Investing in cryptocurrencies for retirement could offer you substantially higher returns and add diversity to your retirement portfolio. But if there’s one thing we’ve learned about any cryptocurrency, it’s that they are extremely volatile and very risky. Here’s what you need to know if you’ve decided to save for retirement in a crypto IRA.
A Crypto IRA is another name for a self-directed IRA. Self-directed individual retirement accounts allow you to invest in alternative asset classes, like real estate, precious metals and cryptocurrency, which are excluded from conventional IRAs.
In general, a Crypto IRA works much like a normal IRA, except you’re investing your money in cryptocurrency instead of mutual fund shares. You’re able to choose between traditional and Roth self-directed IRAs and benefit from their associated tax advantages. You face the same annual contribution limits, $6,000 or $7,000 if you’re 50 or older in 2021.
If you’re self-employed or a small business owner, you can opt for SEP and Simple IRAs and solo 401(k)s, which have substantially higher contribution limits. You can even roll over funds from a normal IRA to a self-directed IRA.
While self-directed IRAs are largely similar to normal IRAs, they do differ in a couple of key ways. Instead of the one-stop shopping experience that most brokerage firms provide, where you can set up an IRA and buy and sell securities in one place, you may have to be a little more DIY with a Bitcoin IRA. You’ll need to keep in mind several components:
• A custodian can hold your IRA and is responsible for its safekeeping along with ensuring your account adheres to regulations set by both the IRS and government. This is the role banks and other financial institutions typically play with normal IRAs.
• An exchange can manages your cryptocurrency trades. A crypto exchange (also known as a DCE or digital currency exchange) is similar to the stock market. It’s a place where digital currencies are actively traded and where you’ll purchase your cryptocurrency.
• A secure storage solution protects your cryptocurrency. Most providers of crypto IRAs include proprietary secure storage methods to help keep your digital coins protected from theft once you purchase them.
Another option to consider is a SDIRA, (Self Directed Individual Retirement Account), one member LLC checkbook control roth. That's a mouthful to say, but easy to setup and has many advantages for other investment options.
Crypto IRAs offer investors several advantages, including:
• Diversification. Cryptocurrency is an asset class that is not correlated with stocks and bonds, which is what most Americans hold in their retirement accounts. This may help protect your retirement balance, even though crypto may be volatile in its own way.
• Potential for high returns. Cryptocurrencies can be very volatile, but with volatility comes the potential for huge gains For example, Bitcoin was at $5,200 on March 15, 2020 and ended the year close to $30,000 and Ethereum, the second most popular crypto, was up over 400% in 2020.
• Tax advantages. The single greatest headache for crypto investors is tracking trades and calculating taxes owed. Because you owe taxes each time you sell cryptocurrency at a profit, it can be a bookkeeping nightmare to stay on top of your various purchase prices and gains. Investing in a tax-advantaged account, like a traditional or Roth IRA, alleviates this burden as you aren’t taxed on anything as long as the money and securities are held in your account. In addition, you’ll get to benefit from the compounding growth of value you aren’t losing to taxes.
Saving for retirement with cryptos, however, is not without its cons:
• Fees. Unlike with normal IRAs, which generally allow you to invest for free, self-directed IRAs generally come with more fees involved. From set-up fees to trading and account management fees, make sure you’re well aware of the costs associated with investing in cryptocurrency for retirement.
• Exchange limitations. Some crypto IRA companies only allow you to trade on affiliated currency exchanges. Others let you choose your preferred exchange. If you have a particular crypto exchange you want to invest with, make sure your IRA provider allows it.
• Volatility. The price of cryptocurrencies are very volatile. That kind of volatility is a substantial risk for an IRA, especially for investors close to retirement.
• Capital losses. In a normal, taxable investment account, those kinds of losses would be unfortunate—but not without their upside. You’re generally able to deduct losses you incur while investing or use them to offset gains with other investments. Due to the tax-advantaged status of a Bitcoin IRA, this isn’t possible, however.
• Complexity. In addition to handling the moving parts of custodians, exchanges and secure storage, you’ll probably need to maintain at least one other retirement account when you invest in a crypto IRA.
Once you’ve decided on a crypto IRA, you need to decide where to open your account. That means locating a custodian to host your self-directed IRA and enable you to make cryptocurrency trades, or consider a SDIRA One Member option for total control. Like opening any brokerage account, you’ll need to have your full legal name, address, Social Security number and banking information available.
MAXPLANS FOR LIFE can assist you in selecting a Crypto ROTH option that works best for you.
All information and discussions presented are for educational purposes only, are general in nature, and are not intended as investment, legal or tax advice. Each person’s personal and financial situation is unique and different, and the information provided may not apply to or work effectively for you. By signing up for, and attending or participating in any presentations, you agree that Bob Adams, David Steffensen, Tony Elder, personally, and MaxPlans for Life, Inc., and all affiliate companies, representatives, associates, or employees (“Information Providers”) are hereby held harmless from all liability and loss associated with the information and discussion provided, and as to any action or strategy you may choose to implement with regard to the same. In all events, we encourage you to consult with qualified and independent legal, tax and investment advisors of your choosing as to any idea, strategy, or concept presented herein.
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