Ever since cryptocurrencies busted on the scene, they’ve fought to grow their legitimacy by gaining access to retirement accounts.
It’s a particularly valuable spot for the asset. Within an individual retirement account (IRA), for example, you could, theoretically, hold the majority of your coins never spending the investment as they grow, tax-free. Once you withdraw, then gains are taxed as regular income at a time when you need less of it. If cryptocurrencies ever live up to their perceived hype, this would provide a powerful way to save over many years, avoiding much of the taxes on the appreciation. It’s aided in this effort, if you can do so while also investing in your usual retirement products, like stocks, bonds, funds and real estate.
Kingdom Trust, a provider of self-directed IRAs has released a new feature that pulls this reality closer to fruition. Under its newly launched Choice platform, it has begun offering the ability to trade within your self-directed IRA, whether you want to hold stocks, bonds, exchange traded funds (ETF) or, yes, even cryptocurrencies.
“By our estimates, there are 7.1 million Americans who own bitcoin, have a retirement account, but currently don’t have the option to hold bitcoin in their retirement account with their other assets,” Ryan Radloff, CEO of Kingdom Trust, said in the press release announcing the launch.
Earlier this year, Kingdom Trust purchased Choice Holdings, which was created by some members of the founding team of the popular digital asset management company CoinShares. Kingdom Trust’s feature doesn’t veer too far from its current offering of self-directed IRAs, which allow you to buy and sell cryptocurrencies within an IRA-like tool. But Choice does provide you with the opportunity to trade cryptos on the same platform as other potential self-directed IRA investments, whether they’re stocks, bonds or alternative assets.
How It Works
You’re not able to buy and save cryptocurrencies within traditional retirement accounts, like a 401(k), regular IRA or a Roth IRA. Instead, you have to use what’s referred to as a self-directed IRA, which allows access to alternative investments, such as real estate or digital coins.
The self-directed IRAs have, traditionally, targeted investors that want access to alternative investments as a way to diversify a part of their retirement portfolio. Such investors might have 90% to 95% of funds in traditional retirement accounts, growing via stocks and bonds. They will use the self-directed IRA to place the remainder of the portfolio into investments that have a greater risk, but could provide upside and aren’t as closely linked to stock and bond movements.
To gain access to this flexibility, however, expect higher fees.
A traditional self-directed IRA through Kingdom Trust, for example, comes with a $225 annual account cost, plus a 0.25% holding fee, which is capped at $1,500 a year. The holding fee for digital assets run .05% of the account value per year, capped at $1,800 with a $20 monthly account fee. Each trade of a digital asset runs $150.00.
On Choice, crypto trades will cost 1% while stock trades will not have a fee.
The Savings Conundrum With Cryptocurrencies
Self-directed IRAs have been a way for cryptocurrencies to creep into retirement planning, and take advantage of the fact you’re not taxed on the returns, except as regular income and only at the time you begin withdrawing funds (assuming you’re over 59½ when you do). The act of trading while building assets for retirement, however, can cut into returns, due to additional fees.
It creates a fickle situation for investors in cryptocurrencies within a retirement account. On the one hand, investors want transaction volumes of bitcoin and other coins to rise in order to justify the investment. Without transaction volumes rising, it’s difficult to argue that the coins have made much headway into replacing fiat currency. But if cryptocurrency holdings rise within retirement accounts, then it has the potential to cut into the coin’s spend rate. It’s a hoarding situation that cryptocurrencies already experience, as transaction rates for bitcoin, which track the number of coins spent and traded each day, hasn’t materially increased in the past four years, even as the number of coins in the market, grows.
Yet, within retirement accounts, it’s not the place to make a lot of trades. It increases the fees paid and can deeply cut into the ability for your returns to compound, even if you’re lucky enough to correctly time trades.
Kingdom Trust ran a test of the current Choice offering with about 200 clients holding only cryptocurrencies, tracking the use during the first quarter of 2020. They found that approximately 1,100 trades took place – an average of five to six trades per user – with 70% of the trades using bitcoin. Of those bitcoin trades, the average size of trade was $31,000.
The Likely User
The early days of cryptocurrency buying within a self-directed IRA has leaned towards those within the millennial age group.
Recently, Charles Schwab provided some demographic information of those trading within its self-directed IRAs. It found that among millennials, the fifth most popular holding within self-directed IRAs was Grayscale Bitcoin Trust, an investment vehicle that provides access to bitcoin without actually having to buy or store the coin. The level of holdings in the trust outpaced average share holdings for Berkshire Hathaway
Cryptocurrencies didn’t place in the top 10 of holdings for those within the Gen-X or Boomer age groups.
As of now, only 1% of Kingdom Trust customers hold cryptocurrencies and other assets in the same account. The company argues, along with the complexity of holding multiple assets in the same account, it’s because customers often target the self-directed IRAs to hold one asset, not allowed or easily found in traditional retirement accounts. This could include real estate vehicles, crowdfunding investments or digital coins.
Whether that rate of adoption changes, as it’s easier to trade bitcoin on the same platform as other investment vehicles, will provide just another small test in the myriad of steps the coins must pass for wider-spread acceptance.