A Fee-Free Way to Hold Cryptocurrency in a Retirement Account
Cryptocurrency may not only be an investment for today, but for the future as well. Investing in cryptocurrency through an IRA enables individuals to not only evade taxation, but to benefit from the potential of appreciation as well. The trouble is, maintaining crypto in a retirement account has not been easy. The Internal Revenue Service prohibits “direct holdings” in an IRA account. Rather, all retirement funds must be kept by a custodian, such as a bank, or a “nonbank custodian” approved by the IRS.
This would be a simple task if most custodians would allow cryptocurrency to be placed within retirement accounts. Unfortunately, there are too few of such investors. Those who do exist call themselves “Bitcoin IRA” custodians and they’ll allow investments in Bitcoin. Of course, because there is a high demand and low supply of such custodians, the custodians hold private keys and charge large fees for the services.
Further, the Bitcoin IRA custodians typically operate using a multi-sig wallet, which does not give them full control of the funds.
Those are interested in investing in crypto for retirement, but would like to overcome the aforementioned obstacle may have an alternative avenue for their investment. Rather than opening an IRA, it may be viable to open a “checkbook IRA.” This type of account allows for the custodian who maintains the IRA to hold only one asset – which is an LLC owned just by the IRA.
The IRA owns the LLC in its entirety and the manager of the LLC is the investor – as in, you. Managers are tasked with maintaining the LLC and investing in it as well. As currency is invested into the IRA, the IRA then contributes to the LLC.
It is crucial to keep in mind that setting up a checkbook IRA is not easy and it often requires the expertise of an attorney who can provide legal advice and organization. Once the LLC is created and is compliant, managers are able to control how their funds are invested and they can invest in cryptocurrency as well. A custodian does not need to issue approval in this situation because the investment is held by the LLC and not the IRA. Take note though, that the IRS has some “prohibited transaction rules” that prohibit IRAS from investing in certain assets – and cryptocurrency is not one of the assets listed under these rules.