You can’t escape the hype. It seems that everywhere you turn, people are talking about bitcoin. But few people understand what bitcoin is and how it works.
Bitcoin is a peer-to-peer system where transactions typically take place directly between users. It works without a single or central administrator, unlike the U.S. dollar, which is produced and managed entirely by the U.S. Treasury and the Federal Reserve. Bitcoins can be exchanged for services, products and various currencies. As we have seen in recent years, the currency can also be used for investment purposes.
One method of investing in bitcoin that has been increasing in popularity is the use of an individual retirement account (IRA). Is this legal? How is the account established?
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Investments made using traditional IRAs are typically handled solely by the financial institution with which the IRA is established. The self-directed IRA (SDIRA), however, allows investors to purchase any asset permitted by law. It is capable of holding both conventional assets (stocks and bonds) and alternatives, such as gold and bitcoin.
That said, there is technically no such thing as a bitcoin IRA. There is only the SDIRA that can be used for investing in the so-called cryptocurrency. If you’re considering this option, here are some essential facts to consider.
1. The Self-Directed IRA landscape is evolving.
SDIRAs are flexible, allowing for diverse investments. As many investors are getting bored with traditional investments, such as stocks and mutual funds, more investment variety is being introduced to the market. This evolution of the SDIRA landscape includes the introduction and growing popularity of the idea of investing in bitcoin.
2. Bitcoin has increased in value.
Bitcoin valuations have skyrocketed. The usage of bitcoin has grown, as well, with over 100,000 vendors currently accepting bitcoins as a form of payment. Since a single bitcoin has gone from being valued at 8 cents in 2010 to well over $6,000 today, it makes sense that it is being used more and more as a form of investment. But beware, as a correction could come at any time.
3. The viability of bitcoin IRA investments is questionable.
While it is known that bitcoin values have increased beyond any early predictions, it is unknown how much longer these increases will continue. In fact, should you be looking to invest your IRA in bitcoin, it would be wise to keep it a very small amount of your entire portfolio. It is still very speculative. Make sure to consult with your financial adviser on your portfolio allocation.
4. The legality of bitcoin is currently being debated worldwide.
Some countries, such as Australia and Canada, explicitly permit bitcoins and bitcoin transactions, while others, including Iceland, have strictly prohibited the cryptocurrency. China has allowed the holding and trading of bitcoins but banned the participation of its financial institutions in these activities. Some countries, such as Australia and Canada, explicitly permit bitcoins and bitcoin transactions, while others, have strictly prohibited the cryptocurrency. China has recently banned bitcoin trading, which forced many bitcoin operators to shut down or move their servers offshore.
Bitcoin has been permitted in the United States. However, debate is ongoing, such as whether or not any restrictions should be placed on the cryptocurrency. The IRS in 2014 published guidance stating that it “does not approve IRA investments,” but the agency doesn’t explicitly prohibit them either, which brings us to our next fact.
5. The IRS does not prohibit IRA investments into Bitcoins.
Regarding legality in the United States, investors can find comfort in the lack of specific legal restrictions. Currently, the Internal Revenue Service only prohibits IRA investments in life insurance and collectibles such as stamps, artwork, metals, coins, etc. This stipulation means that you are technically allowed to use your SDIRA to invest in bitcoin, as it is not specifically named in either of the prohibited investment categories.
The legality, stability and investment potential of bitcoin have all been intensely debated — often without clear answers or solutions. In the end, it is up to you to decide what to invest in using your SDIRA.
If you plan to invest in bitcoin using an SDIRA, make sure you do so through a self-directed custodian that does not restrict your investments solely to cryptocurrencies. This way, you can use your SDIRA to act on any significant investment that comes your way.
But be cautious. Bitcoin is very speculative and only should be invested in with careful consideration.
-
What’s Happening With Trump’s Tariffs? Key Updates for April 2025Tariffs Donald Trump continues to use tariffs as a central tool of his trade policy. Here’s where tariffs stand now.
-
New South Carolina Income Tax Cut Might Eat Your CashState Taxes South Carolina’s flat income tax bill could have the majority of residents paying higher income taxes. Find out how.
-
Winning Strategies for Financial Advisers as Clients' Lives EvolveHow can the wealth management industry help make life transitions easier for the adviser and the client?
-
How Advisers Can Establish Relationships With HNW ProspectsThese strategies can help to build influence with high-net-worth individuals, who are often looking to an adviser for insight rather than solutions.
-
When Your Car Is Fixed, But You've Still Got the ProblemThis reader's experience with trying to get squealing brakes fixed under an extended warranty mirrors what others are experiencing these days.
-
Seven Questions to Ask When Evaluating Personal Loan OptionsTaking out a personal loan too hastily could lock you into unfavorable terms with an untrustworthy lender. Ask these questions before signing anything.
-
The Three Biggest Fears Keeping Retirees Up at NightHere are the steps you can take to put those fears to rest and retire with confidence so you can relax and enjoy the life you've planned.
-
What Can a Donor-Advised Fund Do for You? (A Lot)DAFs and private foundations go about helping charities (and those who donate) in different ways. Each comes with its own benefits and restrictions to navigate.
-
Estate Planning When You Have International AssetsEstate planning gets tricky when you have assets and/or beneficiaries outside the U.S. To avoid costly inheritance mistakes, it pays to understand the basics.
-
Three Essential Estate Planning Steps to Protect Your Nest EggAfter dedicating years to building your wealth and securing your future, make sure your assets are protected and your loved ones are provided for in the future.
