with a self-directed IRA holding crypto is to enlist the services of a custodial firm to set up the account. The custodian ensures that the plan follows the IRS rules and regulations, plus those set by the government. In a traditional situation, the bank or a financial institution would play this part for the regular individual retirement accounts.

The custodial representative will manage the plan and also ensure the safety and security of the IRA in storage since investors cannot hold these in their homes. Custodians can’t make guarantees with bitcoin IRAs, and there is minimal formal regulation. These investors take these at their own risk. Open to learning what happens when all 21 million bitcoins are mined.

The Exchange

A crypto exchange is responsible for managing the bitcoin and other cryptocurrency trades. These are also referenced as “digital currency exchange” or “DCE”). 

They work in a similar fashion to the stock exchange as a venue where digital or virtual coinage trades are active. That’s the place where cryptocurrencies like bitcoin, Ethereum, and other examples are purchased. 

Generally, a custodian will guide you toward the ideal exchange with whom to work. Sometimes that can be limiting based on their preferences or companies with whom they partner. It’s essential to work with a custodian who will allow you the opportunity to trade with a third-party exchange of your choice.

Cup of Coffee and Bitcoins on a Pink background

Storage Safety And Security

Cryptocurrencies like bitcoin need protection, with most providers of these IRAs providing proprietary security options, so the digital coins have protection against theft after purchase.

Some companies will offer a full selection of services to their investors and some variations of the select options. It’s wise to make sure you get as many services to meet your needs as possible. That includes the ability to choose with whom you do your exchanges and how the company will secure your investments.

A priority above all else is researching to ensure that you secure the optimum custodian with whom to set up an account and help guide you through the process. 

While no custodial service provider will be able to make any guarantees, a reputable, experienced representative will do all they can to help their clients meet their retirement needs. You can count on testimonials, references, and Better Business Bureau ratings to attest to this trait.

Final Thought

An important component when working with a firm or custodian is to learn the fees and understand them. Some might not be accessible via the website as readily as you might imagine. 

The suggestion is also to consider these investments (self-directed IRAs holding bitcoin) as a minimal portion of the retirement portfolio, maybe even test the waters outside of that realm first. Again, if you do decide to include it, keep it small.

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