Table of Contents
- 1 Bitcoin IRA
- 1.1 What is a Bitcoin IRA?
- 1.2 How Bitcoin IRA Works
- 1.3 Steps to Follow When Opening a Bitcoin IRA Account
- 1.4 The Benefits of Investing in a Bitcoin IRA
- 1.5 The Risks Associated with Bitcoin IRA
- 1.6 The Rules and restrictions of a Bitcoin Rollover
- 1.7 Whether You Should Open a Bitcoin IRA
Planning your retirement involves opening an individual retirement account and choosing the right retirement investments strategy. If you don’t mind taking a little risk in return for potentially larger returns and tax advantages, you should consider opening a Bitcoin IRA. Investing in a Bitcoin IRA lets you diversify your retirement portfolio and offers you substantially high returns. However, you should know one thing about cryptocurrencies; they are highly volatile and risky, especially compared to a gold IRA. Here’s what you should know if you decide to invest in a Bitcoin IRA.
What is a Bitcoin IRA?
A Bitcoin IRA is a type of self-directed IRA. Self-directed IRAs allow investors to invest in alternative assets that are not included in conventional IRAs. These alternative assets include precious metals, real estate, and cryptocurrency. Americans have an option of investing in a wide range of alternative assets under the self-directed IRAs. Even if investing in a crypto IRA introduces more risk to your retirement portfolio; it could provide a broader diversification and enhance your investment returns.
You can set up a Bitcoin IRA with any of the classifications that you are used to, including Traditional, SEP IRA, SIMPLE IRA, and Roth IRA. Regal Assets are one of the leading gold ira companies that offer Bitcoin IRAs. The common cryptocurrency assets available from them include Bitcoin, Ethereum, Bitcoin Cash, Litecoin, Ethereum Classic, Stellar Lumens, Chainlink, Aave, and Zcash.
How Bitcoin IRA Works
Bitcoin IRAs work the same way as normal IRAs, except that you invest money in cryptocurrency instead of the typical mutual fund shares. You can choose a traditional or Roth IRA and tap from their tax advantages. You can roll over funds from your 401(k) or normal IRA into your self-directed IRA. Even if self-directed IRAs are almost similar to normal IRAs, the two retirement accounts differ in some ways. Unlike a normal IRA where the brokerage firm does everything for you, you may have to engage in a bit of DIY with a Bitcoin IRA. Here’s what you will need while investing in a cryptocurrency IRA:
#1 A custodian — A custodian holds your IRA and ensures that your investment is safe. A custodian provides technical support, FDIC (Federal Deposit Insurance Corporation) insurance, and helps you set up your account. The custodian will also ensure that your account is in line with both the IRS and government regulations. A custodian plays the same role financial institutions play for a normal IRA.
#2 Secure Storage Solution — Bitcoin IRAs require secure storage methods to protect the cryptocurrency and protect your digital coins from theft after you purchase them. This digital service encrypts and stores your cryptocurrency, keeping it safe from loss.
#3 An Exchange —An exchange is similar to the stock market and plays the role of managing your cryptocurrency trades. An exchange allows live crypto trading; it is here that the USD is traded for digital currencies. It is from here that you will buy your Ethereum, Bitcoin, and other cryptocurrencies.
Many self-directed IRA providers will serve all the above roles. For example, your crypto IRA company could partner with an exchange or allow an investor to use a third-party crypto exchange.
Bitcoin IRA companies handle the process of setting up storage and exchange solutions for investors. You should contact a trusted Bitcoin IRA company if you’re interested in getting started with cryptocurrency IRA.
Steps to Follow When Opening a Bitcoin IRA Account
When you decide to engage in cryptocurrency investing, you have to decide where to open your account. This means choosing a custodian to host your crypto IRA and enable you to trade in cryptocurrency. Like when opening a brokerage account, you should have the following information: legal names, social security numbers, addresses, and banking information.
When choosing a crypto IRA custodian, you should ensure that their account types, cryptocurrencies available, and exchanges line up with your goals. Ensure that you compare the relevant fees imposed by different custodians because these could add up over time and affect your ability to achieve your retirement goals.
The steps that you should follow when opening a Bitcoin IRA account are relatively straightforward:
· Step 1: You should choose whether to open a Traditional IRA, Roth IRA, or a SEP-IRA. The ideal individual retirement account will depend on your personal financial circumstances.
· Step 2: Ensure that you open an account with one of the best Bitcoin IRA companies. All companies are not the same; exercise discretion when choosing a reliable provider.
· Step 3: This step involves funding your account through a crypto IRA rollover, direct bank transfer, or direct IRS-to-IRA transfer. Your new account custodian will facilitate this process.
· Step 4: With the help of your crypto IRA provider, choose the cryptocurrencies that you wish to invest in. Your assets will then be stored in secure digital wallets.
The Benefits of Investing in a Bitcoin IRA
Since their creation, Bitcoin and other cryptocurrencies have had a massive increase in value, creating a worldwide buzz. Over the last three years alone, the price of Bitcoin has increased by over 600%. Below are the advantages of cryptocurrency IRAs:
1. Portfolio Diversification
A gold standard for a successful investment strategy is a diversified portfolio that matches your risk tolerance and your current and future financial goals. Cryptocurrency is distinct from stocks bonds, the assets that most Americans hold in their retirement accounts. Even if crypto may be volatile in its own way, it helps you protect your retirement balance. Investing in a crypto IRA in conjunction with a traditional retirement plan or as part of your overall strategy is a great way of increasing your returns.
2. Higher Returns
We all know that Bitcoin is very volatile; however, with this high volatility comes a great potential for high returns. For example, on March 15, 2020, Bitcoin was at $5,200 but ended the year at around $30,000. The second most popular crypto, Ethereum, had an over 400% increase in value in 2020. The great high returns potential of Bitcoin is worth the risk, especially when you only invest a portion of your overall IRA value. Even if Bitcoin could lose 100% of its value, its upside is much higher than this.
3. Tax Advantages
For investors seeking to minimize their crypto taxes, a cryptocurrency IRA is a safe way of gaining some tax advantages. For most Bitcoin investors, the greatest headache involves tracking trades and calculating the tax they owe. A trader owes taxes every time they sell crypto at a profit. When you invest in a tax-advantaged account, traditional or Roth IRA, you will no longer bear this burden. As long as your money and investments are held in your account, you aren’t taxed on anything.
Both the traditional and Roth IRAs provide tax benefits, but the timing of receiving the tax benefits differs. In a traditional cryptocurrency IRA, you will enjoy immediate tax benefits because your crypto contributions are tax-deductible. Therefore, you defer paying taxes until your retirement. On the other hand, contributions to a Roth IRA are not tax-deductible. However, you will not pay capital gains taxes on any increase in the value of your investment.
Blockchain technology is a secure way to transfer, authorize, and document the exchange of Bitcoin and other crypto. This technology helps create an efficient, secure, and tamper-proof log of activity. When you hold a digital IRA, Blockchain will be logging money transfers into digital wallets that you will use for your IRA. The ability of Blockchain to conduct secure transactions is a great advantage to investors.
5. Resistant to Government Confiscation
Unlike the traditional retirement investment assets, crypto is a largely anonymous asset. Bitcoin exists in a cryptographically protected digital wallet. Therefore, crypto is highly resistant to government confiscation. It is also resistant to thefts and seizures.
The Risks Associated with Bitcoin IRA
Despite the many benefits of a Bitcoin IRA, saving for your retirement with Bitcoin has some disadvantages:
I. Additional Fees
Unlike the traditional IRAs, where you invest free, a self-directed IRA comes with some additional fees. The additional fees include trading account setup fees and account management fees. You should ensure that you understand all the fees associated with investing in cryptocurrency for retirement.
The price of Bitcoin fell from almost $20,000 in December 2017 to around $3,400 in December 2018. This volatility is a significant potential risk for an investor, especially if you are close to retirement.
III. Exchange Limitations
Some Bitcoin IRA companies allow investors to choose their preferred exchange. However, other companies will only allow you to trade on affiliated currency exchanges. If you would like to invest with a certain crypto exchange, you should ensure that your Bitcoin IRA provider allows this arrangement.
With a cryptocurrency IRA, you have to deal with exchanges, custodians, and secure storage. In addition, you probably have to maintain another retirement account alongside the crypto IRA. This is because a crypto IRA cannot accommodate other traditional investment assets like bonds, stocks, and mutual funds. Therefore, investing in cryptocurrency for your retirement could add some degree of complexity to your retirement savings.
The Rules and restrictions of a Bitcoin Rollover
Initiating a Bitcoin IRA rollover is one of the most common ways of setting up a Bitcoin IRA. Rollover is the process of transferring funds from an existing IRA account into a new cryptocurrency IRA. It’s not mandatory for a rollover to originate from an IRA. Investors can rollover funds from employer-sponsored accounts like 401(k) and 403(b) to a crypto IRA. This is what a rollover involves:
· Your Bitcoin IRA Company contacts your current retirement account provider to start the rollover process.
· Funds are withdrawn from the investor’s pre-existing retirement account and put into the account holder’s bank account.
· The investor will have up to 60 days to deposit the funds into their IRA account before they become taxable income.
· After depositing the funds into the account, the crypto IRA custodian helps the investor to purchase Bitcoin or other cryptocurrencies with the funds.
· Another rollover can only be initiated after a 365-day period has elapsed
Initiating and completing an IRA rollover is simple with the help of a Bitcoin IRA company. You should only have a reputable company handle your rollover to avoid costly compliance mistakes.
A Bitcoin IRA transfer can also occur by sending distributed funds directly to an investor’s new crypto IRA account without depositing the funds into a bank account. This process is faster and eliminates the margin of human error. Some Bitcoin IRA companies facilitate direct transfers; ask your company if they provide this transfer rather than a rollover.
Whether You Should Open a Bitcoin IRA
If you are close to retirement, opening a Bitcoin IRA might not be a prudent option due to the volatility of cryptocurrencies. However, if you have a long time to retire and a high-risk tolerance, investing some of your retirement savings in alternative assets like Bitcoin and other crypto is beneficial. It could offer you a hedge against other conventional holdings.
Remember that, unlike traditional individual retirement accounts, crypto IRAs have more moving parts. You have to do more due diligence with a Bitcoin IRA, both in choosing the right IRA provider and researching potential cryptocurrencies. Make sure that you understand all the fees involved and, above all, understand that crypto IRAs should only comprise a portion of your retirement investment, not its entirety.