Is a Bitcoin IRA Right For Your Retirement Plan?

It’s pretty difficult to ignore the cryptocurrency craze — despite the well-publicized price volatility. More now than ever, people are trying to find new ways to incorporate Bitcoin (CRYPTO: BTC) into their respective retirement plans. Recent IRA offerings seek to meet this demand.

Enter the Bitcoin IRA. The Bitcoin IRA provides crypto access to investors trying to diversify and tax-optimize their portfolios; whether this is a good decision remains to be seen. Here, we’ll explore the reasons you might consider — or entirely avoid — the Bitcoin IRA.

Why you might consider a Bitcoin IRA

One of the big reasons people look to roll money into a Bitcoin IRA is related to tax management. If you’re a believer in Bitcoin, holding it in a tax-advantaged space like a 401(k) or an IRA is likely very important to you. Essentially, Bitcoin and other cryptocurrencies held in traditional or Roth IRAs are exempt from capital gains taxes at the point of sale. This means you can trade freely in either type of crypto IRA without needing to worry about tax charges.

At the same time, crypto interest or rewards related to staking are shielded from tax when the underlying position is held in an IRA. In other words, if you lend, or “stake,” your crypto in exchange for periodic interest payments, you won’t be charged any tax when you receive the payments. This is very much unlike holding crypto in a traditional wallet, wherein you’ll be liable for taxes every time you receive any sort of income.

With this said, it’s important to know that crypto IRAs function much like regular IRAs when it comes to their tax rules. Traditional IRAs offer tax-deferred growth, which means you only pay tax (albeit at ordinary income rates) when you withdraw money from the account. Roth IRAs, on the other hand, require that you pay tax before depositing money to the account — the upside is that once you’ve contributed to a Roth, you’ll never have to pay tax again.

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Reasons to avoid a Bitcoin IRA

Needless to say, Bitcoin has demonstrated itself to be an extremely volatile asset. Price swings of 50% or more are common, which can make even the most stoic investor feel anxious.

Further, there are also still big questions about Bitcoin’s utility, particularly when it comes to its function as a store of value. Unlike the dollar, Bitcoin’s value fluctuates wildly on a day-to-day basis; as a result, it’s an unreliable savings vehicle. What you put into Bitcoin — or any other digital currency — is money you need to be comfortable losing, especially in the short term.

But the main reason a Bitcoin IRA presents risk is that people only have so much tax-advantaged space to save for retirement — IRA contribution limits are notoriously low, and IRA income limits can be restricting. Is it really worth using valuable space to invest in something with an uncertain future? Only you can make that call.

The reality is, unless your portfolio is large enough to make speculative investments, investing in a Bitcoin IRA may present too much risk to bear. Of course, that’s for you to decide — but a clear understanding that cryptocurrency comes with severe potential downside is necessary before making an investment.

Utilize free resources and make a call

In advance of making a decision about a Bitcoin IRA, try reading as much as you can on the subject: how to roll a 401(k) to a Bitcoin IRA, the costs associated with Bitcoin IRAs, and the benefits of choosing one provider over another.

If you do decide to move forward with a Bitcoin IRA, you’ll reap the benefits of tax deferral or tax exemption — depending on the type of IRA you choose. Ideally, you’ll then pair Bitcoin’s explosive growth with all of the tax benefits available to regular IRA investors.

At the same time, remember that we’re still in a stage where Bitcoin is seen by many as a speculative investment with no underlying value. There’s no telling what the crypto landscape will may like in 5, 10, or 20 years, so be sure to educate yourself as much as possible on the subject and proceed with a risk-management mindset.

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Sam Swenson, CFA, CPA has no position in any of the stocks mentioned. The Motley Fool owns and recommends Bitcoin. The Motley Fool has a disclosure policy.

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