Using a IRA or 401(k) to Invest in Cryptocurrency

You can use a self-directed IRA to invest in Bitcoin and other cryptocurrencies. However, options are limited with a 401(k). We discuss your options for investing in cryptocurrencies with a retirement account.^[1][2][3]

NOTE: Below I’ve done my best to research IRA and 401(k) crypto options, I however I’m not a Retirement Plan Administrator, I am a researcher. So you’ll want to double check with a professional before taking the final leap.

First off, what you can invest in with an IRA or 401(k) is defined not by what is allowed, but what is not allowed.

In general the only things not allowed are life insurance contracts and collectibles (art, jewelry, etc.).

Meanwhile, cryptocurrency, being an investment property for tax purposes, is not expressly prohibited as an investment option, and thus can be considered an allowable investment for retirement accounts.

While the above is true, you need specific types of accounts to be able to invest due to other rules that end up prohibiting cryptocurrency (specifically the problem is crypto doesn’t trade on government sanctioned exchanges and thus doesn’t meet a ERSIA standard).

Given the above, without going into detail, the bottomline here is that you need either a self-directed IRA or a Solo 401(k) to invest in cryptocurrency through a retirement account.

The self-directed IRA one is a little more straight forward, what you need to do is 1. either set up an IRA limited liability company (LLC) to purchase “investment property” (in this case crypto), or 2. set up a Bitcoin IRA with a custodian like BitcoinIRA.com (and then of course pay them fees).

The solo 401(k) one is a little more murky, but it is the same basic gist. If you are in a position where you would not be disqualified from investing in real estate AKA an investment property like crypto (if your plan documents allow for this), you should be able to manage to set up a Solo 401(k) that allows crypto (see solo 401(k) real estate investments for an idea of how that would work). Meanwhile, again, you can set up a Bitcoin Solo 401(k) with a custodian like BitcoinIRA.com (and the of course pay them fees).

So in all of the above cases we have we have the same general problem, that is we are dancing within the rules to make crypto as an investment property fit, and to do that we need a custodian (our LLC or an entity like BitcoinIRA), and we need to pay fees and file forms, and we need to follow very specific rules or the IRS gets mad.

So is it doable? YES. Is it easy? NO or simple… not really (and when it is, it sure ain’t cheap).

One cool thing is there is another choice. Although it isn’t directly investing in crypto, you can buy the crypto stocks GBTC and ETCG with any IRA or 401k as long as your broker allows it (although these can trade at a gnarly premium and could potentially be delisted at some point down the road; the limited amount of options comes with its own drawbacks).

Thus, there are a number of ways to directly or indirectly invest in cryptocurrency with an IRA or 401(k) and a few different ways you can structure your retirement accounts to do so depending on which type of investments you want to make…. but, every method has its pros and cons.

With all of that in mind, it is hard to fully recommend any of these methods, with the custodian you are paying rather high fees, with an IRA LLC you are taking on a good deal of responsibility, paying LLC fees, and following very specific rules, with GBTC you have to be savvy to avoid paying the premium.

Thus, all these options are high level in their own way and have fees and traps that can eat into your profits.

Ok, that said, here are some additional things to consider before investing:

1. You can always pay the fee to withdraw money early from retirement and then buy your own crypto. In some cases doing this with a small portion of funds, if say you have a low taxable income this year, might make sense. Do you want to pay a Custodian 15%, or do you want to own your own crypto with no extra rules and pay the 10% early withdrawal penalty? Neither of those options is great, but you should at least consider your options.
2. Cryptocurrency is insanely volatile, and that isn’t generally an attribute of an asset you want in your retirement account as a long term investment. Cryptocurrency could be a smart asset to add to your retirement as a long term investment in small amounts over time, but it is a risky bet. Any given price you will pay today could end up being cheap or expensive in retrospect. There is no way to know, because the market is still so young.
3. The most important cryptocurrency to own long term could change. Today Ethereum and Bitcoin are the go-tos for a portfolio, but that could change with time. It would be more than frustrating to build a position in one of these only to have the top coin of tomorrow be another coin. One could diversify, but all cryptocurrencies around today have the same potential problem.
4. If you actively manage your account, solo or with the assistance of manager, then cryptocurrency starts making more sense. In other words, if you are willing to trade out of cryptocurrency and go into dollars on the next high, then your crypto investment makes more sense. The chances that we will see higher prices than we see today at some point in the next few months or years is probably a more solid bet than betting that any price paid now will pay off in 5, 10, 30 years from now. Digital currency is a rather new thing, it could be a passing fad (likely it isn’t, but we can’t rule that out yet). NOTE: The fees and custodial nature of some of the retirement account options can make actively trading crypto next to impossible, and thus there is an extra problem here.
5. Cryptocurrency can get expensive quick, try to avoid the mania and keep the percentage of your total investable funds spent on cryptocurrency reasonable. It is generally not a great move to put all your eggs in one basket. Cryptocurrency is such a basket. The market tends to move in lockstep, so diversifying within the crypto sphere is likely to do very little to keep you diversified in terms of risk.
6. Companies that help you manage your funds will charge fees. No one does anything for free, if you have a self directed IRA focused just on cryptocurrency, you’ll be paying fees for that. If you have a fiduciary to help invest in a range of assets, at least you’ll only pay one set of fees for that.
7. Storing cryptocurrency and keeping it safe isn’t the easiest thing in the world, there is room to mess up and lose everything. You can’t insure a Bitcoin. You’ll need to come up with a storage solution or pick an entity that offers a storage solution. If you lose a Bitcoin, it is gone forever. There are some things to consider here beyond just whether cryptocurrency will increase in value or not. The companies focused directly on crypto IRAs can help with storage, but again you’ll be paying fees (also, if the company ends up closings its doors some day, there are potential problems there too; all these IRA crypto companies are new!)

NOTE: Cryptocurrency as an investment is a bit like Silver and Gold in some respects. Both Silver and Gold generally thought to be solid long term investments, but both have had some serious price bubbles which made them less attractive as long term holds at certain times. Do me a favor and look at Gold prices in 1980 to today. Are we in a 2011 – 2013 for cryptocurrency? Or are we in 1980? The answer to that question matters. Are we in a period where the price is bubbling higher than it will be at for a while, or are we on a wave that will be dwarfed by a bigger wave in the future? We don’t know, and that makes cryptocurrency a difficult investment to recommend in the moment (if and when the price steadies, that could change). If you do choose to invest long term, consider averaging in over the course of years (rather than going all in in the moment).

1. How to Use a Solo 401(k) Plan to Buy Cryptocurrency. Irafinancialgroup.com
2. How to Use a Self-Directed IRA LLC to Buy Cryptocurrency. Irafinancialgroup.com
3. Bitcoins Are All the Rage, but Not for the 401(k). BNA.com.