The ultimate guide to bitcoin IRAs

First published: 02/23/2022
| Last updated: 02/09/2024
| -- min read

After you understand the importance of bitcoin as a new form of money, you may start to wonder whether you would want to hold it in a retirement savings vehicle like an individual retirement account (IRA). At the intersection of bitcoin and retirement, you’ll find a robust mechanism for building and saving your wealth for your future, and eventually, your descendants. Here’s everything you need to know about holding bitcoin in an IRA.

What is an IRA?

401k to bitcoin ira rollover

An IRA, or individual retirement account, is a tax-advantaged retirement savings account held by an individual that is not tied to their employer. IRAs can be established independently with annual contributions, but the primary funding for an IRA often happens when someone leaves their employer. Separation from employment allows an individual to “rollover” the balance out of their workplace retirement plan (typically a 401(k), 403(b), 457, or TSP) into an IRA.

What are the different kinds of IRAs?

Traditional IRA

A Traditional IRA is funded pre-tax. That means after age 59.5, withdrawals from a Traditional IRA are generally taxed at ordinary income rates. These will usually be funded by a rollover from an existing Traditional IRA or 401(k). They are generally best-suited for people who expect to be in a lower tax bracket when they begin taking withdrawals or otherwise prefer tax benefits “up front” rather than in the future. Contributions to Traditional IRAs also give you current-year tax benefits because they are tax-deductible.

Roth IRA

A Roth IRA is funded post-tax. That means if you meet certain age and other requirements, withdrawals from a Roth IRA after retirement age are generally free of all taxes. Roth IRAs will usually be funded either by a rollover from an existing Roth IRA or Roth 401(k) or by a “Roth conversion” of non-Roth retirement funds. They are generally best-suited for people who expect to be in a higher tax bracket when they begin taking withdrawals. Unlike Traditional IRAs, Roth IRA contributions offer no current-year tax benefits as they are not tax-deductible.

What about SEP and SIMPLE IRAs?

If you are self-employed, you may be able to contribute up to 20% of your “net self-employment earnings” with a maximum of $61,000 (the maximum for 2022, although this changes annually) to a SEP IRA.

A SIMPLE IRA is a special type of group retirement plan for small employers that has declined in popularity over the years. You can usually roll any balance from a SIMPLE IRA into a bitcoin IRA tax-free. However, SIMPLE IRAs do have a special rule that rollovers are not allowed during the first two years of the account’s existence.

What kind of IRA is best for holding bitcoin?

As for Traditional vs. Roth IRAs, you can read below some example scenarios for different rollover approaches and their tax implications. Unfortunately, we aren’t able to give any sort of tax advice here at Unchained. We encourage you to consult a tax advisor for any questions related to the different types of IRAs and how they apply to your specific tax situation.

As for which specific IRA provider is best for your bitcoin IRA, you should read the section below on the different kinds of bitcoin IRAs available on the market and how they compare.

How old must I be to make a withdrawal without penalty?

The point of an IRA is retirement savings, and for that reason, there is a 10% penalty for withdrawals taken before a certain age, typically 59.5. Any withdrawals before that age are usually subject to a 10% penalty plus any applicable income tax. That said, there are some exceptions, so always check with your tax advisor.

Can I convert a Traditional IRA into a Roth IRA?

Yes, you can convert a Traditional IRA to a Roth IRA. The conversion will be subject to income tax, but will be exempt from the usual 10% penalty on early distributions.

How much bitcoin can I contribute to an IRA (Traditional or Roth)?

There is no limit on incoming rollovers from other retirement plans. Regarding annual IRA contributions that are not rollovers, the IRS publishes the limits (which change annually) on its website.

Bitcoin IRA basics

While the basic functionality and rules around IRAs apply regardless of the investment instruments you hold in them, there are some specific considerations to be aware of for bitcoin IRAs.

Are purchases and sales of bitcoin within an IRA tax-free?

Yes, tax is postponed to when funds are withdrawn from the IRA itself (and even then, in the case of a Roth IRA, there should be no tax if the requirements are met). An Unchained, however, we believe in holding bitcoin for the long term as a savings vehicle. Hence, our IRA product is not designed for frequent traders.

Can I mine bitcoin in an IRA?

bitcoin mining in an IRA

While bitcoin mining within an IRA is possible, the question you should ask is whether it’s prudent given current tax law and the risks involved. Unchained does not offer mining within an IRA because of the potential risks for UBIT tax liability, a special type of tax that applies when IRAs make certain “trade or business” investments.

You can learn more about those risks in our post covering What you need to know about bitcoin mining, IRAs, and taxes.

Can I take a loan against bitcoin in an IRA?

Like mining in an IRA, taking a loan against your bitcoin in an IRA would expose your IRA to Unrelated Business Income Tax, or UBIT. As mentioned, there are considerable risks with exposing your IRA to UBIT tax liability.

Can I contribute bitcoin directly to my IRA?

No. Under IRC 408(a)(1), IRA contributions must be U.S. dollars. The exception will be if you are already holding bitcoin in an IRA with a different bitcoin IRA provider and want to do an “in-kind rollover” of the bitcoin from one bitcoin IRA to another. That is only allowed if your old provider allows it; Unchained has no control over whether the old provider will allow an in-kind rollover or whether it must be in USD.

Is the government going to ban bitcoin IRAs?

Another common concern people have about bitcoin IRAs is their regulatory sustainability. What will happen if bitcoin itself sees unfavorable tax code/laws in the future?

The short answer to this question is that the Internal Revenue Code doesn’t state which assets are allowed within an IRA. In this regard, the IRS works with negative statutes; it instead lists investments that are not allowed within a retirement account. Any investment that is not prohibited is therefore allowed.

We designed the structure of the Unchained IRA to comply with all relevant tax law and believe this structure is as sustainable as any other type of retirement account under current law.

Depending on the specific circumstances, you can hold many kinds of unconventional investments in an IRA, including real estate, private stock, stock options, as well as bitcoin. And while laws can change, an act of Congress would be required.

Unfortunately, Unchained Capital is not a law firm or CPA firm and cannot give tax advice. If you have questions about bitcoin’s legal or tax suitability in an IRA, please consult your tax advisor.

Read more: Are bitcoin IRAs sustainable?

The McNulty case and bitcoin IRAs

On November 18th, 2021, the United States Tax Court issued an opinion, McNulty v Comm’r, 157 TC 10 (2021), which garnered a lot of internet discussion among those interested in bitcoin IRAs. It’s important to understand what the McNulty opinion said and how the structure of an Unchained IRA falls outside the structure criticized in the ruling.

Watch our webinar on this topic for a full overview of McNulty and its application to bitcoin IRAs and the Unchained IRA specifically.

In the McNulty case, the taxpayer got in hot water by holding gold in a “checkbook” IRA where the gold was not in the physical possession of a bank or trust company.

If you’re worried about the result of the McNulty case, you should avoid checkbook bitcoin IRAs. Check out our Unchained IRA, which is structured very differently from a checkbook IRA, and we therefore believe it does not run afoul of the McNulty rationale. Unchained cannot provide tax or legal advice, so if you have any questions about the suitability of the Unchained IRA structure, please consult with your tax advisor.

Read more: What you should know about McNulty v. Comm’r and bitcoin IRAs

How to maximize your bitcoin holdings in an IRA

There are many different ways to start contributing to your bitcoin IRA, and everyone is coming from different financial backgrounds. If you’ve never had an retirement account before, it’s simple and easy to get started with one and start making annual contributions to a bitcoin IRA. But what if you already have existing retirement accounts? How can you ensure that you preserve as much value as possible and walk away with the most bitcoin and the smallest tax burden when you decide to start making withdrawals later in life?

Should I liquidate an old retirement account?

One common question we get relates to simply liquidating an existing IRA and buying bitcoin with the proceeds (outside of an IRA). While you certainly can do that, this would generate income tax, as well as a 10% penalty. That can mean your overall bitcoin holdings could see a 40% reduction or more.

A rollover of your old retirement account avoids these issues.

Assuming $50,000/BTC and a $100,000 retirement account, this is how these two approaches would compare:

ApproachTotal BTCTax implication
Rollover from a Traditional IRA or 401(k) to a bitcoin IRA2Income tax-deferred
Liquidate Traditional IRA and buy bitcoin outside of an IRA1.2 (-.8)Income tax + penalty today + future capital gains tax

How does a Roth conversion compare to a Traditional IRA?

Another option many consider when rolling over an existing non-Roth retirement account into an Unchained IRA is a Roth conversion. (On the other hand, if your existing retirement account is already a Roth, you’re in luck, as you can roll those funds to an Unchained Roth IRA tax-free.)

If you do a Roth conversion, you opt to pay tax up-front, but you avoid the 10% penalty that would be applied to an early withdrawal. The biggest benefit here is that you’re then tax-free for life. When you spend that bitcoin during your future retirement, you don’t have to think about taxes at all.

ApproachTotal BTCTax implication
Rollover from a Traditional IRA or 401(k) to a bitcoin IRA2Income tax-deferred
Roth Conversion into a bitcoin IRA1.4 (-.6)No future taxes
Liquidate Traditional IRA and buy bitcoin outside of an IRA1.2 (-0.8)Income tax + penalty + future capital gains tax

Can I make a backdoor contribution to a bitcoin Roth IRA?

While there are no income limitations on converting a Traditional IRA to a Roth IRA and no income limitations on any rollovers to a bitcoin Roth IRA like the Unchained IRA, there are income limitations on making annual contributions from personal funds to a Roth IRA.

Fortunately for the many bitcoin buyers who are over this IRS income limit, this is where the backdoor contribution process comes in.

Backdoor contributions are a multi-step process, but once you have done the first one you will get the hang of it. To learn more about the specific steps, see below.

Read more: How to make a backdoor contribution to your bitcoin Roth IRA

How do different bitcoin IRAs compare?

There are four main types of bitcoin IRAs, each with its trade-offs. When choosing between them, you need to consider the two most significant benefits of holding bitcoin: financial sovereignty and exposure to price action.

ProductSovereigntyPrice appreciation
Bitcoin futures ETFNo control of keysIndirect exposure to price
Bitcon spot ETFNo control of keysMostly direct exposure to price
Bitcoin IRA without key controlNo control of keysDirect exposure to price
Bitcoin IRA with key controlFull control of keysDirect exposure to price

We believe bitcoin IRAs that offer exposure to both of these benefits are the best option for your bitcoin retirement savings.

While an Unchained IRA may require more from you in terms of a learning curve to hold keys, we believe it’s time well spent to receive a basic bitcoin custody education as well as the other benefits such as direct price exposure, no counterparty risk, and overall value.

Read more in Bitcoin IRAs compared: Spot ETF vs. no-key-control vs. physical bitcoin.

How to set up a bitcoin IRA with Unchained Capital

If you’ve decided you want to move forward with setting up a bitcoin IRA, you may now be wondering how to get started. Luckily for you, we’ve made it seamless and easy to get set up holding bitcoin in an Unchained IRA in just four steps:

  1. Open an IRA account with Unchained Capital
  2. Sign the agreement
  3. Create your IRA vault
  4. Initiate your IRA or 401(k) rollover

You can read the full details on these steps in our 4-step guide to holding bitcoin in an IRA.

What if I’m doing a 401(k) rollover?

If you’re rolling over from a 401(k), 403(b), or other employer retirement plan instead of an IRA, we can provide you with instructions on initiating that transfer with the administrator of your old plan. From there, our trading desk will automatically convert your USD funds to bitcoin, safely held in your IRA.

Read more: How do 401k (employer plan) to bitcoin IRA rollovers work?

How long does it take to set up a bitcoin IRA?

The entire IRA rollover process (from filling out the order form to having bitcoin in your IRA vault) can take anywhere from 2-4 weeks, depending on how quickly both you and your prior IRA provider complete your responsibilities within this process.

How long will I be “out of the market”?

It can be difficult to say how long you will be “out of the market” when setting up your Unchained IRA, as it is entirely contingent on how long your current IRA provider takes to liquidate your investments and transfer the resulting funds to your Unchained IRA

Once our financial services partner receives the funds from your prior IRA, it’ll take 1-2 business days for the funds to settle and be sent over to the Unchained Capital trading desk. Once we receive the funds, we will place a trade on the next business day. We will send you a trade summary once the purchase has been made and the bitcoin will be deposited into your vault within 48 hours of the initial purchase.

What is the minimum to open an Unchained IRA account?

Whether by rollover or contribution, every transfer must be at least $6,000. When Unchained receives any rollover or contribution to an Unchained IRA, it is automatically converted from U.S. Dollars to bitcoin and deposited into your IRA vault.

Your partner on your bitcoin custody journey

At Unchained, we don’t just help you set up and hold bitcoin in an IRA—we help you with everything as it relates to managing your bitcoin wealth. That’s why we offer multisig vaults—the foundation of our IRA product—lending, an OTC trading desk, and more. If you’re ready to get started with any of these services, our Concierge team is ready to help you get started at a moment’s notice. Whether you need help setting up an IRA or want to figure out complex bitcoin technical subjects, we’d love to hear from you.

This article is provided for educational purposes only, and cannot be relied upon as tax advice. Unchained makes no representations regarding the tax consequences of any structure described herein, and all such questions should be directed to an attorney or CPA of your choice.

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