“Should I buy bitcoin in my IRA?”
An old friend asked me that question the other day. But here’s the thing. It’s actually two questions. One is tricky to answer, while the other one is a breeze.
I’ll start with the tricky one: Should you buy bitcoin?
My answer here is: “probably.” It looks like cryptocurrency has reached critical mass, and it’s here to stay. Bitcoin is the oldest and most recognized crypto, so we should probably all own a little. It wouldn’t hurt to own a smattering of other coins as well.
On to question No. 2: Does bitcoin belong in your IRA?
Your answer to that question might be different. Let’s say you are now a believer and want to own a little bitcoin as a long-term holding. In that case, yes, by all means, hold bitcoin in an IRA. Something explosive like Bitcoin or other cryptocurrencies can generate massive capital gains. Why not shield those gains from the taxman by trading your bitcoin within the tax-free utopia of your IRA account?
Before you back up the truck and load up your IRA, here are a few points to keep in mind.
Cost to Own Bitcoin in an IRA
To start, you still can’t buy cryptocurrencies in an IRA offered by a traditional discount broker like Charles Schwab or TD Ameritrade. Your best bet is to use a specialty IRA shop with expertise in crypto. That’s going to come with some expenses.
As an example, iTrust Capital is considered to be one of the most budget-conscious options for a crypto IRA, and even it has a $29.95 monthly service fee.
Thirty dollars per month or $360 per year isn’t a big deal if you have a large account and the fees as a percentage of the account are reasonable. But if you’re starting with a modest amount, paying $360 per year in fees might be a deal-breaker. If that’s the case, then just hold your crypto in a regular taxable account.
IRA Money is Precious
Also remember that IRA money is precious. A dollar in an IRA is worth more than a dollar in a taxable account because of its ability to grow tax-free. So, you don’t want to squander those precious tax-free dollars with something reckless.
I’m not suggesting that owning a little cryptocurrency is reckless. Betting the farm on it would be, however. So, just make sure any IRA investment in bitcoin or other cryptos is a reasonable size.
Consider Tax Efficiency
If most of your investment accounts are IRAs, tax efficiency isn’t really an issue. But if your savings are divided between taxable and tax-free accounts, you should give some thought to which assets go where.
Bonds are horribly tax-inefficient considering that interest is taxed at your marginal tax rate. All else equal, bonds should go in your IRA first.
On the other extreme, a buy-and-hold position in an S&P 500 ETF is about the most tax-efficient thing you can ever own. Apart from the modest dividends, there are almost no taxable gains unless you sell. And if it’s a buy-and-hold position, you may never have to face that tax burden.
So, where does crypto fit in here?
It depends on how often you plan to trade it. If you plan to buy and hold forever, then keeping it taxable might make more sense. If you plan to trade it actively, an IRA is a better option. If you plan to do a little of both, then keeping some taxable and putting some in an IRA will be the way to go.
There’s really no wrong way to do it. But you’ll want to take some time and plan this out because every dollar you lose to tax inefficiency is a dollar that could be growing for you.
To safe profits,
Editor, Green Zone Fortunes
Charles Sizemore is the editor of Green Zone Fortunes and specializes in income and retirement topics. Charles is a regular on The Bull & The Bear podcast. He is also a frequent guest on CNBC, Bloomberg and Fox Business.