In today’s post, we shall look at how to invest in a Bitcoin IRA. Whereas many people are aware of the fact that they can make an income investing in cryptocurrencies, not many know about how they can utilize an IRA structure to invest for their retirement years. Herein, we’ll discuss all you need to know about Bitcoin IRA investing, to help you decide whether this is a path worth taking. Read on to find out more.
The last decade has been quite dramatic in the world of finance. Investors have found themselves having to revisit their investment strategies, and rebalancing their portfolios, with the hope of surviving some tough times that have troubled most people in all corners of the world.
Even in the very severe financial storms, however, some investors have still managed to put up a good fight, and have managed to still grow their wealth.
Cryptocurrency investors have been in the limelight from time to time, receiving admiration and contempt in almost equal measures. As the crypto industry still takes shape and carves unique niches for itself in the present-day financial world, there are some investors who have seen it fit to establish ways to enable the general population to invest in cryptocurrencies as part of their retirement investment strategy.
These investors have worked for hand in hand with the relevant institutions to establish unique retirement investment accounts that can be used to hold cryptocurrencies, known as Bitcoin IRAs.
How does a Bitcoin IRA work?
A Bitcoin IRA is a self-directed individual retirement account that can be used to hold cryptocurrencies. It differs from a traditional IRA, where investors are limited to investments such as stocks, bonds, and ETFs.
Since the IRS Notice 2014-21, cryptocurrencies held for retirement investment in retirement accounts are treated as property, which means that they are taxed in the same manner as other assets. Due to this, any investor who wants to include cryptos in their IRA must enlist a custodian to help them comply with the set regulations.
The difference between using a traditional IRA and a Bitcoin IRA for retirement investment is that with a Bitcoin IRA, you will most likely be interacting with the following entities:
The Bitcoin IRA service providers
These are companies that you will turn to when adding cryptocurrencies such as Bitcoin to your IRA. You can view them as the bridge that will help you cross over to your dream to own cryptocurrencies as part of your retirement investment strategy.
Self-directed IRA custodians
Custodians are financial institutions that have been cleared by the IRS to hold assets in individual retirement accounts. Traditional IRA custodians oversee the investment of assets such as mutual funds and stocks, while self-directed IRA custodians oversee the investment of alternative assets such as cryptocurrencies, precious metals, etc.
The wallet service providers
Bitcoin IRA service providers usually partner with trusted wallet solutions that are entrusted with holding on to the keys to Bitcoin investors’ holdings.
Previously, it was almost impossible to come across a custodian that lets you hold Bitcoin in an IRA, but this has since changed with the inception of reputable Bitcoin IRA custodians. Note that the custodian does not have any fiduciary responsibility to you, hence choosing the right Bitcoin IRA service provider is the most important aspect of bitcoin IRA investing.
Generally, Bitcoin IRAs have:
- Minimum monthly account administration fees
- Holding fees
- Transaction fees for the transfer of funds and the buying of assets.
- Establishment fees
These are the types of fees that you are highly unlikely to encounter as a Traditional IRA owner.
Why do investors hold cryptocurrencies through Bitcoin IRAs?
Some of the reasons that seasoned investors cite for opening Bitcoin IRAs today include:
1. The diversification of their portfolios
You may have already heard the saying “ Do not put all your eggs in one basket”. Investors have found that including the right combination of cryptocurrencies in their retirement investment portfolios may help them diversify their portfolios.
Specific asset classes may exhibit different behavior from time to time, but cryptocurrencies generally move independently from the global economy, and this may be the protective element you need in the event that an economic downturn occurs.
2. Protection from inflation
Cryptocurrencies are harder to obtain as their supply increases, a phenomenon known as adaptive scaling. With most cryptocurrencies, there is a limited number of tokens that are in supply, which is unlike what we have with paper money which can be printed on demand. Investors take advantage of this property to hedge their retirement savings from inflation.
3. Protection from the influence of central bank policies
Cryptocurrencies are decentralized, in that they do not rely or thrive on the premise of the performance or control of central authorities or institutions. Cryptos do not have a single entity that the tokens have to flow through, which implies in part that your retirement funds will not be subjected to any manipulation by the government or central banks.
4. Tremendous growth
Cryptocurrencies have offered unparalleled growth to investors who have managed to make timely entries and exits into the market. If anything, you may know a thing or two about the massive returns that early Bitcoin adopters amassed. The fact that mainstream financial institutions such as PayPal have recently begun supporting cryptocurrencies goes a long way to validate their value in the present-day world. This value could culminate in massive growth in the future.
5. Tax savings
The IRS Notice 2014-21 made it possible for Bitcoin to be treated as property. This means that all gains that an investor accrues can be retained in their IRA tax-free until it is time for them to start taking retirement distributions.
Frequently Asked Questions on “ How to Invest in a Bitcoin IRA”
1. Is a Bitcoin IRA a risky investment?
Cryptocurrencies have been seen to be quite volatile at times, and this has led to many people perceiving them as risky. If you have a low tolerance to risk, then volatility can be such a major downside. Witnessing your retirement funds fall by over 10% in a single day can be too much to stomach. Risk lovers, on the other end, understand that volatility could also work in their favor, and cause the value of their portfolios to rise by several percentage points in a matter of hours.
2. Will the cryptocurrencies invested through a Bitcoin IRA be safe?
There are no guarantees that your cryptos will be safe, but you can maximize the chances of your holdings being safe by:
- Using a wallet service provider that offers cold storage
- Utilizing the services of a company that has high customer satisfaction ratings and reviews
- Keep your wallet keys private.
3. Is Bitcoin IRA investing expensive?
A common drawback to investing using Bitcoin IRAs is the fact that investors have to pay higher fees than regular IRA holders. The account set-up fees vary from one IRA service provider to the next one, but they may always end up being higher than those charged by traditional IRAs.
Investors who open Bitcoin IRAs know, however, that there are tax advantages to be gained by using such a retirement structure. They also understand that it is necessary to keep all fees and charges as low as possible, to ensure that the tax advantages are not eaten into. This is something that you ought to also have in mind as you are deciding which Bitcoin IRA service provider you will turn to.
4. Can I withdraw the cryptocurrencies held through my Bitcoin IRA?
You are allowed to withdraw the cryptocurrencies held in your Bitcoin IRA after hitting 59 ½ years, which is the legal retirement age. Investors who attempt to withdraw their tokens before they are penalized for taking an early withdrawal. You ought to, as such, plan accordingly on the amount of money you will allocate to cryptocurrency investments.
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That will be all for today’s post on how to invest in a Bitcoin IRA. I hope you enjoyed reading it and that you gained information that will help you make better investment decisions. Let me know what your thoughts are about Bitcoin IRA investing, by dropping a comment in the section below.
I wish you well,
Eric, Investor and Team Member at Gold Retired!