About the Author:

Edmund C. Moy

Investing bitcoins in IRAs is gaining popularity as a diversification strategy.The global economy appears to be heading south and recent economic data point to increasing fragility of U.S. economic growth. As a result, some investors are seeking greater diversification of their portfolios, especially for retirement.For example, non-traditional investments in IRAs like gold have gained popularity since the financial crisis and Great Recession. The investor concern is that our accommodative monetary policy could ultimately result in inflation. Gold becomes an insurance policy because the value of gold traditionally moves in the opposite direction of the U.S. dollar. Prices are also anchored by industrial use.That same outlook has also birthed a new non-traditional investment in IRAs: bitcoins. Bitcoin's price, like gold, is determined by similar factors like limited supply, alternative uses and the free market. Bitcoin prices are at relative lows as compared with its all-time high of $1,200 and usage is increasing every day. That makes it an interesting speculative investment that has the potential of appreciating in the long term. So like gold, investing bitcoins in an IRA functions best as a small part of a balanced portfolio.To put bitcoins into an IRA, an investor needs to have a self-directed IRA. Offered by self-directed IRA custodians, they have the same protective measures in place that investors expect from larger brokerage companies. Once a self-directed IRA has been set up, there are two ways to put bitcoins into an IRA.The first way is through an intermediary custodian. One example is a digital currency fund, which operates like a money market fund. Other examples are investing in start-up bitcoin companies or in a bitcoin investment trust. There is one caveat. It is likely that one will need to prove that they are an accredited investor from an IRS perspective. That means having more than $1 million in assets excluding your primary residence or earning at least $200,000 per year. Another disadvantage are the fees charged by the intermediary custodian.The second way is to set up a Limited Liability Corporation that functions as the entity that purchases bitcoins directly. Establishing an LLC is a fairly fast and cheap process. However, the investor has the compliance responsibilities of the LLC.While investing in digital currencies like bitcoins is beginning to take off, this concept opens the door to a whole world of investments that were previously just too hard or impossible to complete or manage. For example, new non-traditional IRA assets could include digital assets like rights to rental properties or soft commodities.As a new type of non-traditional investment to an IRA, there are a few cautions to consider. Bitcoins need to stay in the self-directed IRA like any other investment or the investor will incur penalties and fees. Bitcoins are a speculative investment. Also, the IRS has issued several non-binding Private Letter Rulings (PLRs) but has not established a regulatory framework like other investments. For example, a recent PLR ruled that bitcoins are to be treated like a commodity and not a currency for tax purposes.With increasing uncertainty about the health of the global economy, more investors are exploring the potential of higher returns in non-traditional investments. Putting bitcoins and other digital assets into an IRA is a new option to diversify an investor's retirement portfolio.is the Chief Strategist of Fortress Gold Group and was the 38th Director of the United States Mint (2006-2011). He can be followed on Twitter @EdmundCMoy.