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Planning to invest in a Bitcoin IRA? Here's what you need to know

22nd July 2021 Print

We all need to invest for retirement, and choosing an adequate retirement plan is much easier said than done. IRA stands for an individual retirement account, which you should have as soon as you can fund it. 

There are many types of IRAs, but one that has recently caught the public eye is Bitcoin IRAs. Cryptocurrencies are more popular than ever, with many people owning one cryptocurrency or another. Therefore, it makes sense that there are now retirement accounts that contain Bitcoin.

Cryptocurrencies are an exciting asset; hence, many people seriously consider whether to include them in their retirement accounts. If you are considering investing in Bitcoin via an IRA, the following are some things you should know: 

1. What is a Bitcoin IRA? 

First and foremost, you need to know what a Bitcoin IRA is before you do anything else. An IRA is a self-directed retirement account that contains an asset. The difference between a traditional and a Bitcoin IRA is that the latter contains Bitcoin and cryptocurrencies instead of traditional investments like stocks and bonds. 

The IRS (Internal Revenue Service) considers cryptocurrencies like Bitcoin as property when you use them to fund a retirement account and have done so since 2014. Therefore, they are taxed in the same manner as bonds and stocks when they are part of an IRA. 

A Bitcoin IRA is an option for those looking to open a retirement account with alternative assets to traditional ones like stocks, bonds, and property. You should do as much research as possible if you consider a Bitcoin IRA to ensure you completely understand what you will use to fund your retirement.  

2. You Need a Custodian

One thing you should know and which you will find out if you learn Bitcoin IRAs is that you need a custodian to include digital tokens or currencies in your retirement account. Without one, you can only have traditional assets in your IRA, 

The thing with Bitcoin IRAs is that it is challenging to find a custodian who will accept Bitcoin and other cryptocurrencies for a retirement account. A self-directed IRA is the best option if you want to have Bitcoin in your retirement account instead of one operated by your employer or a fund manager. 

Therefore, you should keep in mind that you need a worthy custodian for a Bitcoin IRA. Evaluate the top bitcoin ira companies and find one that meets your needs. You will have to consider various factors, including annual fees, minimum investments, and bonuses the custodian offers. 

With the rise of Bitcoin's popularity, more custodians have appeared that help people include Bitcoin and other cryptocurrencies in their retirement accounts. With time, more traditional custodians will also offer their clients the same option. 

3. Diversification Tool

You should know that including Bitcoin and other cryptocurrencies in your IRA is more of a diversification tool than anything else. Stocks and bonds may be great, but they are not the components of a well-diversified portfolio. 

Other assets that people use to diversify their portfolios, such as precious metals like gold & silver, are not as attractive as Bitcoin. Cryptocurrencies are an asymmetrical investment meaning that there is a huge potential for upside with low downside potential. 

Very few assets can claim the same characteristic.

Therefore, if you are looking to diversify your retirement portfolio and maybe put ten percent of your retirement in a high growth potential asset, a Bitcoin IRA is an excellent choice. Moreover, if your investment drastically increases in value, you can liquidate it and put it into other high-return assets. 

A Bitcoin IRA is a fantastic option for a retirement account and long-term investors who can withstand short-term price fluctuations. It also offers a great hedge against the dollar, whose value continues to drop. 

4. Tax Benefits

Most people are looking for ways to pay less in taxes, especially for their retirement. You will be happy to know that a Bitcoin IRA can offer you plenty of benefits that other retirement accounts cannot. 

Many people pay substantial capital gains taxes whenever they sell an asset in the retirement account. The same goes when you sell cryptocurrencies for a profit from your Bitcoin IRA.

However, if you can keep the cryptocurrencies in your account for long periods, you can enjoy significant tax advantages.

Some custodians offer tax-advantaged IRAs, alleviating the stress of calculating your IRA profits and taxes to pay. As long as the assets remain in your IRA, the IRS will get nothing from you; hence you get more money to enjoy your retirement. 

5. The Risks

bitcoin laptop

Everything that has an upside also has a downside, and the same goes for Bitcoin IRAs. If you invest in Bitcoin and other cryptocurrencies via your IRA, you should know that it will involve risks

Cryptocurrencies suffer the pitfalls that any emerging technology would face. You need to understand the risks of owning cryptocurrencies as an asset and how they can affect your retirement account. 

The most significant risk as it pertains to Bitcoin as an asset is volatility in its price. The vast majority of cryptocurrencies traders do it on a purely speculative method, leading to erratic price movements. 

Another substantial risk associated with Bitcoin IRAs is the lack of reliable and trustworthy regulatory authority. Therefore, you can experience cyber theft where your computer is hacked, and you are left with nothing in your account. 

Cryptocurrency exchanges can also be hacked, and your assets can be stolen when making trades which is another significant risk. Moreover, certain custodians will only allow you to trade cryptocurrencies using certain exchanges, limiting your options. 

You can avoid many of the pitfalls of Bitcoin IRAs by carefully scrutinizing providers and cryptocurrency exchanges to ensure they are legitimate. Cold storage is also crucial in storing bitcoin and cryptocurrencies; hence you should ensure your custodian has secure cold storage protocols. 

As you can see, you need to know plenty if you want to invest in a Bitcoin IRA. You mainly need to understand cryptocurrencies and the market to avoid many of the risks associated with Bitcoin IRAs. If you know the above points, you should be in a great position to invest in a Bitcoin IRA. If you understand cryptocurrencies and their future potential, plus have an appetite for risk and a long-term horizon, Bitcoin IRAs might be for you.

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