Bitcoin

The 6 Most Common Pitfalls of Self-Directed and Checkbook Bitcoin IRAs


Originally published on Unchained.com.

Unchained is the official US Collaborative Custody partner of Bitcoin Magazine and an integral sponsor of related content published through Bitcoin Magazine. For more information on services offered, custody products, and the relationship between Unchained and Bitcoin Magazine, please visit our website. The term “Roth IRA” rarely makes headlines, but in 2021, tech investor Peter Thiel caught attention for his $5 billion tax-free Roth IRA piggy bank. How did he achieve this? Through alternative investments using a self-directed IRA to invest in early-stage tech companies. While it may be viewed as a loophole, it emphasizes the potential for significant growth within certain IRA structures, potentially prompting further scrutiny.ProPublica (2021) reported, “Thiel has taken a retirement account worth less than $2,000 in 1999 and spun it into a $5 billion windfall.”Let’s delve into the risks associated with self-directed and checkbook IRAs, particularly in relation to bitcoin, and discuss the potential for increased regulation in the future. But first, we must understand the various IRA structures available.Different IRA StructuresIRA structures can be Traditional (pre-tax) or Roth (post-tax), regardless of custodial relationships. All IRAs require a custodian, a licensed financial institution overseeing and administering the IRA. Brokerage and Bank IRAs are the most common types, enabling investment in traditional assets like stocks, bonds, and mutual funds. Self-directed IRAs offer more diverse investment options beyond standard assets, such as real estate and digital assets like bitcoin. Checkbook IRAs provide more control over investments through a checking account, while non-checkbook self-directed IRAs require custodial approval before investments are made.Risks of Self-Directed and Checkbook IRAsHere are some risks associated with using self-directed or checkbook IRAs:1. Liquidity issues with assets like real estate and precious metals.2. Legal and structural complexities when forming a checkbook IRA.3. Challenges in reporting transactions accurately in a checkbook IRA.4. Potential tax implications due to deemed distribution treatment, as seen in the McNulty case.5. Prohibited transactions, such as commingling personal and IRA assets.6. Financing complexities, including the need for non-recourse loans and managing unexpected costs.Implications for Bitcoin IRAsGiven the intricate nature of self-directed IRAs and potential regulatory scrutiny, proper management and compliance are crucial. Unchained IRA offers a solution by providing a non-checkbook structure that mitigates many common pitfalls associated with self-directed IRAs. By leveraging collaborative custody and avoiding the need for self-reporting, Unchained IRA ensures compliance with existing IRA rules and regulations, safeguarding assets like bitcoin within an IRA structure.This informational article does not constitute tax advice, and individuals are advised to consult legal professionals for personalized guidance on IRA structures. The evolving landscape of alternative investments within IRAs requires a nuanced approach to navigate potential risks effectively.



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