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Investing for retirement is one of the most important things you can do to make sure you have money in your golden years. Individual retirement accounts (IRAs) and traditional retirement investments like stocks, ETFs, and mutual funds are probably familiar.
Most of the time, you can’t invest in less common types of assets, like cryptocurrency, with these accounts. But if you want to buy bitcoin and diversify your portfolio beyond the traditional asset classes, you may be able to do so with a certain type of IRA. Here’s what you need to know about buying bitcoin with an IRA.
What is an IRA in Bitcoin?
You may have heard of a type of IRA that lets you invest in bitcoin with your retirement savings. This type of IRA is called an SDIRA, which stands for self-directed IRA.
“Normal” IRAs let you invest in the kinds of things, usually in retirement accounts. Typically, stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
With a self-directed IRA, you can invest in things that aren’t usually allowed in IRAs. This can include physical gold, digital currencies like Bitcoin, real estate, etc. Self-directed IRAs are usually not offered by traditional brokerage firms. Instead, they are offered by firms that focus on this type of account.
Bitcoin IRAs are sometimes referred to as self-directed IRAs that allow you to invest in bitcoin. You can get these self-directed IRAs from BitcoinIRA, but they aren’t your only choice.
How Does an IRA with Bitcoin Work?
Depending on who you use to set up your account, the way your self-directed IRA works may be slightly different. Most of the time, a custodian takes care of self-directed IRAs. The custodian holds your investments and makes sure that your self-directed IRA follows IRS rules.
You will also need a way to buy cryptocurrency. Some custodians have their own ways of buying cryptocurrency or working with other companies. Some people may let you use any exchange you want.
The last thing you need is a safe way to store your bitcoin. A wallet is what you use to store your cryptocurrency. There are hot wallets connected to the internet, and cold storage wallets, which are not connected to the internet. You can use a secure storage option from many custodians since any cryptocurrency you buy for your self-directed IRA must be held by the IRA and not by you.
Sometimes, the same company is in charge of all three of these parts. In other cases, you might need to use services from more than one company to invest in bitcoin through an IRA.
Types of IRAs
People who want to open their own IRA accounts can choose between two types: Roth IRAs and traditional IRAs.
To put money into either type of IRA, you or your spouse must have a job. For 2021 and 2022, the most you can put in is $6,000. If you’re 50 or older, you can put in $7,000. This is the same for traditional and Roth IRAs and self-directed versions.
With a traditional IRA, you could get a tax break for the money you put into the account. The money in the account grows without being taxed. But you might have to pay ordinary income tax on distributions, and if you take money out too soon, you might have to pay taxes and fees.
Depending on your income and how you file your taxes, you may not be able to deduct all of your contributions to a traditional IRA.
Roth IRAs don’t give you a tax break right away. The earnings grow tax-free, just like in a traditional IRA. Most of the time, you don’t have to pay taxes or penalties on qualified withdrawals from a Roth IRA after age 59 1/2 if you’ve had it for at least five years. You might also have to pay taxes and fees if you take money out of these accounts too soon.
Depending on your situation, the amount you can put into a Roth IRA may be lowered. These can be affected by the retirement accounts you or your spouse have and your adjusted gross income, and how you file your taxes.
Your tax situation and plans for the future will help you decide which type of IRA to use for a self-directed bitcoin or another crypto IRA. Some people may prefer a traditional IRA because they think they will pay less tax when they retire. People who think they will make a lot of money and pay a lot more in taxes in the future may want to learn how to buy bitcoin in a Roth IRA.
Pros of Bitcoin IRAs
Buying bitcoin with an IRA can help you in the following ways:
- Tax-free gains from bitcoin with a Roth IRA: Since money is added to Roth IRAs after taxes, any gains on bitcoin in the account won’t be taxed as long as the money is taken out according to the rules age 59 and a half. This lets cryptocurrency grow without paying taxes on it, and it’s also a way to avoid paying taxes on capital gains.
- Diversify your retirement portfolio: Traditional assets like stocks, bonds, ETFs, and mutual funds are often found in retirement portfolios. Using a self-directed IRA to buy bitcoin can add more variety to your portfolio than just these traditional assets.
- Security: Because Bitcoin is based on blockchain technology, it is less likely that your retirement funds will be stolen (but not impossible).
If you’re willing to set up a self-directed IRA, you can put your IRA money into bitcoin. You may have to pay more for these IRA accounts and make a bigger initial investment, but you can invest in some cryptocurrencies. If you don’t know if a self-directed IRA is right for you, you might want to talk to a trusted financial advisor.
If you decide that using a self-directed IRA to invest in bitcoin isn’t the best choice for you, you can still do other things. You can learn how to buy cryptocurrency in a regular account if you’re ready for the tax consequences when you sell your assets. You can also start putting money into a traditional IRA with more traditional assets, like an ETF.