Can I Invest in Crypto through my retirement plan?

By December 22, 2020 Crypto Taxes

While crypto currency has proven to be extremely volatile, it has also made one thing abundantly clear: the potential is enormous. This has led many young professionals and investors to ask the question:

“Can I Invest in crypto currency through my retirement plan?”

Yes!

Let’s start with the 401k, because the answer there is a simple “no.” Obviously, 401ks are sponsored by an employer and usually managed by a third-party administrator. The employee, or investor, has almost zero power over the holdings of the plan. They can sometimes input risk preferences or equity-or-debt preferences, but can’t choose which stocks or bonds their 401k holds, let alone crypto currency.

The only way to invest in crypto with a retirement plan is through an Individual Retirement Plan (IRA). There are two ways of achieving this:

  1. Use funds in your IRA to purchase shares of a crypto-related index fund.

Although this does not allow you to directly purchase and hold crypto currency in your account, it does allow you to place your money into an investment vehicle which will rise and fall with the value of crypto. There are several index funds which track an index that is comprised of leading crypto currencies. By purchasing shares of these funds, you can get diversified exposure to bitcoin and other leading crypto currencies.

Some examples of index funds that are crypto related are Bitwise 10 (BITW) and Grayscale Bitcoin Trust (Btc). These index funds serve the sole purpose of allowing investors to get exposure to crypto currencies through traditional investment vehicles like IRAs.

This method of crypto investment is indirect, but simple.

2. Use a self-directed IRA to purchase crypto currency

It used to be much more complicated to invest in crypto through a self-directed IRA. It would require the use of both an SDIRA and single-member LLC, with careful tip-toeing around the IRS rules of comingling between the two. But in recent years, it has become much more simple.

In recent years, there have emerged several new SDIRA custodians which allow you to easily open an account and purchase crypto currencies directly. Some of the companies that offer this include BitIRA, Equity Trust, and Bitcoin IRA.

There are advantages and disadvantages to this method as well. The pros are that digital SDIRAs directly allow you to purchase and hold crypto in your retirement account. It is also a relatively simple and easy process. The disadvantage is that with digital IRAs that hold Bitcoin, there are increased requirements for security and reporting on behalf of the custodian, and those expenses are passed on to you in the form of fees.

Do you homework to determine the best retirement plan for you, and talk to your CPA about which of these best fits your goals and your tolerances for fees and risk.

Colby Cross, CPA

Author Colby Cross, CPA

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