Can You Invest in Bitcoins in Your IRA?

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NEW YORK (InsideBitcoins) — Public and government interest in Bitcoin has never been so high, and our friends in Australia haven’t been spared: where there’s Internet, there’s Bitcoin. Recently, Australians have been taking a keen interest in the digital currency in regards to their SMSF, or Self Managed Super Funds, which is similar to the American IRA.

People saving for retirement have been anxious to explore the new possibilities that have accompanied the emergence of Bitcoin, and investors agree that the only way to approach such a matter is with extreme caution.

Matthew Walker, an investment advisor from WLM Financial told Australia’s Financial Review that “There’s too much uncertainty around it in terms of security. Until there’s more information, regulation, more substance to it, I think I’ll be wary about advising around it.” He also added that “If a client asked me to make an investment into bitcoin, I would certainly take a look into it, but it’s not something I’d confidently make a recommendation on – not yet, anyway.”

But as Australians try to find new ways to diversify their retirement savings, what exactly is the situation for retirement savers in the United States? Can you invest in bitcoins in your IRA?

Of course, in terms of funding a traditional IRA, only payments in cash or cash equivalents are permitted, and the general consensus is that excludes payment via bitcoin. On the other hand, if digital currencies keep on rising in value, more and more people will seek to invest in them. Forums and message boards all over the Internet are buzzing with questions, most of them concerning investment of IRA funds in digital currencies.

In order to diversify investment opportunities, a self-directed IRA may be the answer. This type of IRA allows a broader range of investment instruments than a typical IRA, and lets the account holder take a stake in areas such as real estate, notes, LLCs and even precious metals.

Eileen Loustau, senior vice president of marketing for PENSCO, a self-directed retirement custodian specializing in holding alternative assets, offers two ways to put BTC in your IRA.

“The first is to use an intermediary custodian such as SecondMarket’s Bitcoin Investment Trust (BIT),” she says in a post on the firm’s blog. “The second is to set up an LLC, within your IRA through which you can purchase bitcoins directly. An LLC is a legal form of business enterprise that provides limited liability to its owners. LLCs can be formed very quickly and inexpensively, and are not taxed as entities in most states.”

In fact, Fidelity, a major player in retirement investments, allowed Bitcoin investments in their self-directed IRA accounts back in December – but for only a day. Apparently, just one investor was able to make the trade before Fidelity suddenly, and without explanation, yanked the option.

“On an individual basis, we allowed an investor to invest in that Bitcoin Investment Trust,” Rob Beauregard, director of public relations at Fidelity, told MarketWatch at the time. “We are no longer allowing that.”

But even if you are able to add a little digital currency to your retirement portfolio, Loustau offers one note of caution.

“It’s important to understand that, just like any other IRA investment, you can’t transfer bitcoins out of your account (e.g. spend them online) without incurring the associated IRS penalties and fees. For this reason, the investors who use their IRAs to invest in Bitcoin are likely interested in the capital appreciation as opposed to the online transaction capabilities,” she says.

There are a lot of factors to consider, among them risk, volatility, suitability and taxation. Of course, many financial professionals recommend exercising extreme caution. But with more and more governments working to put in place a stable legal framework around Bitcoin, perhaps soon investing in Bitcoin will be a part of your retirement portfolio allocation.

Written by David Lock

Additional reporting by Hal M. Bundrick

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