Cryptocurrency pricing is very much relatable to mood swings as it keeps on changing every other minute. The next time you refresh your screen, it is either gone up by a certain percentage or is suffering a rapid declining trend.
Despite its volatility, there are some great financial services that offer the option of investing in cryptocurrency using self-directed IRAs.
And given how the crypto market prices wildly goes up and down, whenever you trade Bitcoin, you are always subject to capital gain taxes.
However, when you invest in cryptocurrency IRA or in Bitcoin Individual Retirement Accounts, you can easily work your way around to avoid these taxes as the Individual Retirement Accounts shield you from paying taxes on transactions within the account.
But again, you cannot be sure whether this would be enough to justify the risks of investing your Individual Retirement Accounts fund in cryptocurrency or Bitcoin.
What Is Cryptocurrency Individual Retirement Account?
A cryptocurrency or a bitcoin IRA is in general a self-directed IRA. This lets you invest in alternative assets which includes cryptocurrency, real estate and physical gold.
Moreover, one of the platforms has trademarked the name Bitcoin IRA, but there are several other brokerages that allow you to make a financial transaction of your pension and invest it in crypto using self-directed IRA.
Important to note here that IRS rules say that you cannot transfer your crypto holdings into a self-directed Individual Retirement Account. Instead, you will have to fund this account with U.S. dollars and only then buy Bitcoin in your Individual Retirement Account.
It is important that you invest your money wisely into these IRAs.
The tradition in self-directed IRA is that the regular IRA contribution limits for 2021 apply: $6,000 for those who are under 50 or $7,000 for people 50 or older.
Remember that the cryptocurrency market isn’t the same as stock market although the concept of buying, selling and holding your stocks and or cryptocurrency is pretty much the same in this business.
As an investor, when purchasing digital currency make sure you are well aware of the credit risk and the cryptocurrency business as a whole here in United States.
Cryptocurrency is quite different from mutual fund, bond (finance), account (bookkeeping), portfolio (finance), capital gain etc.
Are There Any Drawbacks Of Bitcoin IRA?
Besides fee, payment, ownership, tax, accounting, bank involvement and some expert opinion, a problem with investing your retirement money in cryptocurrency IRA is that today’s $330,000 nest egg will be worth a lot less when you will need it, and this is mainly because bitcoin is a highly volatile investment with a high risk.
For instance, if we look at the stock market and when it goes a correction, we see a drop of 10% or more, roughly once every two years.
When compared the same with Bitcoin, it has crashed by 50% or even more and that too a six whopping times since 2012. During this, there have been at least three occasions when it tanked by more than 80%.
Though there have been some historical bounce backs that delivered immense returns overtime, but it is again a very unpredictable market to step into.
Above all, when Bitcoin prices rise or fall, it directly affects the prices of other cryptocurrencies as well. A few to name include Dodge coin, Ethereum, Stellar and many others.
But if we look at a broader picture and perspective, it is important that when you are investing your retirement money into something, there must be a significant level of predictability.
Though Bitcoin IRA is never a bad investment, but it has a very high volatility, making it difficult to predict as compared to the stock market.
Let us suppose that you have made up your mind to invest in Bitcoin IRA, below is a detailed guide on how exactly a bitcoin IRA works.
How Does A Bitcoin IRA Work?
Yes, this will include expert service and opinion, maybe paying some incentive as well, involving the bank, doing the accounting and much more.
However…
Bitcoin IRA works pretty much the same as a normal IRA, except the fact that you are investing your retirement money in cryptocurrency instead of mutual fund shares or fold.
Moreover, you’ve got the option of choosing between traditional and Roth self-directed IRAs and benefit from the tax advantages accordingly.
You might be an investor, self-employed person, small business owners or got after-retirement funds with you to invest in an IRA. Whichever the case might be, you can always opt for SEP and Simple IRAs as well as the solo 401(k)s.
These have substantially higher contribution limits. Moreover, you can also roll over your funds from your normal IRA to a self-directed IRA easily.
Important to note that self-directed IRAs are pretty much similar to normal IRAs, except a few differences.
Below are some important components that you should keep in mind when investing your money in Bitcoin IRA:
- A Custodian: This will hold your IRA and will be responsible for its safekeeping while ensuring that your account adheres to all the rules and regulations set by the IRS and the government. Typically, the banks and other financial institutions play this role with normal IRAs
- An Exchange: This will manage your cryptocurrency trades. A crypto exchange is quite similar to stock market. It is a platform where your digital currencies are actively traded and where you can buy Bitcoin, Ethereum, Dodge Coin, Litecoin and many other cryptocurrencies easily and safely
- A Secure Storage Solution: Protecting your cryptocurrency is extremely important and most providers of Bitcoin IRA include proprietary secure storage methods that help in keeping your digital coins protected from theft once you have purchased them successfully
Pros Of Bitcoin IRA
Here in United States, having a Bitcoin IRA portfolio will immensely benefit you both in terms of long-term return of your invested payment as well as tax reliefs.
- Since Bitcoin is an asset class which is not correlated with stocks and bonds and majority of the Americans hold those in their retirement accounts, this will help protect your retirement balance despite the fact that crypto market is highly volatile
- Irrespective of the high risk, there is no doubt that there is a very high potential of return when it comes to Bitcoin. For instance, Bitcoin was only $5,200 ion March 15, 2020 and it ended the year close to $30,000 and even touched $60,000+ in 2021
- Best of all, you get tax advantages since the single greatest headache for Bitcoin investors is tracking trades and calculating taxes owed. However, you owe taxes whenever you sell cryptocurrency at a profit, and this could be an account (bookkeeping) nightmare to stay up-to-date with various purchase prices and gains. With a tax advantaged account, like the traditional or Roth IRA, the burden of tax is immediately lifted
Cons Of Bitcoin IRA
- Unlike the normal IRAs that allow to invest for free, self-directed IRAs come with more fees. You have the set-up fees for trading and account management fees, risk management, Blockchain fees, computing platform fee, expert experience fee and a few other to name
- Since most Bitcoin IRA companies allow trading on affiliated currency exchanges, in the event you have a specific crypto exchange you want to invest in, you will have to confirm it with your Bitcoin IRA provider
- Back in December 2017, Bitcoin price hit all time high of $20,000 and just a year later in December 2018, it was as low as $3,400. This kind of volatility creates a substantial risk for an IRA
- Finally, handling different moving parts involved in a Bitcoin IRA such as custodians, exchanges, secure storage etc. require a lot of maintenance and at least one other retirement account when you invest in it. Hence, Bitcoin IRAs are a lot more complex
Final Words
Bitcoin IRAs have bother significant gains and risks at the same time, while gains being on the upper end. However, with more moving parts involved, you will have to do much more due diligence.
