More recently, Bitcoin IRA has had experts talking. Is this new investment phenomenon the next best way to expand your portfolio, or is it only a pricey fad with too many risks?
Now, entrepreneurs always watch for new investment developments. For them, timing is essential when investing. As a result, some got rich when they held onto their Bitcoin, and some lost their opportunity to earn.
However, stability is not something any investor can expect from cryptocurrencies. Despite this, many out there still would like their piece of the action.
So, knowing what you’ve learned about Bitcoin, you might wonder about Bitcoin IRA. This article will tell you more.
Table of Contents
The Beginning of Bitcoin IRAs
Individual retirement accounts (IRAs) aren’t anything new. The traditional IRA began in 1974. It started with the Employee Retirement Income Security Act (ERISA). The Roth IRA came much later with the Taxpayer Relief Act of 1997.
Traditional and Roth IRAs have helped people save for retirement. But many employers only offer popular retirement accounts like 401(k) and 403(b). As a result, saving for retirement has become easier with IRAs, as they are accessible to self-employed people. The same is true for those whose employers offer no retirement benefits.
Of course, fiat currency funded these IRAs. Although many still are, a new type of IRA emerged in 2016: the Bitcoin IRA. This one functioned much like the traditional and Roth IRAs. But it has one important difference: Bitcoin funded it.
Since that year, several other providers have begun to offer Bitcoin IRAs. Some with features like concierge-style onboarding help, account rollovers, and investment advising. Bitcoin IRAs are now an accessible and viable choice. Even those who have never heard of the cryptocurrency can enjoy them.
What’s so great about Bitcoin IRAs?
Why are even the (somewhat) non-crypto-savvy investors branching out into the Bitcoin world? The truth is that Bitcoin IRAs offer advantages over the usual fiat-currency-funded IRAs.
Bonus tax advantages
Many of the same tax rules for the more traditional IRAs also apply to Bitcoin IRAs. Your contributions are tax-deductible in some instances. Also, your original contributions will grow tax-deferred.
There is also a unique tax advantage to Bitcoin IRAs and other crypto IRAs. Usually, you must legally pay capital gains tax if you sell cryptocurrency and profit from it. That tax can increase if you buy and sell considerable Bitcoin investments.
But if you sell Bitcoin within your Bitcoin IRA, your earnings won’t be taxed. This is as long as the funds stay within the account. It is the same as when you make trades in other self-directed IRAs.
Diversification opportunities
When one asset class crashes, others follow suit. This is a truth in the investment world that’s most unfortunate, which makes diversification essential. So ensure that if some of your investments are going through some losses, they don’t take your whole portfolio with them.
That’s one advantage of crypto investments. Although many retirement investments are in stocks and bonds, Bitcoin and other cryptocurrencies aren’t generally correlated with them. So, a Bitcoin IRA may provide stability when a market downturn occurs.
Decentralization
Bitcoin has no government backing it, unlike fiat currencies. That might sound like a bad thing to someone who does not know cryptocurrency. However, decentralization might make Bitcoin more secure because of the blockchain. This is a public ledger for transactions regarding cryptocurrency.
How? When someone buys Bitcoin on a cryptocurrency exchange, the blockchain records the sale. The same is true when someone sells Bitcoin. It shows the amount of Bitcoin sold, who bought it, who sold it, and when the transaction date. Anyone can view the blockchain, so fraud is often easy to trace.
However, hesitating to go into this venture is normal. When IRA funds are in banks or other financial institutions, they are protected by the Federal Deposit Insurance Corporation (FDIC). This assures you of the possibility of getting your money back.
But the federal government doesn’t protect money in crypto IRAs. If a company goes under and you can’t get your money back, the government might be unable to help you. Some providers of Bitcoin IRAs offer some security, insurance, or protection though. So you must do your research before selecting one.
Potential for significant gains
If you’ve followed Bitcoin’s history, you’d know its value fluctuations. But everything will always depend on your sensibilities as an investor. You might see that as a potential for incredible gains. You also might see it as a high risk.
Sooner or later, you’d ascertain that both views are correct. Bitcoin is the perfect example of a high-risk investment that comes with high rewards. So, you probably wouldn’t want to put all your retirement savings into a Bitcoin IRA. However, suppose you want to take a chance and see if it leads to a very high capital gain. It might be worth putting some of your funds in a Bitcoin IRA while keeping the rest in a lower-risk investment.
What about the disadvantages of this move?
A perfect investment is non-existent. So before opting for Bitcoin IRA as the best one for you, be mindful of its downsides:
- Most Bitcoin IRAs come with higher fees than regular IRAs.
- The possibility for high gains also means the potential for heavy losses.
- Some providers might ask you for the keys to your Bitcoin, exposing you to third-party risks.
Is a Bitcoin IRA worth it?
There are questions in the investment world with yes or no answers. However, this isn’t one of them. Bitcoin IRA might complement your existing portfolio. But it will depend on your tolerance for risks. There are also other factors to consider. These include overall financial situation, age, and investment goals. It also might be an investment you’d be wise to avoid altogether.
Any major financial decisions need serious discussions with your financial advisor. You can find a wealth manager or another trusted financial professional if you don’t have one. Also, know the risks, benefits, and unanswered questions surrounding crypto IRAs first. Only then can you make the choice that best safeguards your financial future.
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