Continued From: Yes, You Can Buy Bitcoin in Your (Self-Directed) IRA
Two Models
Under U.S. tax law, there are two options for Self-Directed IRAs that allow for using retirement funds to purchase alternative assets such as Bitcoin:
- Self-Directed IRA LLC standard Custodian model
- Self-Directed IRA LLC with “Checkbook Control” model
Self-Directed IRAs are typically held by specialized Self-Directed IRA custodians. If Bitcoin is the alternative investment of choice for your Self-Directed IRA, it’s necessary to have a custodian that can specifically hold Bitcoin. Both standard Custodian and Checkbook Control options also require that a Limited Liability Company (“LLC”) first be created that would be owned by the Self-Directed IRA. This means that the IRA is actually the investor in the LLC even though you, the LLC member, will be funding and managing the LLC.
Once the new LLC is established, the general manager of the LLC will need to set up a business checking account for the LLC. Banks will require, at a minimum:
- A tax ID number (EIN); and
- A copy of the LLC’s Articles of Organization.
In the standard Self-Directed IRA Custodian model, investing in alternative assets such as Bitcoin requires an application to open an account with a specialized Self-Directed IRA custodian. Upon account approval, the custodian must authorize each transaction that will be made in the Self-Directed IRA. This requires the IRA holder to obtain custodian approval to purchase the Bitcoin as an asset, followed by funding the purchase. This custodian authorization process is required for every transaction or modification following the original purchase.
In a Self-Directed IRA with Checkbook Control model, the IRA holder is able to purchase the asset immediately by writing a check. Forms are generally not required and there are no waiting periods for custodian consent in the investment process. Custodian fees may also be lower than in the standard model, but the investment process under this Checkbook Control IRA model may be more complex because it requires direct management by the IRA holder to invest in the LLC; there are no intermediary administrators involved in the process.
Prohibited Transactions
Given the “self-serve” nature of Self-Directed IRAs, you should be especially careful to avoid inadvertently tripping IRS rules against “Prohibited Transactions.” If caught in a prohibited transaction, your IRA account could be treated as having been distributed. This would mean that penalties and interest could be owed, which can have significant adverse impact to your retirement funds and planning.
Prohibited transactions include:
- Borrowing money from the IRA
- Selling property to the IRA
- Compensation for managing the IRA
- Using the IRA as security for a personal loan
- Personally guaranteeing an IRA loan
- Personal use of IRA owned property
- Providing services to an IRA investment, including real estate services
As with any retirement account or investment, you must file a tax report with the IRS that covers all assets within your self-directed IRA. Tax implications can vary greatly, so consult your tax advisor, attorney, and/or investment professional for guidance related to your individual circumstances.
Coming Up Next: How To Set Up And Buy Bitcoin In A Self-Directed IRA
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Disclaimer: Lumina does not provide legal, tax, investment, or other professional advice. Please consult your own legal, tax, or accounting professionals for advice on compliance with applicable state and federal laws. This post is provided for informational purposes only, and is not intended to substitute for professional tax, accounting, audit, or legal advice. Information provided on Lumina is subject to change without notice.
