How to Buy Bitcoin in an IRA: What You Should Know

It’s possible to buy bitcoin in an IRA, but you need a special IRA account called a self-directed IRA.

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Updated May 13, 2024
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Investing for retirement is an important step to setting yourself up to be financially secure in your golden years. Chances are you’ve heard of individual retirement accounts (IRAs) and traditional retirement investments, such as stocks, ETFs, and mutual funds.

These accounts don’t typically allow you to invest in less common asset classes, such as cryptocurrency. However, a special type of IRA may give you ways to buy bitcoin if you want to diversify your portfolio beyond the traditional asset classes. Here’s what you should know about how to buy bitcoin in an IRA.

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What is a bitcoin IRA?

You may have heard of a special type of IRA that allows you to use your retirement savings to invest in bitcoin. This special IRA type is a self-directed IRA or SDIRA.

“Normal” IRAs allow you to invest in traditional retirement account assets. These usually include stocks, bonds, mutual funds, and ETFs.

Self-directed IRAs allow you to invest in alternative assets not usually allowed in normal IRAs. This can include digital currencies such as bitcoin, physical gold, real estate, and more. Self-directed IRAs are not usually offered by traditional brokerage firms and are instead provided by more specialized firms.

Self-directed IRAs that allow you to invest in bitcoin specifically may commonly be referred to as bitcoin IRAs. In fact, a company called BitcoinIRA offers these self-directed IRAs, but they’re not the only option you have.

How does a bitcoin IRA work?

Each self-directed IRA may work slightly differently depending on who you use to set up your account. In general, self-directed IRAs are managed by a custodian. The custodian ensures the self-directed IRA meets IRS guidelines and holds your investments.

You’ll also need a way to buy cryptocurrency. Some custodians have their own systems or partnerships to purchase cryptocurrency. Others may allow you to use an exchange of your choice.

Finally, you need a way to hold bitcoin securely. Cryptocurrency must be stored in a wallet. Some crypto wallet options include hot wallets, which are connected to the internet, or cold storage wallets, which are not connected to the internet. Many custodians have secure storage options you can use as any crypto you purchase for your self-directed IRA must be held within the IRA and not by you personally.

In some cases, all three of these parts are managed by the same company. In other instances, you may have to combine services from different companies to invest in bitcoin in an IRA.

Types of IRAs

In general, there are two types of IRAs to choose from for individuals wanting to open their own accounts: Roth IRAs and traditional IRAs.

Both types of IRAs require you or your spouse to have earned income to contribute to them. They have contribution limits of $6,500 for 2023, which increases to $7,500 if you’re age 50 or older. In 2024, these limits are $7,000 people younger than 50 and $8,000 for people 50 or older. This contribution limit applies across all traditional and Roth IRAs, including self-directed versions.

Traditional IRAs allow you to potentially get a tax deduction for your contributions to the account. Earnings in the account grow tax-free. However, you may have to pay ordinary income tax on distributions, and early withdrawals may result in taxes and penalties.

Traditional IRAs may limit how much of your contributions you can deduct on your taxes based on your income and filing status.

Roth IRAs do not give you a deduction upfront. Like a traditional IRA, earnings grow tax-free. Qualified withdrawals after age 59 1/2 when you’ve held a Roth IRA for at least five years are both tax and penalty-free in most cases. You may have to pay taxes and penalties on some early withdrawals from these accounts, too.

Roth IRA contribution limits may be reduced based on your circumstances. These can be impacted by the retirement accounts you have available to you or your spouse, as well as your modified adjusted gross income and tax filing status.

Deciding which type of IRA to use for a self-directed bitcoin or other crypto IRA depends on your tax situation and future expectations. People who expect large gains and higher tax rates in the future may prefer learning how to buy bitcoin in a Roth IRA. Others who believe they may pay a lower tax rate in retirement may prefer a traditional IRA.

Other IRAs exist within small businesses, including SEP IRAs and SIMPLE IRAs. Unless you’re self-employed or a small business owner, you do not usually have the option of setting these up for yourself.

Bitcoin IRA pros

Purchasing bitcoin in an IRA can have the following benefits:

  • Shield bitcoin gains from taxes with a Roth IRA: Since funds in Roth IRAs are added after taxes, any gains on bitcoin in the account will be tax-free as long as you withdraw the money according to the rules after age 59 and 1/2. This allows tax-free growth and it’s a way to avoid capital gains tax on cryptocurrency.
  • Diversify your retirement portfolio: Retirement portfolios usually hold traditional assets such as stocks, bonds, ETFs, and mutual funds. You can add diversification to your portfolio beyond these traditional assets using a self-directed IRA to invest in bitcoin.
  • Security: The blockchain technology behind Bitcoin makes it less likely that your retirement funds would be compromised (but not impossible).

Bitcoin IRA cons

Using an IRA to buy bitcoin has the following drawbacks:

  • Potentially higher fees: Self-directed IRAs require more work to maintain than a normal IRA account. For this reason, custodians may charge higher fees to self-directed IRA account holders.
  • Higher risk: Bitcoin is a relatively new investment vehicle. While the digital currency has wildly increased in value to this point, its future is unknown.
  • Potentially high account minimums: Some IRA accounts allow you to start investing with very minimal amounts of money. However, companies that allow self-directed IRAs to invest in bitcoin may require at least a few thousand dollars for a minimum investment.
  • Volatility: Bitcoins prices have historically swung wildly. If you need to sell crypto from your IRA at an inopportune time, you may find yourself selling your bitcoin at a loss rather than experiencing the gains you were hoping for.

How to buy bitcoin in an IRA

Figuring out how to buy bitcoin in an IRA depends on your specific circumstances. However, here’s a general guideline to follow.

  1. Identify potential self-directed IRA options.
  2. Compare options to find the one that best fits your needs.
  3. Set up a self-directed IRA with that company.
  4. Deposit the funds required to buy bitcoin within your self-directed IRA (or add rollover funds from another IRA).
  5. Use your self-directed IRA’s preferred method to purchase bitcoin.
  6. Have the bitcoin stored according to the self-directed IRA custodian’s guidelines.

When purchasing bitcoin through a self-directed IRA, watch out for the fees you may incur in the process. In particular, compare the fees you have to pay to purchase bitcoin within an IRA to purchasing bitcoin outside of an IRA. Don’t forget about ongoing management fees.

BitcoinIRA.com Benefits

  • Take advantage of the growing crypto movement
  • Avoid inflation and capital gains tax on your investments.
  • Get world-class security and up to $100 million in insurance

Alternatives to a bitcoin IRA

A bitcoin investment in an IRA may be a good start for those interested in investing in cryptocurrency for retirement. However, once the account is set up, people may feel overly exposed to one cryptocurrency if they only invest in bitcoin. As long as your custodian allows it, you may decide to diversify into other types of digital assets like Ethereum, Bitcoin Cash, or Litecoin to spread out the risk of any one cryptocurrency rapidly decreasing in value.

You could also consider other alternative investments in your self-directed IRA like precious metals or real estate.

Using a self-directed IRA to invest in bitcoin may not be something you want to go through the effort to set up at all, though. If that’s the case, you still have other ways you can invest in an IRA.

First, your existing IRA may have the option to invest in newly created bitcoin ETFs. While these ETFs don’t usually own actual bitcoin and instead own bitcoin futures, they give you exposure to the price movements of bitcoin.

If the tax advantages of an IRA are your main concern, you can always invest in traditional assets usually held within an IRA. Investing in mutual funds, ETFs, individual stocks, or even bonds may fit your needs better than investing in bitcoin, depending on your risk tolerance and goals.

Another option is investing in bitcoin outside of an IRA. You can set up an account with one of the best cryptocurrency exchanges like Coinbase and start buying whichever cryptocurrency you prefer. You won’t get the tax advantages of an IRA, but you can still get the financial impact of investing in bitcoin, and it can still be a part of your retirement planning.

FAQs

Can I use my IRA to buy bitcoin?

You likely cannot use an IRA you already have set up to buy bitcoin or another cryptocurrency directly. Instead, you have to open a self-directed IRA that allows you to invest directly in cryptocurrency, such as bitcoin. A bitcoin ETF may be an option within your current IRA, but these ETFs generally don’t hold actual bitcoin. Instead, they usually invest in bitcoin futures.

How do I transfer my IRA into bitcoin?

If you wish to transfer your IRA into bitcoin, you first need to identify a self-directed IRA that allows you to invest in bitcoin. Once you have identified a self-directed IRA, consult with the IRA provider to roll over your current IRA balance to the self-directed IRA. Once the balance is rolled over, you can use the funds to invest in bitcoin.

What is the best place to buy cryptocurrency?

The best place to buy cryptocurrency depends on several factors. Some of these factors include:

  • The cryptocurrency you want to purchase
  • How you want to hold your cryptocurrency
  • The transaction fees involved for buying and selling cryptocurrency
  • Security of the platform
  • Trading tools and options available
  • User experience

Based on your needs for the above features, narrow down cryptocurrency trading platforms to the one that best fits you. Our guide to the best cryptocurrency exchanges is a good place to start exploring platforms.

Bottom line

Investing in bitcoin within an IRA is possible if you’re willing to set up a self-directed IRA. These IRA accounts may have higher fees and minimum initial investment requirements but allow you to invest in certain cryptocurrencies. If you’re not sure whether a self-directed IRA is right for you, consider talking to a trusted financial advisor.

If you’ve decided investing in bitcoin using a self-directed IRA isn’t the best option for you, you still have other options. You can learn how to buy cryptocurrency in a normal account as long as you’re prepared for the tax consequences when you sell your assets. Alternatively, you can start investing money in a regular IRA with more traditional assets, such as an ETF.

Author Details

Lance Cothern

Lance Cothern, CPA is a personal finance writer and founder of MoneyManifesto.com. Lance's work covering several personal finance topics has been published in U.S. News & World Report, Business Insider, Credit Karma, Investopedia, and several other publications.