Bitcoin & Retirement Funds: What You Need to Know
Investing in Bitcoin and other cryptocurrencies for your retirement can add diversity to your portfolio and has the potential to offer considerably high returns.
But, if there’s one thing that we know about cryptocurrencies is that they can be risky and volatile.
So here’s all you need to know if you’re thinking of saving for retirement in a Bitcoin Individual Retirement Account (IRA). We’ll discuss what an IRA is, how it works, and the pros and cons of using one.
What Is A Bitcoin IRA?
A Bitcoin IRA is an alternative name for a self-directed IRA. With self-directed IRAs, people have the power to purchase a variety of alternative assets that are not permitted in traditional IRAs. These include gold and other precious metals, property, and cryptocurrency.
How Do Bitcoin IRAs work?
Bitcoin IRAs are similar to normal IRAs, except that you’re investing your capital in cryptocurrency instead of mutual funds.
You can choose between conventional and Roth self-directed IRAs and take advantage of their associated tax benefits. You have the same annual contribution limits of $6,000 (or $7,000 if you’re 50 and above), and can carry over funds from a 401 (k) or traditional IRA to a self-directed one.
As opposed to the convenient experience that most brokerage firms provide — where you can simply set up an IRA and purchase and sell securities in one place — you’ll have to be a bit more hands-on and diligent with Bitcoin IRAs.
You’ll want to keep in mind the following 3 elements:
● A custodian is responsible for the safekeeping and holding of your IRA and ensures that your account sticks to the regulations set by the government. This role is usually played by financial institutions and banks.
● An exchange handles your cryptocurrency trades. As opposed to over-the-counter (OTC) crypto trading where trades are carried out directly between counterparties, crypto exchange trading takes place via a centralized exchange.
Crypto exchanges are just like the stock market. It’s where digital currencies are traded and where you’ll purchase your Bitcoin.
If you’re interested in OTC trading, check out the Independent Reserve’ OTC trading desk.
● A safe storage method is necessary to protect your investment. Most Bitcoin IRA providers incorporate secure storage solutions to help keep your digital currency safe from theft.
Institutions offering self-directed IRAs may provide some or all of these components. For instance, an IRA company may partner with a specific exchange or may allow you to trade using any crypto exchange.
The Benefits Of Bitcoin IRAs
Does Bitcoin belong in your retirement fund? Here are a few reasons why the answer may be yes:
● Diversification. Even though bitcoin is volatile, the fact that it’s not correlated with bonds and stocks may actually help protect your retirement credit by broadening your investment portfolio.
● Potential for significant gains. Greater risks are always associated with the potential for higher returns. This is especially true in the world of crypto. For instance, if you look at the price history of BTC from June to October 2021, it almost doubled from $35,945 to $61,374.
This massive upside potential of BTC is what can make the risk worth it, especially if you’re only investing a small percentage of your total retirement funds.
● Tax benefits. The biggest headache for crypto investors is keeping track of trades and figuring out the taxes they owe. As you owe taxes every time you sell crypto at a profit, it can be a nightmare to stay on top of your gains and taxes.
However, investing in tax-advantaged accounts like Roth or traditional IRAs relieves this burden as you won’t be taxed as long as the securities and money are held in that account.
The Drawbacks Of Bitcoin IRAs
Despite its benefits, saving for your retirement with crypto is not without disadvantages. These include:
● Added complexity. On top of handling the moving parts of exchanges, custodians, and storage, you’ll also need to maintain an additional retirement account when you invest in Bitcoin IRAs. This is because Bitcoin IRAs aren’t set up to accommodate conventional assets like mutual funds, bonds, and stocks.
● More fees. In contrast to traditional IRAs, which typically allow you to invest for free, self-directed IRAs charge a fee.
● Volatility. It’s no secret that the price of cryptocurrencies can fluctuate a lot. High volatility is always a significant risk for an IRA, especially for investors nearing their retirement.
So, Should Your Retirement Funds Include Bitcoin?
For investors close to their retirement, it might not be a good idea to risk your retirement on a complicated and volatile investment like Bitcoin.
However, for those who have a higher risk tolerance and a longer period until retirement, investing a portion of their retirement funds in alternative assets Bitcoins may offer value and protection against losses from conventional assets.
But, it’s important to remember that opening a Bitcoin IRA involves more moving parts than conventional retirement accounts. Meaning you’ll need to be more careful, not only when searching for potential cryptocurrencies but also when choosing the right IRA provider for your needs.
Also, make sure you fully understand the fee structure, which is not very clear sometimes. Finally, consider cryptocurrencies like Bitcoin as a small part of your overall retirement plan — not its majority.