Are you wondering whether you should invest in Bitcoin IRAs? If yes, here are the pros and cons of Bitcoin IRAs to consider.
For some people, Bitcoin’s volatile price fluctuations make it an ideal retirement investment. And some financial services companies offer this option for people that want to invest in cryptocurrency vial self-directed IRAs. Bitcoin IRA refers to self-directed IRA. With this option, a person can invest in Bitcoin as an alternative asset, the same way they would with precious metals and real estate. Conventional IRAs do not allow this option.
It’s crucial to note that cryptocurrencies like Bitcoin don’t have a specific Internal Revenue Service or IRS. Therefore, when investors talk about Bitcoin IRA, they mean an IRA with Bitcoin in its portfolio.
IRS considers virtual currencies like Bitcoin as property in retirement accounts. That means the government taxes Bitcoins the same way with bonds and stocks. However, an IRA holder that wants to include Bitcoin in a retirement account should seek the assistance of a custodian. And recently, several companies and custodians started helping investors to have Bitcoin in IRA.
Pros of Bitcoin IRAs
An investor can benefit from Bitcoin IRA in several ways, including the following:
- High returns potential: As stated, Bitcoin is a very volatile digital asset. However, this volatility creates a potential for significant profits. For instance, people bought this cryptocurrency on platforms like Oil Profit at $5,200 in March 2020. Later the same year, people sold the virtual asset at almost $30,000. Essentially, Bitcoin may be a volatile asset, but it has massive potential for upside growth. Nevertheless, people nearing retirement should invest a small percentage of their overall IRA value.
- Diversification: Bitcoin and other cryptocurrencies present an asset class without a correlation with bonds and stocks. Most people hold their retirement accounts in bonds and stocks. Therefore, investing in Bitcoin IRA could protect the retirement balance despite the volatility of this virtual currency.
- Tax advantages: Calculating taxes owed and tracking trades is the primary headache for anybody that wants to invest in Bitcoin. That’s because the investor owes the government some tax whenever they sell this virtual currency at a profit. And this can present a nightmare for bookkeeping because you must be on top of the different purchase prices and profits. Traditional IRA and other tax-advantaged accounts do not have this burden because an investor doesn’t pay any tax because they hold securities and money in their accounts. Additionally, you benefit from compounding value growth because they don’t lose anything to taxes.
Cons of Bitcoin IRAs
Using Bitcoin to save for retirement comes with some cons, including the following:
- Fees: Compared to the regular IRAs that allow people to invest for free, Bitcoin IRA comes with some fees. For instance, you may spend money on trading account setup and management. Therefore, understand the costs of investing in Bitcoin for retirement before starting.
- Exchange limitations: A Bitcoin IRA company may only allow investors to trade on their affiliated crypto exchanges. However, some companies allow investors to trade on their preferred platforms. Therefore, inquire about this from your Bitcoin IRA Company before starting.
- Volatility: Bitcoin price moved from almost $20,000 at the end of 2017 to $3,400 toward 2018. This volatility can present a substantial risk for IRA, especially if a person is nearing retirement.
- Capital losses: Capital losses can be unfortunate for a taxable investment account. When investing, you can deduct losses or use them in offsetting gains with another investment. The tax-advantaged Bitcoin IRA’s status may be impossible.
- Complexity: Apart from secure storage, exchanges, and custodians, Bitcoin IRA may not accommodate conventional assets like bonds, mutual funds, and stocks. Thus, you may need another retirement account even after investing in Bitcoin IRA. And this can complicate retirement planning.
Bitcoin and other cryptocurrencies present a relatively new alternative asset class. Before investing in Bitcoin IRA, weigh the pros and cons. Also, understand how this virtual currency works to make a more informed investment decision.