Bitcoin IRA

[joer1212]

Is it worth placing my Bitcoin and Ethereum in a Roth IRA?

I've heard that the companies which offer this service charge high fees, but haven't been able to confirm this.

For example, the oldest and largest company of this kind is "Bitcoin IRA". Their website doesn't disclose their fees, but what I've read from third parties is that they charge a 5.99% set-up fee, a 2% buying fee, a 2% selling fee, and a monthly fee of 0.08%.

Would it make more sense to just keep my cryptocurrencies in a digital wallet (Ledger Nano S), and pay taxes on them, when I start withdrawing in about 10 years? I'm assuming an annual taxable income of 70k.

I know this is a difficult question to answer, since we neither know what tax rates will be in 10 years, nor the expected returns of Bitcoin and Ethereum, but give it a shot, anyway.

[seattlecyclone]

If you have a functioning crystal ball, make sure to put the assets that will perform best into your Roth IRA, the assets that will perform the worst into your traditional IRA, and the more average-performing assets in taxable.

My crystal ball is broken at the moment, but if yours tells you that Bitcoin will be your best-performing asset between now and when you retire (after any IRA custodial fees), go ahead and buy it in your Roth.

[joer1212]

If you have a functioning crystal ball, make sure to put the assets that will perform best into your Roth IRA, the assets that will perform the worst into your traditional IRA, and the more average-performing assets in taxable.

My crystal ball is broken at the moment, but if yours tells you that Bitcoin will be your best-performing asset between now and when you retire (after any IRA custodial fees), go ahead and buy it in your Roth.

That wasn't my question.

[terran]

Since you (presumably) don't know whether your crypto investments will outperform other investments (like stocks) it seems wise to minimize investing fees by skipping the high fee crypto capable IRA since that's something you can control.

[seattlecyclone]

If you have a functioning crystal ball, make sure to put the assets that will perform best into your Roth IRA, the assets that will perform the worst into your traditional IRA, and the more average-performing assets in taxable.

My crystal ball is broken at the moment, but if yours tells you that Bitcoin will be your best-performing asset between now and when you retire (after any IRA custodial fees), go ahead and buy it in your Roth.

That wasn't my question.

Sure it was. You're asking whether it's best to hold your cryptocurrency in a taxable account or a Roth IRA. That depends mostly on whether you expect it to outperform the rest of your investments or not. If so, then a Roth IRA is a great place for it because that growth won't be taxed. If not, keep it in taxable so that you can put some other higher-performing asset in Roth.

[joer1212]

If you have a functioning crystal ball, make sure to put the assets that will perform best into your Roth IRA, the assets that will perform the worst into your traditional IRA, and the more average-performing assets in taxable.

My crystal ball is broken at the moment, but if yours tells you that Bitcoin will be your best-performing asset between now and when you retire (after any IRA custodial fees), go ahead and buy it in your Roth.

That wasn't my question.

Sure it was. You're asking whether it's best to hold your cryptocurrency in a taxable account or a Roth IRA. That depends mostly on whether you expect it to outperform the rest of your investments or not. If so, then a Roth IRA is a great place for it because that growth won't be taxed. If not, keep it in taxable so that you can put some other higher-performing asset in Roth.

My question was whether the Bitcoin IRA fees are so exorbitant that they'll likely be more expensive than paying taxes on the Bitcoin withdrawals in a taxable account. I didn't word it that way, but that's what I was implying.
Now, in all fairness, no one knows what taxes will be like in 10 years (when I plan to withdraw), or what Bitcoin's performance will be, but I was hoping that someone, with more knowledge and experience than myself, could extrapolate and give me an educated guess.

[joer1212]

Since you (presumably) don't know whether your crypto investments will outperform other investments (like stocks) it seems wise to minimize investing fees by skipping the high fee crypto capable IRA since that's something you can control.

Yeah, I was thinking the same thing, but isn't placing an asset in a Roth IRA also a way to control something (future taxes)?
The question is whether the fees in the Bitcoin IRA account will outpace the taxes I'll pay on Bitcoin withdrawals in a taxable account (in about 10 years).

[terran]

Since you (presumably) don't know whether your crypto investments will outperform other investments (like stocks) it seems wise to minimize investing fees by skipping the high fee crypto capable IRA since that's something you can control.

Yeah, I was thinking the same thing, but isn't placing an asset in a Roth IRA also a way to control something (future taxes)?
The question is whether the fees in the Bitcoin IRA account will outpace the taxes I'll pay on Bitcoin withdrawals in a taxable account (in about 10 years).

I'm making the assumption that you're deciding between bitcoin in an IRA with heavy fees and stocks in a taxable account vs bitcoin not in an IRA and stocks in an IRA without fees. You can't control what the returns of bitcoin and stocks will be, but you can control whether you pay fees to keep one or the other in an IRA.

[MustacheAndaHalf]

Instead of paying 10% round trip to buy BTC, I'd favor buying ProShares Bitcoin Strategy ETF (BITO).  It's expense ratio (0.95%) is slightly cheaper than the 0.08%/month (0.96%/year), and avoids the other 10% worth of fees.  To be clear, that ETF does not track Bitcoin, but tracks Bitcoin futures.  So when they pay to switch from old futures contracts to new ones, they may have a loss or gain unrelated to Bitcoin's price.

You could also buy GBTC (Grayscale Bitcoin Trust) with a 2% expense ratio that actually holds Bitcoin.  It's not an ETF, but an over the counter stock - no exchange wants to list it, but it has high enough volume that's not a problem.

For ETH, the only solution I know about is ETHE (Grayscale Ethereum Trust) charging a 3% annual fee.  For other crypto currencies, I'm not aware of anything you can buy at your broker.

[wudged]

If you have a functioning crystal ball, make sure to put the assets that will perform best into your Roth IRA, the assets that will perform the worst into your traditional IRA, and the more average-performing assets in taxable.

My crystal ball is broken at the moment, but if yours tells you that Bitcoin will be your best-performing asset between now and when you retire (after any IRA custodial fees), go ahead and buy it in your Roth.

If you have a functioning crystal ball, put the best performing asset (singular) in all accounts and ignore the worse performing ones :)

(Yes I know what your real point was.)

[joer1212]

Instead of paying 10% round trip to buy BTC, I'd favor buying ProShares Bitcoin Strategy ETF (BITO).  It's expense ratio (0.95%) is slightly cheaper than the 0.08%/month (0.96%/year), and avoids the other 10% worth of fees.  To be clear, that ETF does not track Bitcoin, but tracks Bitcoin futures.  So when they pay to switch from old futures contracts to new ones, they may have a loss or gain unrelated to Bitcoin's price.

You could also buy GBTC (Grayscale Bitcoin Trust) with a 2% expense ratio that actually holds Bitcoin.  It's not an ETF, but an over the counter stock - no exchange wants to list it, but it has high enough volume that's not a problem.

For ETH, the only solution I know about is ETHE (Grayscale Ethereum Trust) charging a 3% annual fee.  For other crypto currencies, I'm not aware of anything you can buy at your broker.

I've decided to keep it simple and keep all my cryptocurrencies in my Ledger Nano S.

[MustacheAndaHalf]

I recently did some research into "self-directed IRAs", and noticed a few choices offer crypto support.
https://www.altoira.com/products/alto-cryptoira/
https://www.irafinancialgroup.com/gemini-relationship/

Note this should only be for a Roth IRA (1), and it's worth mentioning I'm not opening the crypto self-directed IRA, so I can only give my impression based on what I've come across.  It seems like they setup your IRA, then send the money over to Coinbase or Gemini.  You are the "manager" of the account - you can place trades as you like.  But you cannot withdraw money - only the IRA custodian can pull money out of Coinbase or Gemini and back into your IRA account.

Both firms I looked at charge a "trading fee" of 1% or 1.5%, meaning every time you buy.. 1% cost.  Sell?  Another 1% cost.  So that's how it's profitable for the company offering the IRA.  You can find lower fees outside a crypto IRA.

(1)
One thing to reiterate - this is for a Roth IRA.  Someone with Bitcoin profits after 2 years uses long-term capital gains rates (I believe - I'm not a tax attorney).  Most people will have income + gains somewhere in the $40k to $445k and pay 15% tax.  If that same person uses a Traditional IRA, when they withdraw $40k to $445k in one year they could pay 22% to 35% in taxes.  It's actually worse to hold crypto in a Traditional IRA compared to a taxable account, so make sure this is for a Roth IRA.

[MustacheAndaHalf]

When you have an IRA, you can only withdraw money by telling the custodian that you are doing so, and they file 1099-R with the IRS.  You may owe taxes or penalties - but all your withdrawals go through the custodian.

Note that I am not a lawyer - and most lawyers won't know the rules around this, either.

A very high risk approach is to setup a "self-directed IRA", and then form an entirely new LLC with the IRA's assets.  If you mix this LLC's money with your own at all, from that moment forward the IRA is stripped of it's status and the entire balance becomes a withdrawal.  That's the high risk - suddenly owing tax on everything in the IRA because of a "prohibited transaction" between the LLC and you or certain people related to you.

On the benefit side, your IRA's investment forms this new LLC, and that money goes into a bank account owned by the LLC ("Your Company FBO Some Poster IRA" or something like it).  With that bank account, you can open an account on a crypto exchange (again, for the LLC) and fund the account from the LLC.  If you screw up and put your name on the account, or you accidentally pay a fee with your credit card - you can strip the IRA of it's status and have a 100% withdrawal.  But if you are careful to act only as the manager of this LLC, and not mix finances, you can save on crypto fees at an exchange.

If you like details, this might work.  If you like learning all the details of what can go wrong with a self-directed IRA, maybe it's worth exploring.  But someone who doesn't like details and tries this approach is far more likely to get burned badly - the IRS can force you to withdraw the entire Jan 1 balance of the IRA, and then pay taxes and penalties.

I'm currently halfway through a book about self-directed IRAs.  It mostly discusses what can go wrong, and I'm glad I bought it.  The author is part of "IRA Financial" that I mentioned in my prior post.  You can search "foremost authority self-directed IRAs" and you'll find him.