Bitcoin and Retirement. Is it a good match?

In recent years, Bitcoin and other cryptocurrencies have quickly emerged as a mainstream asset class with multi-trillion dollar market capitalizations. As a result, many people (particularly younger generations) are looking for ways to invest in cryptocurrency through their retirement accounts. This interest has fueled demand for retirement accounts that accept cryptocurrency. Brokers and retirement plan providers have responded by developing alternative plans that accept cryptocurrency.

Investing in Bitcoin for retirement could provide significantly higher returns and diversify your retirement portfolio. But if we’ve learned anything about cryptocurrencies, they’re highly volatile and risky. 

Before investing in cryptocurrencies, people should know how much of their portfolio is invested in them and ensure that the allocation matches their risk profile. If you want to include Crypto in your retirement portfolio, learning how it works is the first step.

1. Step one, Learn About Bitcoin IRA 

The IRA is one of the most popular ways to save for retirement. Depending on your circumstances, traditional or Roth IRAs can help you build tax-advantaged retirement savings.

You can use an IRA provider to purchase cryptocurrency with your account. You must fund your crypto-compatible retirement account by making contributions, transferring funds from another account, or rolling over an existing account to a crypto-compatible one.

You can buy cryptocurrency from your account once it has been funded.  When selecting an IRA that allows you to buy cryptocurrency from the account, make sure it is regulated and licensed.

A Bitcoin IRA is a type of self-directed IRA. Traditional IRAs do not allow investments in alternative asset classes like real estate,cryptocurrencies or precious metals, but self-directed IRAs do. Because the IRS takes cryptocurrencies as a property for tax purposes, you can add them to an IRA if the IRA buys and holds them.

The most challenging aspect of putting cryptocurrency in your retirement account is locating a company that allows you to use the funds from the account to make purchases. Look for a company that will enable you to include cryptocurrency in a self-directed IRA, allowing you to control what is in your account.

2. Step two. Difference between Traditional IRA and Bitcoin IRA

Service providers of Bitcoin IRAs: These companies you’ll deal with if you want to add bitcoin to your IRA. They are the financial rails that will convert your assets into Bitcoin.

Custodians of self-directed IRAs: Custodians are typically brokerage firms, credit unions, or banks holding IRA assets. Traditional IRAs invest in bonds and stocks, whereas self-directed IRAs allow you to hold assets such as precious metals, real estate, or cryptocurrency.

Wallet or custody providers: A Bitcoin IRA service provider will collaborate with a reputable custody provider or wallet solution to secure an investor’s Bitcoin funds.

Previously, it was challenging to find a custodian who accepts bitcoin in an IRA; however, with the introduction of players such as iTrustCapital, Bitcoin IRA, BitIRA, and Equity Trust, the narrative has shifted. However, there is a caveat: the custodian has no fiduciary responsibility to you, so selecting the right Crypto IRA provider is more important.

3. Step three. Start buying Crypto

After funding your account, you can begin trading cryptocurrency with the funds. When you first begin trading, you must account for blockchain and exchange transaction fees, as these can slowly drain capital from your account if you are an active crypto trader.

4. Step four. Pros of Crypto IRAs

4.1.Diversification of one’s portfolio:

As you are aware, you should not put all of your investments in one basket when it comes to investing. Bitcoin holdings may provide investors with much-needed diversification in their retirement portfolios.

Bitcoin technically moves independently of individual economies, currencies, and markets, so it may aid in the protection of your retirement account in the event of a severe market downturn.

4.2.There are tax advantages:

Because you owe taxes every time you sell cryptocurrency for a profit, keeping track of your different purchase prices and gains can be a bookkeeping nightmare. Investing in a tax-advantaged account, like traditional or Roth IRA, relieves this burden because you are not taxed on anything as long as the funds and securities remain in your account. Furthermore, you will benefit from the compounding growth of value that you are not losing to taxes.

4.3.Central bank policies have no influence:

Bitcoin and other cryptocurrencies are decentralized, independent of how well the system of central banks operates. Since there is no central organization through which cryptocurrency transactions are routed, this portion of your retirement funds won’t be vulnerable to fraud. Governments and banks are unable to intervene.

Investing in cryptocurrencies involves a lot of risks. Significant gains, as well as large losses, are possible. Cryptocurrency may be another way to diversify a portfolio to offset declines in other markets. Still, a retirement account with more than a small percentage of cryptocurrency carries a very high risk of loss.

In comparison to traditional retirement accounts, bitcoin IRAs have more moving parts. This means you’ll need to exercise much more caution when choosing the best IRA provider and to research potential cryptocurrencies.

Make sure you know the costs because many are not immediately clear from their websites. Most importantly, remember that Bitcoin and other cryptocurrencies should only make up a small portion of your overall retirement plan.