I have been observing a spike of organizations promoting their self-directed “Bitcoin IRA” plans; it’s the same thing that occurred following the 2008 market correction (for precious metals). If this is something that interests you then read on to better arm yourself with insight that may help you decide for or against, or if there are alternatives to this approach.
Traditional Retirement Accounts
Traditional institutions such as Vanguard, Fidelity, etc., manage your funds and you have limited access and limited control over what to invest in. Generally, most prefer this approach because it provides a passive method for “experts” to manage your money. The system is designed to help you keep your retirement account in this form, and to make it difficult to withdraw or rollover; for instance, you may have to leave the comfort of your job to rollover. If you are unable or unwilling to actively manage your money then this might be the option for you. Most are not comfortable managing their life’s savings because we are too busy with life itself. Others who are less comfortable with this option probably feel they can do better, or may even have studied below the surface and want to move their wealth outside of the system.
Self Directed IRA’s
You generally decide what to invest in, but you cannot take possession of the checkbook, or the assets you invest in, or the wallet that holds your Bitcoin (for a crypto IRA). There are varying types of self-directed IRA that are typically tailored to the type of investments you are looking to invest in. This option gives you more control than the traditional options, but a “custodian” is the only party that can have direct control. The custodians are the actors, you are the director.
IRA managed precious metals might be an OK option because no retirement plan allows for the plan beneficiary to take direct possession, and your metals are typically held by a metals depository, not the plan custodian. Although, if you are deeply concerned about such things as counter party risk then this option may not be for you (the risk of confiscation such as Executive Order 6102 of 1933 notwithstanding, which is beyond the scope of this article).
An IRA managed Bitcoin plan will typically give the custodian direct control over your crypto wallet. This is where my concerns weigh heaviest of all. The counter party risk is significant, for instance:
- There is no assurance that a third party is knowledgeable enough to follow best practices, nor is there any guarantee that they will even follow such best practices. Coverage may exist to insure the counter party risk, but you should investigate the details of such a policy to ensure it is worth the paper it’s printed on. Moreover, you should make sure that you have sufficient protection for coverage lapse or termination (for any reason). If there is no reasonable notice guarantee prior to lapse then that would be a weak link.
- It’s too easy to steal crypto and blame it on a “hack”, with no trace. Pay attention to the recent “hacks” from various Bitcoin exchanges — a new wave of “hacks” will also arise from Bitcoin IRA’s. Conversely, it’s too easy to hack your crypto wallets. Refer to my earlier article Managing a Crypto Portfolio for more insight on this.
- Even when implementing a long strategy (that is not “trading” your coins) you may need to be extremely agile to seize upon an opportunity to buy or sell. This is not likely to be possible with a custodian. Cryptos are so new and so volatile that agility is important.
This option offers fine grain control, but with other limitations and scrutiny. It is intended for those who are self employed or operate a business on the side, and for those who require active and direct control. It also gives you enough rope to hang yourself so be sure to spend the time to study the rules as there is no custodial net to catch you. Like the self directed IRA, this option may allow your retirement trust to manage a brokerage account (equities), crypto currency exchange account (Bitcoin), or to purchase real estate. You also would typically have checkbook control.
Be aware that this option is often the victim of a bait and switch tactic whereby plan administrator promotional materials disguised as a solo 401k plan, but are trying to sell you an IRA plan.
A self-directed IRA isn’t the only option, even though the majority of one’s research will likely lead you to believe it is. A solo 401K option gives the greatest flexibility and control for self-employed participants, or for those who are employed but also work and receive income on the side.
If asked, I would discourage anyone considering a solo 401k option to invest in crypto currencies who isn’t skilled enough to manage a crypto portfolio or not prepared to invest what’s needed to adhere to the rules of plan administration. Likewise, I would encourage them to seriously weigh the counter party risk if considering a self-directed IRA, for Bitcoin or otherwise.
I have had folks ask me about about using the 401K method to acquire metals. There is a lot of mis-information about this so use caution and get professional advice before doing such a thing. As with the IRA, the 401K rules do not permit taking direct possession of bullion. Unlike, the IRA, there is the possibility of reducing counter-party risk, however. For instance, placing into a safe deposit box meets the requirement of a “bank” having possession of the metal. Not all banks permit this type of storage (such as Chase). Also, using such a method isn’t ideal for storing silver because it is bulky, making it on par (cost wise) with storing at a COMEX affiliated depository.
Be safe, practice safe crypto.
This is not financial advice, I am not your financial adviser, this is insight from my personal experience that I am sharing with my readers.