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Should You Invest in a Bitcoin IRA?

If you have decided that these are risks Bitcoin (CRYPTO: BTC) Worth the rewards, you might be worried that you won’t get hit by a big tax bill. When you trade Bitcoin, you are vulnerable capital gains tax, which could be significant given the wild ups and downs of cryptocurrency.

One workaround is investing in a Bitcoin IRA or individual retirement account. As with any IRA, you are protected from paying transaction tax within your account. But is that enough to justify the risks of investing their IRA funds in Bitcoin?

Digital currency with bitcoins.

Image source: Getty Images.

What is a Bitcoin IRA?

The Bitcoin IRA is basically just self-governing IRA, which is an IRA that allows you to invest in alternative assets like cryptocurrency, real estate and physical gold. Although one platform is a trademark Bitcoin IRA, there are several brokerage houses that allow you to invest in crypto with your own IRA.

According to IRS rules, you cannot transfer crypto assets to a self-directed IRA. You will need to fund the account in U.S. dollars and then buy Bitcoin in your IRA.

A self-directed IRA can be any Roth IRA or a traditional IRA. Regular IRA contribution limits apply for 2021: $ 6,000 if you are under 50 or $ 7,000 if you are 50 or older.

Imagine maximizing your Roth IRA with Bitcoin in 2016, when the contribution limit for people under the age of 50 was $ 5,500. Even after last month’s crypto crash, from June 6, 2021, your investment would be worth more than $ 330,000 – all yours, tax-free in retirement if you follow Roth IRA rules.

What are the disadvantages of Bitcoin IRA?

The problem with investing retirement money in Bitcoin is that today’s $ 330,000 nest eggs may be worth a lot less when you need them. Read also : 5 strategic ways to save for your child’s college tuition. Bitcoin is a very volatile investment.

The stock market is undergoing a correction, which means a drop of 10% or more, approximately once every two years. By comparison, Bitcoin has crashed 50% or more six different times since 2012, according to Visual Capital. Three times the tank exceeded 80%. As the example above proves, it has historically returned and has brought huge returns so far. But those returns were very unpredictable.

Bitcoin remains speculative because its real usefulness is still so limited, plus there are thousands of other cryptocurrencies. Anyone guessing where bitcoin will be in five or ten years from now.

Bitcoin price chart

Data on bitcoin prices by YCharts.

Meanwhile, stock market returns are fairly predictable in the long run. The S&P 500 index delivered average annual yields of about 10% in the past 50 years. These yields may fade compared to what we’ve seen since Bitcoin in recent years, but in retirement planning, achieving predictability is essential.

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When does the Bitcoin IRA make sense?

First and foremost, investing in Bitcoin in an IRA or anywhere else only makes sense if you have carefully assessed your risk tolerance and decided that you can suffer major changes. You can use this to assess your risk tolerance this calculator. Bitcoin is only suitable if your risk profile is very aggressive.

Be sure to consider the high fees for investing in the Bitcoin IRA against tax benefits. This may interest you : Roth IRA Conversions: When Is the Best Time?. Many charge setup fees, maintenance fees, and transaction fees, plus they often have significant minimum bills.

Generally, speculative assets should not account for more than about 5% to 10% of your total investment portfolio. So, if you have significant crypto repositories outside of your IRA, stay away from the Bitcoin IRA.

Only consider if you are on your way to withdrawing comfortably with savings from other retirement accounts, such as a 401 (k) or 403 (b). If there is any chance that you will need your IRA money to fund your golden years, that money should not be invested in Bitcoin.

Also, avoid investing in Bitcoin if you plan to use the money for other purposes, such as first buying a house or tuition for your child’s child, which is popular with the Roth IRA.

Even if Bitcoin makes sense to you as an investor, the Bitcoin IRA is probably not a good way to invest retirement money.

This article presents the opinion of a writer who may not agree with the “official” position of the Motley Fool premium advisory service recommendation. We are colorful! Rethinking the thesis of investing – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier and richer.

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