What Kind of IRAs Are There?
Under U.S. tax law, individual retirement accounts (IRAs) are special tax-advantaged vehicles that are widely used for U.S. retirement planning. Types of available IRAs include: Traditional IRA, Roth IRA, SEP/SIMPLE IRAs (employer-offered only), Rollover IRA, and the Self-Directed IRA, among others. The availability of any given IRA and its accompanying tax treatment is specific to the IRA type.
Most IRAs can only be invested in conventional assets sold by the IRA provider/trustee itself. Further limitations on investment options may be imposed by the IRA provider/trustee, even if not expressly prohibited by the Internal Revenue Service (IRS). In contrast, Self-Directed IRAs are allowed to hold any legally permissible asset.
The only asset classes expressly prohibited by the IRS for purchase in any kind of IRA are:
- Life insurance
- Collectibles
But even these asset classes have certain exceptions to the general IRS prohibition, and may (under specific circumstances) be included in IRA assets. Consult your tax advisor to learn more.
Right Now, Only Self-Directed IRAs Hold Bitcoin
Since Bitcoin is neither considered to be life insurance nor a collectible, an IRA owner can theoretically purchase Bitcoin in any type of IRA. The reality, however, is that most IRA providers/trustees do not directly offer Bitcoin as an investment option, and thus will not accommodate Bitcoin purchases in the IRAs that they offer. Regulatory and administrative complexities in managing Bitcoin custody are among the primary reasons that IRA providers/trustees do not offer Bitcoin as an option to IRA owners.
IRA owners can use their retirement funds in self-directed IRAs held at self-directed IRA providers to purchase alternative assets, including Bitcoin. Self-directed IRAs differ from traditional IRAs because they use self-directed IRA custodians, which are generally more flexible than traditional IRA custodians. (Traditional IRA custodians are usually established chartered banks.) Be aware that self-directed IRA custodians disclaim many of the risks associated with alternative investments and shift those risks to the IRA owner to oversee. Self-directed IRA providers and custodians can also vary in quality and service, so do your research carefully before selecting one.
Coming Up Next: Getting Started with Self-Directed IRAs
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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.
