Because of the sudden rise in value of cryptocurrencies such as bitcoin, and because of the fact that the IRS sees BitTorrent as property and therefore allows them to be included in retirement plans, more and more people are interested in holding a digital IRA.
Because this is still a relatively new solution, it is often quite difficult to find a custodian willing to manage these types of accounts. If you are able to find one, then it is likely that they will demand you to invest through an LLC. Essentially, the LLC will be owned by the IRA rather than by you as an individual. That LLC, meanwhile, will be used to purchase cryptocurrency. Let’s take a look at how all of this works.
9 Steps to Investing in a Digital IRA
1. Find an IRA custodian and established a self-directed digital IRA.
2. Rollover any existing retirement funds that you have, such as cash and in-kind phones, and place them into your new self-directed IRA. This can be done tax free.
3. All assets held in the IRA are transferred to the LLC. Again, this is tax free. The newly established IRA LLC will exchange this for 100% interest.
4. You become the LLC manager and open a proprietary bank account for this LLC. You can choose any bank you like for this.
5. You gain checkbook control as the LLC’s manager, which extends to all the funds and assets held in the IRA LLC. This is what you can use to invest in the cryptocurrencies.
6. You must open a cryptocurrency account or wallet, using the IRA LLC’s name.
7. You will use your checkbook control that you gained by being the official manager of the LLC to wire any funds contained in it to the cryptocurrency account, using the crypto exchange to do so. The account with the crypto exchange will also be in the name of the IRA LLC
8. Any cryptocurrencies that you have purchased will be held at the exchange using your online or offline wallet.
9. Because the LLC is completely and fully owned by the IRA, it will be seen as a disregarded entity by the IRS. This means that you are not required to file a federal income tax return although you do have to check whether your state in posies franchise taxes on this type of construction. This also means that any gains and income that comes from the cryptocurrency flows straight back into the IRA and that no tax has to be paid over it. Do make sure that you speak to your tax advisor so that you fully understand the implications of having this type of construction in place for your retirement account.
While the system may look quite complex, the reality is that once it is set up, it’s almost manages itself. However, as it is a self-directed IRA, you will be responsible for making any and all investment decisions. The custodian will not do this for you as they would in a standard IRA. If you do not feel confident about your ability to understand the Investment markets, then this is perhaps not the solution for you.