Can You Buy Bitcoin in a Roth IRA? Tax Advantages, Risks, and How to Do It Correctly
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Contents
- So Can You Actually Hold Bitcoin in a Roth IRA?
- Why Consider Bitcoin in a Roth IRA?
- 1. Tax-Free Growth
- 2. Asset Diversification
- 3. Long-Term Growth Potential
- The Downsides of Bitcoin in Retirement Accounts
- How to Buy Bitcoin in a Roth IRA: Step-by-Step
- Is Bitcoin a Good Investment for Your Retirement?
- Other Considerations for US Investors
- The Bottom Line: Proceed with Caution
- IRS Rules on Cryptocurrency: A Deeper Look
- Security Considerations for Bitcoin IRAs
- Alternative Approaches to Cryptocurrency Retirement Investing
- Real-World Example: Setting Up a Bitcoin Roth IRA
- Potential Tax Pitfalls to Avoid
- Want to Learn More?
Clients sometimes ask us, “Can I buy Bitcoin in my retirement account?” and for good reason, as investors continue to look for new ways to grow their nest eggs and protect retirement savings.
But before you jump in, there are important tax rules and security issues you need to know about.
Specifically, this article will answer your questions about Bitcoin in a Roth IRA – whether it’s possible, how to do it right, and if it’s actually a good idea for your retirement.
So Can You Actually Hold Bitcoin in a Roth IRA?
Yes, you can hold Bitcoin and other cryptocurrencies in a Roth IRA—but there are important caveats.
According to IRS rules, you cannot contribute cryptocurrency directly to any IRA. Since 2014, the IRS has classified Bitcoin and other cryptocurrencies as property, not currency. Section 408(a)(1) of the tax code requires that contributions to IRAs must be made in cash.
However, you can purchase Bitcoin within your Roth IRA after contributing cash. The IRS does not prohibit IRAs from holding cryptocurrency as an investment, provided it’s properly structured.
The challenge isn’t legal permission—it’s finding a provider willing to accommodate cryptocurrency investments. Most traditional IRA custodians don’t support digital assets, which is why specialized self-directed IRAs have emerged to fill this gap.
Why Consider Bitcoin in a Roth IRA?
Investing in Bitcoin through a Roth IRA can offer significant tax advantages compared to holding cryptocurrency in a personal account:
1. Tax-Free Growth
With a Roth IRA, investments grow tax-free, and qualified withdrawals in retirement are completely tax-exempt. This means potential Bitcoin gains won’t face capital gains taxes when withdrawn properly.
Let’s illustrate with an example.
If you had purchased $10,000 worth of Bitcoin in January 2017 and sold it in August 2021 for approximately $470,000, you would have realized a gain of nearly $460,000.
- In a personal account: You’d likely pay about 25% in combined federal and state taxes (assuming 20% federal long-term capital gains plus 5% state tax), reducing your profit by approximately $115,000.
- In a Roth IRA: The entire $460,000 gain would remain in your account and could be withdrawn tax-free after age 59½ (assuming the account meets the five-year rule).
2. Asset Diversification
Cryptocurrencies may offer portfolio diversification since they have a tendency to move independently of traditional markets. While Bitcoin’s correlation with the S&P 500 has intensified in recent years (meaning that the cryptocurrency was acting very similarly to the US stock market), more recent data suggests that this correlation is starting to disintegrate.
Reliable alt coin (all cryptocurrencies other than Bitcoin) data is more difficult to come by, but a recent analysis of the COIN50 index (a basket of 50 cryptocurrencies) shows alt coins still mirroring US stock market activity.
It’s a lot of “he said, she said.” So, this diversification comes with significant volatility.
3. Long-Term Growth Potential
Some investors (83% of a recent Coinbase survey) believe that Bitcoin and select cryptocurrencies have long-term growth potential as digital assets become more mainstream and institutional adoption increases. Even asset management behemoth BlackRock has joined the club.
The Downsides of Bitcoin in Retirement Accounts
Before rushing to add Bitcoin to your retirement portfolio, consider these significant drawbacks:
1. Extreme Volatility
Bitcoin is notorious for its price swings, with double-digit percentage changes possible in a single day. This volatility may be inappropriate for retirement funds, especially for those approaching retirement who cannot afford to ride out major downturns.
2. Higher Fees
Self-directed crypto IRAs typically charge substantially higher fees than traditional retirement accounts:
- Setup fees: Initial account setup may cost thousands of dollars.
- Trading fees: Often 1-3.5% per transaction (compared to commission-free trading at many brokerages).
- Annual custody fees: Usually higher than traditional IRAs.
- Maintenance fees: Additional charges for securing digital assets.
These fees can significantly eat into returns and may negate some of the tax advantages.
3. Regulatory Uncertainty
Cryptocurrency regulations continue to evolve. Future regulatory changes could impact how crypto assets are treated in retirement accounts.
4. Reduced Liquidity
With self-directed IRAs, transaction processing can be slow. You typically need to make a request to your custodian for each transaction, which can take days—making it impractical for any kind of active trading.
One way around this is to set up a special type of self-directed IRA called a Checkbook IRA. This subset makes you a manager of an LLC that is 100% owned by the IRA. As a manager, you can manage the assets yourself instead of waiting for custodian approval for each trade.
Like any retirement structure, there are pros and cons. But it’s possible, and something we help set up for our clients.
How to Buy Bitcoin in a Roth IRA: Step-by-Step
If you’ve decided to proceed despite the risks, here’s how to properly invest in Bitcoin through a Roth IRA.
1. Choose a Qualified Custodian
First, you’ll need to find a custodian that allows cryptocurrency investments. The company must be licensed and regulated as a bank, trust company, credit union, or an IRS-approved broker-dealer.
Look for:
- Custodians subject to financial oversight (like regulated trust companies or broker-dealers). Transparent fee structure.
- Available cryptocurrencies (some only offer Bitcoin and Ethereum).
- Security measures for digital asset storage.
- Insurance coverage.
Some established providers include BitIRA, Equity Trust, and Bitcoin IRA, though fees and offerings vary widely.
2. Fund Your Crypto Roth IRA
You have three primary options to fund your crypto Roth IRA:
- Make a new contribution (subject to annual limits: $7,000 in 2025, or $8,000 if you’re 50 or older).
- Transfer from an existing Roth IRA (no tax consequences).
- Rollover from a 401(k) (this will likely have tax implications if converting to a Roth).
Remember: You cannot transfer existing personally owned cryptocurrency into a Roth IRA.
3. Purchase Bitcoin Through Your IRA
Once your account is funded with US dollars, you can direct your custodian to purchase Bitcoin or other approved cryptocurrencies.
Depending on the custodian, you may:
- Submit trade requests that the custodian executes.
- Use a connected exchange platform (some custodians partner with exchanges like Gemini).
- Have a “checkbook control” IRA LLC that allows more direct trading (this is what we recommend. Slightly more complex but with generally more reasonable fees than dedicated crypto IRA companies).
4. Ensure Proper Storage
The IRS requires that IRA assets be held by the custodian, not the individual account holder.
This means:
- No personal wallets: You cannot store IRA-owned Bitcoin on your personal hardware wallet or exchange account.
- No direct control of private keys: The custodian or a qualified third party must maintain control.
If you personally take possession of the Bitcoin or control the private keys, the IRS may consider it a distribution, triggering taxes and potential penalties.
Compliant storage options include:
- Custodial wallets managed by the IRA provider.
- Cold storage solutions maintained by qualified third parties.
- Institutional-grade wallets (highly secure, backed up, and financial regulation-friendly wallets that offer offline storage) owned by an IRA LLC (if using the checkbook structure).
Is Bitcoin a Good Investment for Your Retirement?
While the potential for significant returns exists, cryptocurrency may not be appropriate for most retirement portfolios due to:
Risk profile: The extreme volatility makes Bitcoin unsuitable for funds you’ll need in the near future.
Portfolio allocation: Even crypto advocates typically recommend limiting exposure to a small percentage of your overall retirement savings.
Investment timeline: Those nearing retirement have less time to recover from potential downturns.
Talk to your advisor about whether cryptocurrency makes sense for your specific situation and risk tolerance.
Other Considerations for US Investors
Multiple IRA Accounts
You can maintain both a traditional IRA with conventional investments and a self-directed Roth IRA for crypto assets. However, contribution limits apply across all your IRA accounts combined.
Withdrawal Rules
Standard Roth IRA withdrawal rules apply to crypto investments:
- Contributions can be withdrawn at any time without penalties.
- Earnings can only be withdrawn tax-free after age 59½ and if the account is at least five years old.
- Early withdrawals of earnings may incur a 10% penalty plus taxes.
Importantly, in the vast majority of cases, you cannot withdraw actual Bitcoin from your Roth IRA—you must sell it first and withdraw the cash proceeds.
Compliance Risks
The most significant compliance risk comes from improper storage. If your crypto is stored in a way that gives you personal control (rather than the custodian maintaining control), the IRS may consider this a prohibited transaction, which causes a distribution of the entire account (along with taxes and potential penalties).
The Bottom Line: Proceed with Caution
Bitcoin and other cryptocurrencies can potentially be held in a Roth IRA for tax advantages, but this approach comes with significant risks, complexities, and costs that many investors may find prohibitive.
If you’re considering adding crypto to your retirement portfolio:
Only use funds you can afford to lose.
Keep allocation modest (many advisors suggest no more than 5% of your portfolio).
Choose a reputable, licensed custodian.
Understand and follow IRS rules on storage and control.
Be prepared for significant volatility.
For most investors, traditional assets like stocks, bonds, and real estate will remain more appropriate for retirement savings. However, for those with higher risk tolerance and a longer time horizon, a small allocation to cryptocurrency might provide diversification benefits.
Talk to your advisor about whether cryptocurrency makes sense for your specific financial situation, goals, and risk tolerance.
IRS Rules on Cryptocurrency: A Deeper Look
Understanding the IRS’s position on cryptocurrency is essential for anyone considering a Bitcoin IRA. Let’s explore the rules in greater detail.
The IRS Classification of Cryptocurrency
When the IRS issued Notice 2014-21, it officially classified virtual currencies as property for tax purposes.
This classification has several implications:
- Cryptocurrencies are subject to capital gains taxes when sold at a profit.
- They are not treated as currency for tax purposes.
- They cannot be directly contributed to retirement accounts.
- They are not considered collectibles (which are prohibited in IRAs).
This property classification means that crypto assets held in a Roth IRA must follow the same general rules as other property investments within the account.
The Prohibited Transaction Rule
The IRS strictly prohibits certain transactions between an IRA and its owner (or other disqualified persons). These rules become particularly important with cryptocurrency because of how digital assets are typically stored and controlled.
Prohibited transactions include:
- Self-dealing: You cannot use your IRA to buy crypto from or sell crypto to yourself.
- Personal benefit: You cannot use IRA-owned crypto for personal purposes.
- Personal possession: You cannot personally take possession of IRA assets before distribution.
Violating these rules can result in your entire IRA being treated as distributed in the year of the violation, triggering taxes and penalties.
The Storage Rule: Custodial Control is Essential
The IRS requires that IRA assets be held by a qualified custodian. With cryptocurrency, this means:
- The crypto must be stored in a wallet controlled by the custodian, not by you personally.
- Private keys must be maintained by the custodian or an approved third party.
- All transactions must be executed through the custodian.
Using a personal wallet, controlling the private keys yourself, or trading on exchanges in your own name constitutes a prohibited transaction and may trigger severe tax consequences.
Security Considerations for Bitcoin IRAs
Security is a critical concern when holding cryptocurrency in a retirement account. Unlike traditional assets, cryptocurrencies are vulnerable to hacking, theft, and loss of access if not properly secured.
Cold Storage vs. Hot Wallets
Most reputable crypto IRA custodians use some form of cold storage, which keeps private keys offline and inaccessible to hackers.
This typically involves:
- Hardware wallets that remain disconnected from the internet.
- Physical vaults with robust security measures.
- Multi-signature authorization for any withdrawal.
- Geo-distributed private key backups.
Hot wallets, which remain connected to the internet, are generally considered too vulnerable for institutional storage of retirement assets.
Insurance Coverage
Ask potential custodians about their insurance policies. While FDIC insurance doesn’t cover cryptocurrency, some providers offer private insurance that may protect against:
- Theft from hacking.
- Insider theft.
- Physical loss or damage.
- Private key loss.
Insurance coverage varies widely among providers, with some offering little to no protection. Genesis Custody, Kingdom Trust, and BitGo are examples of providers that typically offer some form of insurance coverage.
Multi-Signature Protection
Multi-signature (multi-sig) technology requires multiple private keys to authorize a transaction. This provides an additional layer of security by ensuring that no single person can transfer funds unilaterally.
A robust multi-sig setup might require:
- One key held by the custodian.
- One key held by a third-party security provider.
- One key held in secure backup storage.
This approach prevents any single point of failure in the security system.
Alternative Approaches to Cryptocurrency Retirement Investing
If a self-directed Roth IRA seems too complex or risky, consider these alternatives:
1. Crypto ETFs and Funds
The SEC has approved Bitcoin futures ETFs, and spot Bitcoin ETFs launched in early 2025. These provide exposure to Bitcoin price movements without directly owning the cryptocurrency.
Benefits include:
- Available through conventional IRA providers.
- No special storage concerns.
- Familiar regulatory framework.
- Lower fees than most crypto IRAs.
Products like the ProShares Bitcoin Strategy ETF (BITO) or Grayscale Bitcoin Trust (GBTC) can be purchased through standard brokerage accounts connected to traditional IRAs.
2. Crypto-Adjacent Stocks
Another indirect approach is investing in public companies with significant Bitcoin exposure or that benefit from cryptocurrency adoption:
- Mining companies like Marathon Digital Holdings or Riot Blockchain.
- Payment processors that support crypto transactions like Block (formerly Square) or PayPal.
- Exchanges like Coinbase.
- Technology providers that support blockchain infrastructure.
These investments offer cryptocurrency exposure while maintaining the simplicity of a traditional IRA.
3. Limited Liability Company (LLC) Structure
Some investors use what’s known as a “checkbook IRA ” structure, where:
- You establish a self-directed IRA.
- The IRA invests in a specially-structured LLC that you manage.
- The LLC purchases and holds the cryptocurrency.
This approach gives you more direct control but requires:
- Precise legal structuring.
- Careful adherence to IRS rules.
- Additional setup and maintenance costs.
- Awareness of prohibited transaction rules.
While this approach offers more flexibility, it also increases the risk of accidentally triggering prohibited transactions if not managed carefully.
That’s one of the reasons we started helping clients set up and maintain such structures, which are quite flexible. We currently have clients using them for everything from stocks and bonds to offshore investment accounts to foreign real estate in Panama and Mexico. If you’re wondering if such a structure makes sense for you, please get in touch.
Real-World Example: Setting Up a Bitcoin Roth IRA
That was a lot of info. Let’s walk through a practical example of what establishing a Bitcoin Roth IRA might look like.
Step 1: Researching Providers
James, ever the curious investor, researches several crypto IRA providers and compares:
- Setup fees ($500-$3,000).
- Annual maintenance fees ($250-$500).
- Trading fees (1%-3.5% per transaction).
- Security protocols (cold storage vs. hot wallets).
- Available cryptocurrencies (Bitcoin only vs. multiple options).
- Insurance coverage.
He selects a provider with institutional-grade cold storage, $1 million in insurance coverage, and moderate fees.
Step 2: Account Setup
James completes the application process:
- Provides identification documentation.
- Signs custodial agreements.
- Sets up beneficiary designations.
- Pays setup fees.
The process takes approximately 2-3 weeks to complete all paperwork and verification.
Step 3: Funding the Account
James decides to transfer $50,000 from his existing Roth IRA:
- He submits transfer paperwork to the new custodian.
- The new custodian initiates the transfer from his existing provider.
- The funds arrive in his new self-directed Roth IRA after 2 weeks.
Step 4: Purchasing Bitcoin
With funds now available, James instructs his custodian to purchase Bitcoin:
- He submits a buy order for $40,000 worth of Bitcoin.
- The custodian executes the trade within 24 hours.
- James pays a 2% trading fee ($800).
- The Bitcoin is stored in institutional cold storage under the custodian’s control.
Step 5: Ongoing Management
James monitors his investment and pays:
- Annual custody fees of $350.
- Additional trading fees when rebalancing.
- Any special service fees as needed.
All gains accumulate tax-free within the Roth IRA structure.
Potential Tax Pitfalls to Avoid
Despite the tax advantages of a Roth IRA, several potential pitfalls can trigger unexpected tax consequences:
1. Prohibited Transactions
If the IRS determines you’ve engaged in a prohibited transaction with your IRA, the entire account may be treated as distributed, potentially resulting in:
- Taxes on the full account value.
- A 10% early withdrawal penalty if you’re under 59½.
- Loss of tax-advantaged status.
Common prohibited transactions with crypto IRAs include:
- Taking personal possession of the private keys.
- Moving IRA-owned crypto to a personal wallet.
- Using IRA funds to buy crypto from yourself or family members.
2. UBTI Concerns
Unrelated Business Taxable Income (UBTI) refers to any income earned by a tax-exempt entity, such as a retirement account or nonprofit, from a business activity that’s not related to its main purpose.
For instance, if a Roth IRA invests in a business or uses borrowed money to make investments, it might generate UBTI. When that happens, the IRA may have to pay taxes, even though it’s usually a tax-free account.
With cryptocurrency, potential UBTI sources include:
- Mining operations (if your IRA owns mining equipment).
- Staking rewards (potentially, though this area remains legally ambiguous).
- Certain DeFi lending activities.
If your crypto IRA generates UBTI exceeding $1,000 annually, your IRA may need to file Form 990-T and pay taxes on that income.
3. Early Withdrawal Penalties
If financial need arises and you withdraw earnings from your Roth IRA before meeting the qualified distribution requirements (age 59½ and five-year holding period), you may face:
- Income tax on the earnings portion.
- A 10% early withdrawal penalty.
- Permanent loss of tax-advantaged growth on those funds.
Want to Learn More?
Since 1984, we’ve helped thousands of people just like you protect what they’ve worked hard to build.
Wondering if Bitcoin fits into your wealth protection plan? Or curious about other ways to safeguard your assets?
Let’s talk about it. Schedule a friendly, no-pressure consultation with one of our Associates today. We’re here to help.
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