In October of last year, we noted that 2017 was a watershed year for Bitcoin and a handful of cryptocurrencies. As we roll into 2018, virtual currency assets are exploding in value, and the asset class continues to draw the interest of self-directed IRA investors like nothing we have seen in the 13 years we have been in this business. We have been receiving more and more calls each week on the topic, and have been working hard to become well versed in this fast-evolving space. Of course, being able to shelter significant gains from cryptocurrency growth in a tax-sheltered IRA has real appeal.
We have learned a few key things and wanted to share that knowledge with our readers.
- There are not many easy ways to get IRA or Solo 401(k) money into cryptocurrency investing.
- The “turnkey” crypto-currency IRA programs available are exactly that – turnkey – as well as very secure… but, they come at a high cost and provide very limited investment options with slow response times.
- The Checkbook IRA LLC or Solo 401(k) platform really is the best, most flexible and most cost-effective way to pursue a cryptocurrency investment strategy.
- It is very easy for self-directed IRA providers to say “Yes, your IRA can invest in cryptocurrencies.” It is an altogether different thing to be able to provide meaningful assistance to clients wanting to set up a cryptocurrency exchange account and start investing.
Limited Options for Cryptocurrency in an IRA
Establishing a cryptocurrency trading account in a retirement plan umbrella is just not easy. No mainstream brokerages offer direct cryptocurrency investment options. You can’t just move money from your current IRA or 401(k) onto a cryptocurrency exchange.
There are a few firms offering specialty Bitcoin IRA or Crypto IRA programs, but they are expensive and inflexible. These programs have the advantage of being simple to navigate, relatively quick to implement, and providing robust security. However, this option requires the use of a 3rd party broker, generally with pretty steep commissions on each trade, as high as 15%. Only a handful of the top virtual currencies are available. The robust security and broker layers also mean that initiating a buy/sell transaction can be a 2-4-day process.
For novice investors without the technical savvy to establish their own cryptocurrency exchange accounts, and/or for those with a long-term buy and hold view, these trade-offs can be well worth it, especially with respect to ensuring compliance and strong security features. For investors who want to take advantage of the inherent volatility in the crypto space and trade more frequently, however, these plans just won’t get the job done.
The Checkbook IRA Advantage
For true control and flexibility, an IRA LLC or Solo 401(k) is the way to go.
With such plans, you can:
- Open trading accounts with one or more cryptocurrency exchanges of your choosing
- Invest in a full range of cryptocurrencies, not just the top 3 or 4 tokens
- Secure your currency holdings with the wallet you prefer
- Initiate trades on-demand in real-time, without 3rd party paperwork, delays or commissions
This is possible because of the checkbook control these structures provide. Since the retirement plan assets are held in a legal entity that you control – LLC for the IRA, trust for the 401(k) –you can directly manage all aspects of your IRA cryptocurrency investing.
The Challenge of Cryptocurrency Exchanges
Even with a self-directed retirement plan that allows for such flexibility, the path to getting your IRA or 401(k) invested into Bitcoin, Etherium, Ripple, Tron or Monero is not quick or easy. Frankly, the main problem is simply the extreme popularity of this new investment avenue, and the fact that the cryptocurrency exchanges are overwhelmed with new account applications.
The first thing you need to understand is that this is an entirely web-based space, and customer service is not a human being on the other end of a phone call. An email response within 24-72 hours is the norm. You need to be pretty tech-savvy and self-sufficient to get from “I have a self-directed plan” to actually investing that plan. You also need to have patience. It is not uncommon for onboarding verification of new accounts with cryptocurrency exchanges to take several days or even longer.
As our team here at Safeguard has worked with clients wanting to invest in digital currencies, we have not only fielded questions about how to fill out applications and provide the necessary supporting documents, we have actually gone through the process ourselves. We’ve opened our own accounts at several of the leading exchanges. We’ve also failed to open accounts when the exchange website is overloaded for 3+ days running. It is what it is. Starting with realistic expectations is just something you have to do.
Where to Start
In order to ensure compliance and get IRA or 401(k) capital into a position to invest in digital currencies, you need to start with a mainstream exchange capable of accepting deposits in US dollars and licensed to provide services in your state. Coinbase, or their GDAX institutional platform is the largest US based exchange and probably the most reliable in terms of being able to establish an account. Gemini is a very compliance-focused exchange based in New York with good institutional services. Kraken is a viable alternative, but the website has been in degraded capacity for some time due to high demand and establishing new accounts is hit or miss.
Be prepared to submit your own personal identification as well as documentation for your IRA owned LLC or 401(k) trust. The account you establish must be an institutional account in the name of the plan, not an individual account in your name. When establishing such an institutional account, privacy is not really an option.
Expect anywhere from a few hours to several days or even longer for account verification. The timeline certainly varies based on current market conditions and the demand for new accounts at any given time.
Once the account is in place, you will need to fund it from your IRA-owned LLC or Solo 401(k) bank account. Direct draft via ACH/wire is generally the best option, though you can expect an additional 3-5-day delay. Some exchanges will accept funding via debit card. This can be faster, but also expensive. Be sure to read the fine print.
Use a Secure Wallet
For small amounts of cryptocurrency holdings or when you expect to be engaging in frequent trading, holding your currencies in an exchange provided hot-wallet can be acceptable. Because such wallets are connected to the internet, however, there is a risk of theft via hacking.
Using a secure web-based multi-key wallet, or a physical wallet such as a Trezor or Ledger Nano will be a better, more secure option if you plan to hold any significant value of currencies, or simply plan to hold a certain value for a longer time period. A physical wallet can also be helpful if you plan to do crypto-to-crypto exchanges.
Please keep in mind that any wallet – physical or cloud-based – must be held in the name of the IRA or 401(k) plan, paid for with plan funds, and used exclusively for plan coin holdings. You should not mix personal and plan coins on the same wallet, or use a personally purchased wallet to hold plan coins.
Expanding Beyond Bitcoin
The primary exchanges that can offer institutional accounts for US based LLC and trust entities are generally going to be limited to the top cryptocurrency tokens such as Bitcoin, Bitcoin Cash, Etherium and Litecoin. If you want to invest in a broader array of currencies such as Ripple, Dash or Neo, you will need to use a two-hop method.
Several services such as Changelly or Shapeshift are not capable of handling US Dollars, but they can do direct crypto-to-crypto exchanges. Once you have obtained a mainstream cryptocurrency such as Bitcoin or Etherium using your primary exchange, you can use one of these tools to trade that currency for a wide array of alternative coins. You will need a wallet address to use these platforms, so having a hardware wallet will be the most efficient option.
Invest with Care
While virtual currencies are certainly experiencing phenomenal growth, there are plenty of risks associated with this kind of investing. The regulatory environment is nascent or non-existent in many cases. One needs to be mindful of the risk of total loss of their investment though market volatility or even the hacking of an exchange. Due to the high levels of uncertainty, volatility, and risk, we suggest you not invest any capital you are not wailing to lose.
*Please be advised that Safeguard Advisors does not make specific investment recommendations or provide investment advice. Safeguard Advisors has no direct affiliation with any providers of cryptocurrency exchanges or services and does not represent or specifically recommend any particular cryptocurrency service providers. Any references provided in this article are purely educational in nature.