Own Bitcoin in your ROTH IRA – Step by Step – Updated

by Pat Heyman | Dec 26, 2022 | How to

Note: When I first made this article in 2018, it was full of fun little anecdotal SNAFUs, so that you could follow along and experience my travails vicariously, in an orgy of schadenfreude. But a lot has changed in the last four years, and I’ve updated the article to be much more streamlined.  I’ve tried to keep the original whimsy in the introduction…

So you’re convinced.  Bitcoin and cryptocurrency are the wave of the future (or at least you hope to make a fortune trading the swings), but the new tax law that you’re supposed to calculate your gain and pay taxes on every trade is cramping your style.  Well, you could avoid paying taxes if you owned and traded the cryptocurrency inside of a tax deferred retirement account (or better yet, a Roth IRA so you never pay taxes on the gains).

But doing so is a bit complicated.  For years I had heard of “self directed” IRAs that allowed you to invest in real estate (but my IRA didn’t have enough money to do that).  Later on, I learned about how you could invest in gold  through an IRA or the IRA could even start its own LLC that you manage (also known as a checkbook IRA).   But I never had a reason to want to do so.

Enter Cryptocurrency.  No matter whether you’re HODLing, trading, or running masternodes, the potential upside is enormous, and you don’t need a huge amount of money to get started.  Now there’s a reason to put that arcane knowledge to use.  What follows below are the things I’ve learned by doing this process myself.

Overview of the IRA/LLC process

1. First you’ll need a self directed IRA with a trust company that allows IRA/LLCs also known as checkbook IRAs.  So find one with minimal fees that you trust, and open an account.
2. Find an attorney who specializes in this sort of thing to create your LLC.
3. Once your LLC is created you need
   1. Request a bank check sent to your house from the IRA in your LLCs name
   2. Open a bank account in your LLCs name.
4. Open an a corporate account for the LLC on a crypto exchange.
5. Wire the money from the bank account to Gdax.
6. Trade your heart out.

It doesn’t sound that hard, but it will likely take you several weeks to make it all the way through the process.  I’ve tried to help you make it as streamlined as possible

Step 1: The first step is to open a self directed IRA

You’ll need to open a self directed IRA with a custodian that allows IRA/LLCs.  My personal preferences are:

1. Custodian has an online sign up (I HATE paper forms)
2. Low fees
3. Allows you to pay maintenance fees with a credit card

Due to anti-kickback laws, no professional you deal with can “recommend” a service to you.  So if you already selected an attorney, they can’t recommend an IRA custodian, and vice versa.  But perhaps if you worded your question in the form of “which companies are the easiest to work with?” they might be able to answer.

Back in 2018, Based on these two criteria, I originally selected Kingdom Trust, updated fee schedule it looks like they eliminated the IRA/LLC option, and the regular self directed IRA option has a percent of portfolio based fee, which simply doesn’t work for me.  So I ended up going with IRA Trust Services, which underwent a name change (and acquisition?) to ForgeTrust.

Fast forward to 2022, and I chose DirectedIRA.  Slightly lower fees, and they can actually handle the LLC formation and be your registered agent, so they can be a one stop shop.  Directed IRA is Mat Sorensen’s company (the attorney whose video above got me into this whole thing in the first place.

They’re pretty much all going to charge an annual (or more often) maintenance fee, check fee, wire fee.  They often charge per “asset” within the IRA, but the only asset should be the LLC you’re going to form.

Action steps:

• Fill out the Application for new account form
• You need to fund the account in some way.  Ideally a large chunk, like say $5000 or more, but whatever you can do that they will accept will work.  You can also transfer assets from an existing IRA/Roth IRA.  You can also rollover your 401k if you leave your job.

Step 2: Have an attorney form your LLC

You can begin this step while you’re waiting for the IRA to fund.  I consulted with two attorneys (Mat Sorensen and Nick Spradlin).  I ended up going with Nick Spradlin mainly for the lower price and because he has offices in Florida.  This step took about two weeks.

You WILL need a Tax Id number for your LLC, so it’s easier to pay the attorney to file it for you than for you to do it yourself (IMO).  It’s also easiest to name your LLC: FirstName LastName IRA LLC.  That way when you go to the bank, they immediately see the relationship.  You can also pay for a DBA (doing business as fictitious name) but I didn’t opt to.  I highly recommend using an “e-book” rather than a traditional printed binder.

You can also pay for the attorney to be your registered agent within the state of registration (which should be your state of residence).  This makes a lot of sense when you’re investing in real estate and there may be legal issues with subcontractors or tenants, but I’m not sure it’s such a great deal if you’re just buying Bitcoin.  (Update: the major reason to do this is that if you are the registered agent, and you use your home address, then it’s going to show up in public records.)

It’s absolutely imperative that this be set up correctly, so use an attorney that specializes in IRALLCs, and not just any ole attorney or LegalZoom.

A couple weeks later you’ll get an e-mail with several things.

• Articles of Incorporation where the attorney filed your LLC with the State
• An LLC seal
• An LLC membership certificate
• Your Tax ID number
• And your LLC Operating Agreement, Minutes, and Ledger

Step 2b: What do you do with all this LLC stuff?

1. First you need apply your company seal to the Membership Certificate.  There are instructions on how to do it using Adobe Acrobat.
2. Then print out the Certificate and sign it.
3. Print the signature pages from the Operating Agreement and Minutes and sign them.  Scan everything back together and assemble the documents into one big file. (Or print them all and then just scan them together.)
4. Send them all to your IRA Custodian (see Step 3 below)

Step 3: Tell your IRA Custodian to invest in your IRA/LLC

This will likely involve several forms.  You’ll need to to fill out an LLC agreement form where you tell them the name of the LLC and provide all of the documents above, and then an Investment Authorization “Kit” (series of forms) authorizing the IRA Custodian to “invest” (send money) to the LLC.  This means that you’re going to have a bank account in the LLCs name.  For some odd reason, neither of the self-directed custodians would allow me to simply wire money to an exchange.  They required that I wire the money to a bank account first, and then send the money from the bank account to the exchange.

Now…good luck finding a local bank that will open a business account for your IRALLC.  They want to know things like what is the nature of the business?  How many customers do you have?  What demographics do they have? What is your average revenue per month?  How much do you anticipate in monthly cash deposits?   Uh…It’s a business where I’m going to open the account, send the funds to an exchange, and just keep the minimum balance required to keep the account open.  I have no customers and no revenue…

Apparently, even more traditional businesses held in IRALLCs run into this problem.  I’ve discovered there are a few banks that cater to the IRALLC market.  Solera National Bank is very IRALLC friendly, has no minimum balance requirement, and no monthly maintenance fees.  They were very easy to work with, and I recommend trying them based on my experience.  You’ll need to answer some questions about the business and send them all your LLC documents, and then wait for it to be approved.  This took about a week, (after thrashing around looking for a bank that would take my money), so start your bank account as soon as you get your LLC docs.

Bank Secrecy Act (Currency and Foreign Transactions Reporting Act)

As part of opening the bank account, they’ll ask you a series of questions required by the Secrecy in Banking act.  One of them includes whether you are creating or exchanging virtual or digital currency.  To the best of my reading, the answer is no.  (If you answer yes, they won’t let you open the account by the way.)  DISCLAIMER: I am not an attorney, nor do I play one on TV, nor did I sleep in a Holiday Inn last night.  This is not advice nor a legal opinion.  The best that I can see is that if you’re in the business of exchanging (like Bittrex or Coinbase) or you’re going to be creating a cryptocurrency (like Ripple) then you probably should say yes.  But if you’re just buying, holding, and selling cryptocurrency, you should be okay saying no.

Step 4: Open a Corporate Crypto Exchange Account

This is actually one of the hardest steps.  BinanceUS and Coinbase are both incredibly obtuse.  First they will ignore your application for two to three weeks.  Then they’ll ask for more information and ask a huge number of questions that you’ve already answered.  They can’t seem to figure out that the source of funds is your own personal IRA money.  They seem to think that you’re going to be soliciting other people’s retirement accounts. Honestly, I wouldn’t even try.

Uphold was relatively easy to set up, but their fees are insanely high, and a lot of the crypto can’t be sent anywhere.  And then a week later, they told me they were going to suspend my account if I didn’t send them more information that I had already sent them twice.  0/10, would not recommend.

That leaves Gemini and Kraken.  Kraken approved me so fast that I never even completed Gemini’s application process.  Now I hate Kraken’s interface.  It’s even worse than Coinbase (I still don’t understand why they killed Coinbase Pro.)  Kraken also doesn’t allow ACH transfers.  You’ll have to wire the money.  BUT that’s a small price to pay for actually having a working, bona fide corporate account.

Final words

Be very careful NOT to engage in any prohibited transactions.  If you’re audited (the IRS says that it’s targeting IRA/LLCs), your IRA could lose IRA status forever.

The IRA will need to pay an annual registration fee with the state you incorporated in, so save some money for that.

You’ll also need to reserve some money for the IRA account fees, and Bank account fees (or maintain the minimum balance to avoid the fees).

You’ll need to provide an annual valuation of your LLC to the custodian that is prepared by a qualified third party (i.e., NOT you or a direct relative).

Overall the process is not that hard, but if you don’t know what to expect or what the right words are, it’s easy to feel stupid and lost.

Dealing with Nick Spradlin was very easy and quick despite my not paying for the expedited service.  I’m not sure if he works in all states, but I know he advertises in Florida and Texas.