Few investments are as exciting as cryptocurrency. Since their (rather rough) beginning almost a decade ago, virtual currencies have taken the financial world by storm. Not only do cryptocurrencies have the potential for incredible profit, but they operate in a nebulous area outside direct government control. It’s not surprising that many people are interested in diversifying their IRAs with the introduction of cryptocurrencies.

Of course, cryptocurrency IRAs are not mainstream by any means. There’s a whole host of complicated legal and financial requirements involved in investing in a crypto IRA. This article will break down everything you need to know about virtual currencies and crypto IRAs.

Why Bother With Cryptocurrency?

If you’re considering adding some cryptocurrency to your retirement portfolio, you’re on the right track. The great benefit of a tax-advantaged retirement account (say, a Roth IRA) is that you’ll enjoy potentially significant tax breaks when the time comes to cash out. A Roth IRA, for example, offers you the potential for tax-free earnings and withdrawals in retirement.

That’s all well and good, but how does cryptocurrency impact your decision?

Put simply, cryptocurrencies have the potential for tremendous gain over time. At one point, Bitcoin (BTC) peaked at an utterly remarkable $20,000 per coin. The possibility of a cryptocurrency skyrocketing value is something ‘future-you’ will greatly appreciate: tax-advantaged gains in a retirement account are nothing to sneeze at.

And The Flip Side?

There’s no denying the fact that cryptocurrencies are a volatile investment. Depending on when you acquired it, a single BTC could have cost upwards of $20,000 or as little as a few pennies. It’s an aggressive, high-risk investment strategy. That said, such a high risk pays off with fantastic rewards.

It’s important to note that Bitcoin’s volatility is not inherently the same thing as risk. Someone who invested thousands of dollars into Bitcoin at or near its inception would still be enjoying unheard-of returns well after Bitcoin’s “crash” in 2018. As of May 28th, 2019, a single BTC is worth nearly $9,000. It’s possible that even a significant market correction wouldn’t drop the value of BTC enough to the point where early adopters would suffer.

What Difficulties Come With Crypto IRAs?

It’s a simple thing to talk with your financial professional and begin the process of diversifying your retirement portfolio. Unfortunately, it’s a little more complicated when it comes to crypto IRAs.

Self-directed IRAs

A traditional or Roth IRA limits you to certain asset classes. Think bonds, stocks, mutual funds, and certificates of deposit. A self-directed IRA, however, lets you hold all sorts of interesting assets: real estate, precious metals, and so on. Thanks to IRS guidelines on cryptocurrencies, virtual currencies are not legal tender. Instead, all cryptocurrencies are treated as property.

So, there must be a way to hold cryptocurrency in your IRA, right?

There is, but there’s another hurdle to get over. The funds you hold in your IRA are not held directly by you. Take, for example, an investment company like Vanguard. If you have an IRA through Vanguard and invest in their funds, Vanguard acts as the “custodian.” You, the actual investor, are not directly holding the funds.

In other words, retirement funds must be held by a qualified bank or “nonbank custodian.”

What’s The Process?

First, you need to establish a self-directed IRA. That can be a journey in and of itself. It’s at this point where asking for some professional advice from qualified accountants is a great idea. If you’re set on doing it yourself, you’ll need to shop around from different IRA brokers to see which firms offer self-directed IRAs.

Let’s assume you’ve already contacted Founder’s CPA and set up a self-directed IRA. Now, in order to hold cryptocurrency in your IRA, you need a custodian. Talk to your financial professional, but you’ll need to form a limited liability company (LLC) that acts as the custodian. Of course, you’re the sole owner of this LLC.

Next, you’ll need to fund the IRA. That means rolling over some or all of your retirement funds into this new account.

The end result? You are the manager of an LLC that owns the self-directed IRA. At this point, you can open a bank account for your new LLC and establish checkbook control.

That Sounds Complicated

You’re not wrong. The process of setting up the self-directed IRA, forming an LLC, transferring assets, and integrating your cryptocurrency digital wallet is incredibly complicated. It’s important to note that virtual currencies are at the cutting-edge of financial technology. The IRS, unfortunately, needs time to process and adapt to these major changes.

Cryptocurrency IRAs with Founder’s CPA

Virtual currencies are viable, mainstream, and rewarding investments. They are a natural fit for anyone looking to diversify their retirement portfolio. If you’re considering opening a crypto IRA, contact Founder’s CPA for a free consultation. Founder’s CPA specializes in small businesses, cryptocurrency investors, and hypergrowth startups. Cryptocurrency and retirement are two areas where an expert’s advice won’t go amiss!