Bitcoin IRA Custodial Fees
What are the benefits of using a Self-Directed IRA to purchase Bitcoin and other cryptocurrencies? There are a couple of factors to consider: commissions and control of the private key, which important to buying and holding Bitcoin securely.
Now, there is a great way to invest in Bitcoin and other cryptos, lessen your Bitcoin IRA custodial fees and control your private key – get rid of the middle man!
Bitcoin IRA Investors
Bitcoin has been back in the news the last several months. As of this writing, its price is hovering around $10,000. Not only that, but other cryptos, such as Litecoin and Etherium are seeing an upward trend. Recently, Facebook unveiled its white paper for it’s own stablecoin, called Libra. Because of this, many investors are looking to get back into the crypto investing business. This is especially true for those looking to use retirement funds for these investments.
You probably know that you can buy alternative investments, like Bitcoin, with a Self-Directed IRA. Further, investing in Bitcoin with one will not trigger the prohibited transaction rules. In 2014-21, the IRS confirmed that cryptos are considered property for tax purposes. This means that it’s perfectly acceptable to purchase Bitcoin with retirement funds. It’s basically like investing in stocks or a real estate project.
Now, what is the easiest way to lower your Bitcoin IRA custodial fees? There are three ways to purchase Bitcoin with your IRA:
- A Broker or Custodian
- A Hard-Wallet Control IRA LLC
- Directly from an Exchange (like Coinbase)
There are some pros (and cons) of each of them.
1. Broker or Custodian Controlled IRA
When using a broker or custodian controlled IRA, you purchase the cryptos through a broker, who is associated with the IRA facilitator.
You would open and fund a Self-Directed IRA with the custodian. Typically, you would roll over previous IRA (or other retirement) funds to fund the account. The custodian will then transfer the funds to a broker to purchase the Bitcoin for you, the IRA investor. The caveat is that you are only limited to the cryptocurrencies that the broker offers. If they don’t offer Litecoin, you cannot invest in it.
Once the broker purchases the cryptos you want, they are then stored in a digital wallet, which generally needs multiple signature verification. You do not control the wallet nor the private key that is associated with it. Further, when it comes time to sell or exchange your cryptos, you need to go through the broker. Also, you generally cannot do this online. You will also have to pay commissions on both sides of the transaction.
What are the advantages and disadvantages using this approach? And, will the lower your Bitcoin IRA custodial fees?
- It’s very “hands-off” approach
- No interaction with cryptocurrency exchanges
- High fees – commissions can range from 15%-25% of IRA funds invested.
- No control over the digital wallet.
- No access to the private key.
- All trades go through the broker. Therefore, you can’t buy and sell whenever you want. Crypto Markets don’t have a closing bell!
This will not lower your Bitcoin IRA custodial fees. However, the hands-off approach may appeal to some investors.
2. Wallet Control IRA LLC
A Wallet Control IRA LLC works similar to one that is custodian controlled. You establish a Self-Directed IRA with a custodian and fund it. The assets are then transferred to a limited liability company, or LLC, tax-free in exchange for a 100% interest in the LLC.
The LLC is then completely owned by the IRA and you act as the manager. Since the IRA owns 100% of the LLC, it’s now a disregarded entity for tax purposes. Therefore, all the gains from your Bitcoin investment will go back into the IRA, without taxes.
Since you are the manager of the LLC, you can open an account at any cryptocurrency exchange. You will then link that account to the IRA. Funds will be wired to your exchange account and will give you the ability to invest in Bitcoin (or any crypto of your choosing). You can do so anytime you want, without the consent of the custodian or broker.
Lastly, you now have complete control of the digital wallet that holds your investments. You also control the private key since you are the manager of the LLC.
Obviously, this will reduce your Bitcoin IRA custodian fees…
- No limit on what cryptos you can invest in
- Control the costs by choosing which exchange to use
- You are in complete control of the digital wallet and associated private key
- Freedom to buy and sell whenever you want, either online or through a mobile app
- Flat low annual IRA custodian fee
- The cost to set up the LLC
- Very much hands-on, since you control the wallet and where and when to buy/sell/trade your crypto investments.
This structure is generally preferred as you now have complete control of the investments you make and the time for which you make them. However, it’s important to note that setting up an LLC can be costly (up to around $1,000). The Wallet Control IRA LLC structure will limit fees on your transactions, which makes it a better bet over the long haul.
3. Direct Exchange
IRA Financial Trust is the only custodian with a partnership with a leading cryptocurrency exchange. Our clients can have his or her IRA funds directly invested in the exchange. There’s never a need for a broker or an LLC.
Again, the investor (you) set up a Self-Directed IRA with a custodian (IRA Financial). You then fund the account as usual. The funds are then transferred directly to our partner exchange, where you have opened an account. The account will be in the name of the custodian FBO the IRA holder.
Obviously, you will control the purchase, sale and exchange of your Bitcoin directly. You do not need to go through a broker and you do not need to set up an LLC. Further, the Bitcoin will be held in the name of the custodian for your benefit which results in cleaner tax reporting.
- No requirement to use broker or setup an LLC
- You control the digital or hard wallet and the private key
- Buy, sell, or exchange cryptos anytime online or with a mobile app
- Low annual IRA custodian fee with no asset valuation fees
- You can only purchase the most popular cryptocurrencies.
- As with the Wallet Control IRA, you are responsible for all transactions
Which Structure will Save You More on Bitcoin IRA Custodial Fees?
If you want to use your retirement funds to invest In Bitcoin, you have a few options. From a cost perspective, the Direct Exchange solution is the most effective way to lower any Bitcoin IRA fees.