For folks who are thinking about building wealth for their future, individual retirement accounts or IRAs are a popular way to combine prosperity and security for the long term.
IRAs were first authorized in the United States by the Employee Retirement Income Security Act of 1974. Typically, Traditional IRAs allow investors to shore up a larger wealth base through pre-tax contributions, while Roth IRAs are generally funded with after-tax contributions, so that investment earnings may be able to accrue free of taxes.
While IRAs have been around for quite a while, self-directed IRAs (as we know them today, at least) are a comparatively modern invention. The advent of Internet-based stock buying and selling in the 2000s made it easier than ever for financial laypersons to take control of their retirement accounts.
Today, there are more choices available to self-directed IRA investors than ever before. Indeed, you’re not limited to stocks and cash anymore — and with popular cryptos like Bitcoin getting more attention and gaining mainstream adoption, investors often want to learn more about the pros and cons associated with investing in Cryptocurrency IRAs.
Perhaps you’re ready to ride the crypto wave and enhance your IRA holdings with some digital assets – but first, you want to be sure that you understand the advantages and risks involved. No worries – we’ve got you covered. So without further ado, let’s dive right into the most important pros and cons of investing in Cryptocurrency IRAs.
Cryptocurrency IRAs: The Pros and Cons
The most obvious benefit of a Cryptocurrency IRA is that it would enable you, the investor, to participate in any gains that might occur in digital assets.
In one survey, 40% of responders expected that the Bitcoin price will be at least $50,000 at the end of 2021. While there are no guarantees that any cryptocurrency’s price will increase, at least you’ll get good exposure to the movements in the asset prices through a Cryptocurrency IRA.
The next advantage to consider is the diversification that a Cryptocurrency IRA could provide to the investor. As the old saying goes, you don’t want to put all of your eggs into one basket — meaning, it’s not recommended to pour your entire account into just one asset class.
Maybe you’ve got stocks or cash already in your IRA account. That’s fine, but is that enough diversification? Cryptocurrency prices tend to move separately from stocks — and having uncorrelated assets is a key component of proper diversification.
In the aforementioned survey, 28% of the respondents stated that their primary reason for buying crypto was due to inflation concerns. As long as more dollars are being printed up, the cash in your IRA is susceptible to inflation, which means the gradual deterioration of the value of that cash.
One way to possibly shelter your IRA’s holdings against the negative impact of inflation is to own a cryptocurrency like Bitcoin. Since there will only ever be 21 million Bitcoins mined, inflation is less of a concern — and that’s why plenty of investors use it as a hedge against inflation.
In addition, a Cryptocurrency IRA may offer tax advantages. Without delving into specific tax codes, it may be possible to have your distributions taxed at a more favorable income tax rate once you’re retired and earning less (please refer to a licensed and registered tax professional for more information on this topic).
Is Investing in Cryptocurrency IRAs Risky?
Any investment strategy involves risks — as they say, no risks often correlate with no rewards. Still, it’s important to be aware of the risk-versus-reward balance when it comes to Cryptocurrency IRAs.
There is the possibility of capital loss if the asset in question — in this case, cryptocurrency — goes down in price. But then, you could say the same thing about an investment in any asset class, including stocks.
We already touched upon the topic of taxes, and if your gains from a Cryptocurrency IRA are substantial, it at least provides you the opportunity to spread out the income tax liability by taking distributions over a longer term. Some might say that this isn’t such a bad problem to have, though.
Finally, there’s the risk of over-investment if someone were to allocate too much capital into cryptocurrencies. This hazard can be avoided by always maintaining a reasonable position size relative to your account overall.
Special Considerations
Along with the considerations mentioned above, there are a couple of important matters to keep in mind.
As the U.S. Securities and Exchange Commission (SEC) explains, you’ll want to be wary of anyone offering “guaranteed” returns for your IRA. There’s always some degree of risk involved in the world of investing — it’s just a matter of knowing those risks, and minimizing them when appropriate.
Moreover, the SEC stresses the importance of staying informed — and rightly so. Even if you’re using a “set-it-and-forget-it” type of investment strategy, you’ll still want to be aware of what’s inside of your Cryptocurrency IRA. The key phrase here is “know what you own” — a credo for all informed investors to abide by.
Take Advantage of a Cryptocurrency IRA — The Right Way
Most importantly, you’ll want to avail yourself of trusted information sources when you’re ready to set up your Cryptocurrency IRA.
Ready to get started? It’s easy and hassle-free —simply visit Coin IRA, a fully compliant and licensed institution that will guide you through safe buying, selling, trading, and storing of Bitcoin and other cryptocurrencies.