What is Bitcoin IRA?
Bitcoin IRAs make it possible to invest in various cryptocurrency using retirement savings. Bitcoin IRAs act as “independent IRAs” provided by several financial institutions in the United States that allow alternative investments for retirement savings.
Basically, one can save another retirement account with traditional investments and be separately involved in self-help options for cryptocurrency investments.
- Bitcoin IRAs are cryptocurrency investments. They are considered as an alternative investment for retirement.
- Bitcoin IRAs offer diversification to retirement portfolios, but they are considered high risk and often involve additional costs and fees.
- Such a bitcoin IRA account is protected by a guard who manages a self-directed account.
- Bitcoin investments are subject to significant price changes, which increase their risk.
Understanding Bitcoin IRAs
In a standard individual retirement account (IRA), individuals can save their investments in traditional securities such as stocks, bonds and money market funds. The Bitcoin IRA provides additional options for investing in cryptocurrency like bitcoin.
Although most IRA accounts tend to carry the name “bitcoin” because the brand value associated with the most popular cryptocurrency, investing in other cryptocurrency such as Ethereum, Ripple, Litecoin, Bitcoin Cash, and Ethereum Classic is possible.
Bitcoin IRA accounts are risky because the custodians may not have any fiduciary responsibility to the investor.
Such Bitcoin IRA accounts are protected by custodians who manage independent accounts and allow virtual currencies to be among the necessary alternative investments. However, the custodian may not have fiduciary responsibility to the investor for the investment.
High Risk, High Costs Associated with Bitcoin IRA
Cryptocurrency IRA is gaining traction because of the hype surrounding cryptocurrency ratings. These IRAs also provide diversification even though they have their own risks. Cryptocurrency valuations are hit with wide price changes making this IRA a risky business for retirement savings.
For example, the most popular bitcoin cryptocurrency was enlarged from the $ 1,000 level in February 2017 to an all-time high of around $ 19,600 in December 2017 before reaching $ 6,252 in February 2018. Imagine mistakenly investing your pension fund at the peak and then seeing it lose about two-thirds of value for the next two months. Investors should explore the crypto currency only after wise consideration of the impact on their retirement needs and their risk tolerance.
Another Weakness for Bitcoin IRA Accounts
Another disadvantage to Bitcoin IRA accounts is that they come with high fees. Typically, companies can charge a minimum monthly account fee, for example $ 20, and a percentage of the account balance as a storage fee. There are additional costs associated with creating an account, purchasing assets, and funds transfer costs that must be considered by investors because the price can be very high.
This is different from standard IRA accounts that do not have annual or monthly maintenance fees or account opening fees. Transaction fees for standard IRA accounts also tend to be small.
Every bitcoin investment must be within the IRA contribution limit – $ 6,000 per year for those under the age of 50, and $ 7,000 for those aged 50 or over in 2020.
Investors should also note that they cannot buy cryptocurrency themselves and move it to an IRA account. Investors must use services from designated companies, such as Bitcoin IRA or BitIRA, to make purchases as mandated by the required compliance rules. Using such a company adds costs.
In addition, third party involvement impacts during periods of extreme volatility. Due to the 24/7 trading nature of cryptocurrency, their valuation can change significantly within a few hours. However, ownership in the Bitcoin IRA can only be liquidated during standard market hours on weekdays.
Because cryptocurrency is considered a property by the IRS, investments are taxed at the rate of capital increase that is valid for the long or short term. Yes, there is a tax for bitcoin.