Bitcoin and other cryptocurrencies,
such as Ethereum, are becoming more popular as an investment alternative. In
early 2021, the price of bitcoin skyrocketed to all-time highs. Bitcoin is
currently worth $33,225.90.
In
2020, Bitcoin and other cryptocurrencies outpaced
the majority of traditional investments.
Bitcoin
and other cryptocurrency investments are well-known for yielding huge profits
at high risk. Almost every investor understands the volatility of
cryptocurrency, whether they invest with personal assets or retirement funds.
If you’re going to dabble in crypto investing, you must be informed of your
acceptable loss.
Should you include bitcoin in your 401(k)?
Begman of IRA Financial stated – “Just like stocks, Bitcoin can be purchased
in an IRA or 401(k). However, from a practical standpoint, an employer-adopted
401(k) plan with employees will likely not allow for any alternative investment
options because of ERISA fiduciary rules.”
Even
so, people who want to add cryptocurrency to their 401(k) should think about a
few things first.
According
to Leanna Haakons, founder of Black Hawk Financial, the biggest benefit would
be that people interested in crypto could invest pre-tax money, something they
now cannot do through a brokerage account. This is something long-term
investors will benefit from. However, some self-directed IRAs do offer bitcoin
as an investment option.
Haakons
also added that because retirement plan providers cap crypto contributions at
5% of your account’s total value, it’s a smart way to get engaged in crypto
investing without risking too much of your money, as you might if you invested
on your own and went all in.
Haakons
added that the at-home investor who isn’t going to be monitoring the market
every day, it’s practically a better option. They should be given the exposure
and the chance to make some of those big potential gains, but restrict them to
follow the guidelines.
Cryptocurrencies,
like bitcoin, are extraordinarily volatile assets. A 401(k) or individual
retirement plan should be made up of stable, low-cost investments you feel will
grow in value over time. That means index funds are one of the best choices for
most average investors.
With
a few exceptions, you won’t be able to take money out of your 401(k) until
you’re above the age of 59, at which point you’ll be subject to taxes and
penalties.
So,
according to Haakons, you need to think about your investment timeframe and
priorities. Bitcoin’s value could skyrocket tomorrow, but it won’t help you if
you’re decades away from retirement. If you’re thinking of a short-term
investment, a brokerage account with more buying and selling flexibility might
be a better choice.
It’s
also important to understand where you’re investing your money. Dan Kemp, chief
investment officer of Morningstar Investment Management, recently cautioned
against buying bitcoin or any digital currency just because it’s what your
friends are talking about.
Understand
the differences between crypto assets and bitcoin, and why they are seen as
superior long-term prospects by some investors. Also keep in mind that there’s
always some hot new investment that promises to turn the average person into a
millionaire quickly. But practically, things aren’t always so easy.
According
to Haakons, investing in safe bets like index funds, and committing only 5% of
your portfolio to bitcoin wagers aren’t always a bad idea. It all boils down to
how much you’re willing to take a chance. You should only invest money you can
afford to lose in something unproven like bitcoin or other cryptocurrencies.
Haakons
commented that it will not be a massive risk if you keep it to the maximum of
5% of your retirement savings, unless you have a lot of money in there. You’ll
still have a strong foundation thanks to mutual funds and exchange-traded funds
(ETFs). investment that promises to turn the regular individual into a millionaire
quickly. But practically, things aren’t so easy after all.
How much is it worth to invest in Bitcoin IRAs?
The Internal Revenue Service (IRS) does
not have a cryptocurrency-specific account. As a result, when investors talk
about a “Bitcoin IRA,” they’re referring to an IRA that contains
bitcoin or other digital currency within its holdings.
A
self-directed IRA is sometimes known as a Bitcoin IRA. Self-directed individual
retirement accounts (SDIRAs) allow you to invest in assets such as real estate,
precious metals, and cryptocurrency that are not allowed in traditional IRAs.
Investing
in Bitcoin for retirement may increase your investment returns and diversify
your portfolio, but it also adds a significant amount of risk to your
retirement portfolio. If you’re self-employed or operate a small business, SEP
and Simple IRAs, as well as solo 401(k)s, offer significantly larger
contribution limits.
You
can also transfer money from a traditional IRA to a self-directed IRA. The IRS
has treated bitcoin and other cryptocurrencies in retirement plans as property
since 2014, which means coins are taxed similarly to equities and bonds.
According
to the Retirement Industry Trust Association (RITA), between 2 and 5% of all
IRAs are currently invested in alternative assets.
You’ll
need to keep three things in mind:
•
Your IRA is held by a custodian, who
handles its safekeeping as well as ensuring that your account complies with IRS
and government rules. With traditional IRAs, banks and other financial entities
often fulfil this function.
•
Your cryptocurrency trades are managed by an exchange. A crypto exchange (sometimes referred to as a DCE or
digital currency exchange) is equivalent to a stock exchange. It’s a
marketplace for digital currencies, and it’s where you’ll get your Bitcoin,
Ethereum, or any cryptocurrency.
•
Your cryptocurrency is safe with a secure
storage solution. Most Bitcoin IRA providers feature patented secure
storage mechanisms to help protect your digital assets from theft after you buy
them.
A
custodian is required for IRA participants who want to include digital tokens
in their retirement funds. Many investors have discovered that finding a
custodian who accepts bitcoin in an IRA might be difficult. Custodians and
other companies that let investors include bitcoin in their IRAs have grown in
popularity recently.
Self-directed
IRAs (SDIRAs) are increasingly allowing for alternative assets like
cryptocurrencies, which is beneficial for consumers who want to include bitcoin
in their IRAs. Some of the early leaders in this area are companies like
BitIRA, Equity Trust, and Bitcoin IRA.
Let’s
analyze the pros and cons of Bitcoin IRA:
Pros:
●
Tax benefits – Tracking trades and
calculating taxes owed is the single biggest problem for Bitcoin investors.
Because you owe taxes every time you sell cryptocurrencies for a profit,
keeping track of multiple purchase prices and gains can be an accounting
problem. Investing in a tax-advantaged account, such as a regular or Roth IRA,
relieves this burden because it does not tax you on anything as long as the
funds and assets remain in the account. Furthermore, you will benefit from the
compounding growth of value that you will not lose due to taxes.
●
High-return
potential –
Bitcoin is extremely volatile, yet with volatility comes the potential for
massive gains. For example, the value of Bitcoin was at $5,200 on March 15,
2020 and completed the year at $30,000, while Ethereum, the second most popular
cryptocurrency, increased by almost 400% in 2020. Bitcoin’s massive potential
is definitely worth the risk, especially if you’re only investing a small
portion of your IRA’s total value.
●
Diversification – Cryptocurrency is an asset
class that is different from stocks and bonds, which are the most commonly held
assets in retirement accounts in the United States. Even while crypto is risky
in its own way, this could help secure your retirement funds.
Cons:
●
Volatility – The price of Bitcoin has
fluctuated from close to $20,000 in December 2017 to as low as $3,400 in December
2018. Such volatility poses a significant danger to an IRA, particularly for
those nearing retirement.
●
Fees – Unlike traditional IRAs,
self-directed IRAs usually have a higher charge structure. Make sure you
understand all the charges associated with investing in cryptocurrency for
retirement, from setup fees to trading and account administration fees.
●
Exchange
restrictions
– Some Bitcoin IRA providers will only let you trade on affiliated currency
exchanges. Others provide you the option of selecting your favorite exchange.
If you want to invest with a certain crypto exchange, make sure your Bitcoin
IRA provider enables it.
●
Complexity – When you invest in a
Bitcoin IRA, you’ll almost certainly need to maintain at least one additional
retirement account in addition to dealing with the moving parts of custodians,
exchanges, and secure storage. This is because Bitcoin IRAs are not set up to
allow traditional assets like equities, bonds, and mutual funds. This can make
retirement planning even more difficult.
Final takeaway – Should you include bitcoin in your
retirement portfolio?
Diversification is an important factor.
Bitcoin is a very volatile investment, but some industry professionals believe
it is an excellent one to have in your portfolio.
Before
including it, though, you must be aware of the risk. Consult your financial
advisor about the percentage of your portfolio that you should allocate to
Bitcoin.
Bitcoin’s
price decreased by about 85% from December 2017 and
December 2018.
However, it has increased tenfold since that low point, showing that volatility
cuts both ways.
The
higher the volatility of an investment, the higher the losses, but also the
higher the potential gains. Whatever amount you invest, make sure you do your
homework by understanding not only about digital currencies but also about the
blockchain technology that powers them.
If
you decide to invest in Bitcoin, be sure you’re in it for the long haul and
that you know you could lose all of your money. This is what experts refer to
as an “acceptable loss”.
You
don’t have to buy coins directly because there are crypto-focused mutual funds.
You shouldn’t invest in these types of assets if you don’t understand how
premiums and discounts work. Also, keep in mind the tax implications for this
form of investment in the funds where you put it.
Given
the volatility of cryptocurrencies, it’s probably not the best idea for
individuals closer to retirement to incorporate Bitcoin in their portfolio.
Those with a longer time-frame and a higher risk tolerance, on the other hand,
may find that investing a modest portion of their retirement savings in
alternative assets, such as Bitcoin or other cryptos, might provide upside and
protect them from losses in their traditional holdings.
Make
sure you understand the fees structure before investing. Lastly, and perhaps
most significantly, consider using Bitcoin and other cryptocurrencies as a
minor portion of your total retirement plan, rather than the entire strategy.
About the Author: Lyle Solomon serves as a principal attorney for the Oak
View Law Group in Los Altos, California.
Bitcoin and other cryptocurrencies,
such as Ethereum, are becoming more popular as an investment alternative. In
early 2021, the price of bitcoin skyrocketed to all-time highs. Bitcoin is
currently worth $33,225.90.
In
2020, Bitcoin and other cryptocurrencies outpaced
the majority of traditional investments.
Bitcoin
and other cryptocurrency investments are well-known for yielding huge profits
at high risk. Almost every investor understands the volatility of
cryptocurrency, whether they invest with personal assets or retirement funds.
If you’re going to dabble in crypto investing, you must be informed of your
acceptable loss.
Should you include bitcoin in your 401(k)?
Begman of IRA Financial stated – “Just like stocks, Bitcoin can be purchased
in an IRA or 401(k). However, from a practical standpoint, an employer-adopted
401(k) plan with employees will likely not allow for any alternative investment
options because of ERISA fiduciary rules.”
Even
so, people who want to add cryptocurrency to their 401(k) should think about a
few things first.
According
to Leanna Haakons, founder of Black Hawk Financial, the biggest benefit would
be that people interested in crypto could invest pre-tax money, something they
now cannot do through a brokerage account. This is something long-term
investors will benefit from. However, some self-directed IRAs do offer bitcoin
as an investment option.
Haakons
also added that because retirement plan providers cap crypto contributions at
5% of your account’s total value, it’s a smart way to get engaged in crypto
investing without risking too much of your money, as you might if you invested
on your own and went all in.
Haakons
added that the at-home investor who isn’t going to be monitoring the market
every day, it’s practically a better option. They should be given the exposure
and the chance to make some of those big potential gains, but restrict them to
follow the guidelines.
Cryptocurrencies,
like bitcoin, are extraordinarily volatile assets. A 401(k) or individual
retirement plan should be made up of stable, low-cost investments you feel will
grow in value over time. That means index funds are one of the best choices for
most average investors.
With
a few exceptions, you won’t be able to take money out of your 401(k) until
you’re above the age of 59, at which point you’ll be subject to taxes and
penalties.
So,
according to Haakons, you need to think about your investment timeframe and
priorities. Bitcoin’s value could skyrocket tomorrow, but it won’t help you if
you’re decades away from retirement. If you’re thinking of a short-term
investment, a brokerage account with more buying and selling flexibility might
be a better choice.
It’s
also important to understand where you’re investing your money. Dan Kemp, chief
investment officer of Morningstar Investment Management, recently cautioned
against buying bitcoin or any digital currency just because it’s what your
friends are talking about.
Understand
the differences between crypto assets and bitcoin, and why they are seen as
superior long-term prospects by some investors. Also keep in mind that there’s
always some hot new investment that promises to turn the average person into a
millionaire quickly. But practically, things aren’t always so easy.
According
to Haakons, investing in safe bets like index funds, and committing only 5% of
your portfolio to bitcoin wagers aren’t always a bad idea. It all boils down to
how much you’re willing to take a chance. You should only invest money you can
afford to lose in something unproven like bitcoin or other cryptocurrencies.
Haakons
commented that it will not be a massive risk if you keep it to the maximum of
5% of your retirement savings, unless you have a lot of money in there. You’ll
still have a strong foundation thanks to mutual funds and exchange-traded funds
(ETFs). investment that promises to turn the regular individual into a millionaire
quickly. But practically, things aren’t so easy after all.
How much is it worth to invest in Bitcoin IRAs?
The Internal Revenue Service (IRS) does
not have a cryptocurrency-specific account. As a result, when investors talk
about a “Bitcoin IRA,” they’re referring to an IRA that contains
bitcoin or other digital currency within its holdings.
A
self-directed IRA is sometimes known as a Bitcoin IRA. Self-directed individual
retirement accounts (SDIRAs) allow you to invest in assets such as real estate,
precious metals, and cryptocurrency that are not allowed in traditional IRAs.
Investing
in Bitcoin for retirement may increase your investment returns and diversify
your portfolio, but it also adds a significant amount of risk to your
retirement portfolio. If you’re self-employed or operate a small business, SEP
and Simple IRAs, as well as solo 401(k)s, offer significantly larger
contribution limits.
You
can also transfer money from a traditional IRA to a self-directed IRA. The IRS
has treated bitcoin and other cryptocurrencies in retirement plans as property
since 2014, which means coins are taxed similarly to equities and bonds.
According
to the Retirement Industry Trust Association (RITA), between 2 and 5% of all
IRAs are currently invested in alternative assets.
You’ll
need to keep three things in mind:
•
Your IRA is held by a custodian, who
handles its safekeeping as well as ensuring that your account complies with IRS
and government rules. With traditional IRAs, banks and other financial entities
often fulfil this function.
•
Your cryptocurrency trades are managed by an exchange. A crypto exchange (sometimes referred to as a DCE or
digital currency exchange) is equivalent to a stock exchange. It’s a
marketplace for digital currencies, and it’s where you’ll get your Bitcoin,
Ethereum, or any cryptocurrency.
•
Your cryptocurrency is safe with a secure
storage solution. Most Bitcoin IRA providers feature patented secure
storage mechanisms to help protect your digital assets from theft after you buy
them.
A
custodian is required for IRA participants who want to include digital tokens
in their retirement funds. Many investors have discovered that finding a
custodian who accepts bitcoin in an IRA might be difficult. Custodians and
other companies that let investors include bitcoin in their IRAs have grown in
popularity recently.
Self-directed
IRAs (SDIRAs) are increasingly allowing for alternative assets like
cryptocurrencies, which is beneficial for consumers who want to include bitcoin
in their IRAs. Some of the early leaders in this area are companies like
BitIRA, Equity Trust, and Bitcoin IRA.
Let’s
analyze the pros and cons of Bitcoin IRA:
Pros:
●
Tax benefits – Tracking trades and
calculating taxes owed is the single biggest problem for Bitcoin investors.
Because you owe taxes every time you sell cryptocurrencies for a profit,
keeping track of multiple purchase prices and gains can be an accounting
problem. Investing in a tax-advantaged account, such as a regular or Roth IRA,
relieves this burden because it does not tax you on anything as long as the
funds and assets remain in the account. Furthermore, you will benefit from the
compounding growth of value that you will not lose due to taxes.
●
High-return
potential –
Bitcoin is extremely volatile, yet with volatility comes the potential for
massive gains. For example, the value of Bitcoin was at $5,200 on March 15,
2020 and completed the year at $30,000, while Ethereum, the second most popular
cryptocurrency, increased by almost 400% in 2020. Bitcoin’s massive potential
is definitely worth the risk, especially if you’re only investing a small
portion of your IRA’s total value.
●
Diversification – Cryptocurrency is an asset
class that is different from stocks and bonds, which are the most commonly held
assets in retirement accounts in the United States. Even while crypto is risky
in its own way, this could help secure your retirement funds.
Cons:
●
Volatility – The price of Bitcoin has
fluctuated from close to $20,000 in December 2017 to as low as $3,400 in December
2018. Such volatility poses a significant danger to an IRA, particularly for
those nearing retirement.
●
Fees – Unlike traditional IRAs,
self-directed IRAs usually have a higher charge structure. Make sure you
understand all the charges associated with investing in cryptocurrency for
retirement, from setup fees to trading and account administration fees.
●
Exchange
restrictions
– Some Bitcoin IRA providers will only let you trade on affiliated currency
exchanges. Others provide you the option of selecting your favorite exchange.
If you want to invest with a certain crypto exchange, make sure your Bitcoin
IRA provider enables it.
●
Complexity – When you invest in a
Bitcoin IRA, you’ll almost certainly need to maintain at least one additional
retirement account in addition to dealing with the moving parts of custodians,
exchanges, and secure storage. This is because Bitcoin IRAs are not set up to
allow traditional assets like equities, bonds, and mutual funds. This can make
retirement planning even more difficult.
Final takeaway – Should you include bitcoin in your
retirement portfolio?
Diversification is an important factor.
Bitcoin is a very volatile investment, but some industry professionals believe
it is an excellent one to have in your portfolio.
Before
including it, though, you must be aware of the risk. Consult your financial
advisor about the percentage of your portfolio that you should allocate to
Bitcoin.
Bitcoin’s
price decreased by about 85% from December 2017 and
December 2018.
However, it has increased tenfold since that low point, showing that volatility
cuts both ways.
The
higher the volatility of an investment, the higher the losses, but also the
higher the potential gains. Whatever amount you invest, make sure you do your
homework by understanding not only about digital currencies but also about the
blockchain technology that powers them.
If
you decide to invest in Bitcoin, be sure you’re in it for the long haul and
that you know you could lose all of your money. This is what experts refer to
as an “acceptable loss”.
You
don’t have to buy coins directly because there are crypto-focused mutual funds.
You shouldn’t invest in these types of assets if you don’t understand how
premiums and discounts work. Also, keep in mind the tax implications for this
form of investment in the funds where you put it.
Given
the volatility of cryptocurrencies, it’s probably not the best idea for
individuals closer to retirement to incorporate Bitcoin in their portfolio.
Those with a longer time-frame and a higher risk tolerance, on the other hand,
may find that investing a modest portion of their retirement savings in
alternative assets, such as Bitcoin or other cryptos, might provide upside and
protect them from losses in their traditional holdings.
Make
sure you understand the fees structure before investing. Lastly, and perhaps
most significantly, consider using Bitcoin and other cryptocurrencies as a
minor portion of your total retirement plan, rather than the entire strategy.
About the Author: Lyle Solomon serves as a principal attorney for the Oak
View Law Group in Los Altos, California.
English 