Better Retirement Options? – Roth IRA vs Crypto
Retirement planning becomes a thought often early in one’s career. Most individuals do not intend or desire to work until their 70s or 80s. With retirement accounts such as 401ks and IRAs, people can plan ahead and prepare for a comfortable retirement. Recently, with the popularity of cryptocurrency and coin-based trading, some have decided to explore if crypto IRAs are a good options when considering retirement accounts.
Roth IRAs and Crypto IRAs attempt to produce similar security, but in different ways. Firstly, what are the key attributes of each type of retirement plan?
According to Investopedia, a “Roth IRA is an individual retirement account (IRA) that allows qualified withdrawals on a tax free basis if certain conditions are satisfied.” To elaborate, all money placed in a Roth IRA has already been taxed before it was placed in the account. The benefit of this system is that retirement withdrawals are tax-free. In turn, Roth IRAs do have possible long-term tax advantages. Additionally, Roth IRAs have no required minimum distributions.
Cons of Roth IRAs
When one places funds into a Roth IRA account, he or she will pay the taxes for said money to the Internal Revenue Service, now. This can be considered a con to some. Another downside to Roth IRAs is that one’s annual income will determine how much money can be placed in an account. The amount will ultimately be determined by one’s modified adjusted gross income and whether taxes are filled as a single individual, married couple, or a family with children.
What Makes A Roth IRA Different From a Traditional IRA?
Simply, the tax language. With a traditional IRA, pre-tax dollars are being placed into the account. Therefore, withdrawals in the future will be taxed. A traditional individual retirement account would be beneficial for those who foresee themselves in the same or a lower tax bracket in the future.
A Roth IRA handles taxes now so that one can withdraw funds tax-free during retirement. For those who believe they may be in a higher tax bracket during their retirement, a Roth retirement account is a great idea.
Before Bitcoin IRAs and Crypto IRAs are discussed in greater detail, cryptocurrency, in general, should be highlighted. Cryptocurrency is exactly what it sounds like. It is a digital-based currency that is encrypted securely and recorded on a blockchain.
Examples of cryptocurrency include Bitcoin, Ethereum, and Litecoin. What makes cryptocurrencies unique is that they are not under the jurisdiction of an authoritative source such as a government or bank. Crypto has been around for over a decade and has been growing at an unprecedented rate.
Why Explore Crypto Investment?
Indeed, cryptocurrency can be a far more risky form of investment compared to other options, but one can reap great rewards. The old saying, the greater the risk the greater the reward, rings true with cryptocurrency. If one can purchase a coin or piece of a coin for a low price and sell it high, the payoff will be well worth it.
Additionally, cryptocurrency can be less complicated to trade. It offers a peer-to-peer transaction system. In turn, this means that no banks or institutions have to get involved. Individuals can buy or sell crypto by themselves or hire a professional financial advisor to aid.
Furthermore, cryptocurrency is an all-day and all-night business. People can buy and sell no matter the time of day. With traditional stocks, one has to be active within stock exchange hours. Crypto allows far greater flexibility for when buying, selling, and trading occurs.
Drawbacks of Cryptocurrency
Cryptocurrency is still fairly new and in its infancy. Since the digital currency has not yet reached its height or greater potential, its value has not been fully determined. While some cryptocurrencies are worth quite a bit of money, their price can fluctuate. Additionally, common financial analysis cannot necessarily be used to determine the future of cryptocurrency.
Another drawback of cryptocurrency is that it is decentralized. While it may be easier to buy, sell, or trade due to no governments or banks involved, its decentralized nature can make it less attractive to some.
There are traditional investors who much rather acquire assets that are government-backed or secured by a financial institution. As time progresses, crypto may become a more accepted currency, but government-issued money is still king today.
Where IRAs Meet Cryptocurrency
What if one can mix the best of both worlds? What if cryptocurrency can play a role in retirement plans? The good news is that this is possible! There are two approaches: claim cryptocurrency in a traditional Roth IRA or create a crypto IRA.
Cryptocurrency and Roth IRA
There is a catch! One cannot directly add cryptocurrency into a Roth individual retirement account due to IRS Section 408(a)(1). This is because only cash-based assets can be placed in a Roth IRA account. According to Investopedia, what is allowed is that one “add cryptocurrency to a Roth IRA by purchase.”
In the eyes of the Internal Revenue Service, cryptocurrency is seen as property. Certain regulations limit NFTs, collectibles, and coins from being placed in a Roth IRA, but general digital currency is allowed.
Since cryptocurrency is viewed as property, crypto placed in a Roth IRA account “has income tax basis for purposes of measuring gain or loss upon occurrence of a taxable sale or exchange.4.” In essence, this means that cryptocurrency can be legally placed in a Roth IRA account as long as the financial institution that oversees one’s Roth IRA agrees to it. Unfortunately, most institutions will not approve of cryptocurrency in a Roth IRA account.
With a crypto IRA, the process to invest in cryptocurrency for retirement can become less complicated. A crypto IRA is a self-directed individual retirement account that allows one to invest in cryptocurrencies while still having tax benefits.
It is important to highlight that such accounts are only offered by a limited amount of banks and financial services. Rest assured, a Bitcoin IRA can be created without major issues. The key is to find an institution that will provide the crypto IRA.
What exactly does a cryptocurrency IRA do? According to Investopedia, “cryptocurrency IRAs allow an individual to maintain more traditional retirement accounts while operating a separate account that invests in digital currencies like Bitcoin and Ethereum.”
The Internal Revenue Service (IRS) views all digital currencies as property, in the same class as investments such as stocks. Therefore, one’s digital cryptocurrency will be legally taxed similarly. This is where the concept of a crypto IRA can become helpful.
With the creation of a crypto IRA, one can receive significant tax advantages. Crypto IRAs can be both Traditional or Roth accounts. Individuals can select what time of account would be most beneficial to them. Furthermore, investing in cryptocurrency IRAs can help one diversify their portfolio. There is truth in the phrase, “do not put all of your eggs in one basket.” Cryptocurrency can be an exciting investment that may prove to be very lucrative.
Crypto IRA Providers
Popular and respected crypto IRA providers include Bitcoin IRA, BitIRA, CoinIRA, iTrustCapital, BlockMint, and Broad Financial.
BitCoin IRA requires a $3,000 initial investment, provides all-day all-night trading, and a $100 million insurance policy. Major cryptocurrencies such as Bitcoin, Ethereum, and Litecoin, among others can be placed in an account.
BitIRA has a minimum investment amount of $5,000. Like BitCoin IRA, it supports a majority of major cryptocurrencies. Users must pay a $195 annual maintenance fee to hold a BitIRA account. Additionally, it also offers a $100 million insurance policy.
CoinIRA requires a $20,000 initial investment or a $3,500 investment if funds are coming from a non-IRA account. Key features include the availability of insightful cryptocurrency literature and resources, the providing of excellent customer support, and the ability to customize one’s bitcoin storage wallet.
iTrustCapital’s minimum initial investment is $2,500. Over 25 different digital currencies are allowed and the provider even supports gold and silver for precious metal investors.
BlockMint requires a $10,000 investment to open Bitcoin IRAs. One of its biggest benefits is the customer support it provides to account owners. Investors can work alongside a BlockMint team member and receive advice on how to invest smartly. BlockMint stores assets very securely and offers offline storage options.
Broad Financial accounts have checkbook control. This gives owners more flexibility and freedom to do what they wish with their cryptocurrency. Broad Financial does not have an account minimum investment. Owners will have to pay a $1,295 account setup fee and a $95 quarter custodial.
Investing in a Crypto IRA Requires Caution
As discussed above, investing in cryptocurrency can be very risky. One will have to determine if he or she wants to entrust crypto as an asset for retirement planning. The rewards can be excellent, but conversely, one can lose a significant amount of money.
This in turn can make a comfortable retirement way more difficult to achieve. Crypto may be valuable at the moment, but is it a reliable long-term investment? Since it is still so new, there is difficulty in determining its value in decades to come.
Because cryptocurrency is not centralized and can fluctuate, a traditional or Roth IRA may be a more safe option to go with to protect retirement savings. This is not to say crypto investment options cannot be explored, but if one were to decide to invest in cryptocurrencies, he or she should do this with care and caution. It is critical to remember that retirement is on the line.
A good starting point for crypto investors would be to have multiple IRA investments, including more traditional alternative assets alongside the cryptocurrency. Like most investment options, individuals can purchase as much cryptocurrency they want. It is imperative to buy comfortably and not “over-invest”.
The Bottom Line
Cryptocurrency is an investment option that will be present for years to come. In today’s financial environment, digital currency is becoming a prevalent and exciting trend. As of April of 2022, one Bitcoin is worth approximately $40,000. Crypto like Bitcoin and Ethereum is highly desirable.
The central question at hand is whether cryptocurrency is a smart investment for retirement planning. The answer is not straightforward. It depends on the investor and his or her comfortability. Cryptocurrency is valuable now, but its future worth cannot be easily predicted. Therefore, any cryptocurrency retirement-based investment should be carefully executed.
There are two options for cryptocurrency retirement investing. The first is to place “cryptocurrency by purchase” into one’s Roth IRA account. The second option is to set up a crypto IRA account. Both traditional and Roth retirement accounts are offered.
If one’s crypto investment proves to be successful, the rewards can be momentous. That is one of the most attractive attributes of digital currency. Cryptocurrency is a very risky investment option though. People can lose all of their retirement savings quickly if an investment proves to be unsuccessful.
This is why traditional and Roth IRAs are recommended for those who want to be extra precautious. One cannot go wrong with a regular IRA. Crypto is enticing though and is very popular in the investment world. All that can be advised for those who choose to invest in crypto is that one only purchases a comfortable amount of cryptocurrency.
With something as serious as retirement, alternative investments besides crypto are strongly recommended for one’s portfolio. Investing in cryptocurrency is not necessarily a bad decision, but it would be very risky to entrust crypto as the only source of retirement income.
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