Adding cryptocurrencies to your retirement account

what is the price of Bitcoin

Investing in digital assets, whether in the form of coins or tokens, is a relatively new development. However, while cryptocurrencies are still new compared to investments in stocks, bonds or real estate, they have taken the trading world by storm. In a little over a decade, Bitcoin has managed to become one of the most widely-discussed assets in the world. Even those that aren’t traders still have a rough idea of what cryptocurrencies entail, such as the fact that they exist only in digital form and that the prices tend to be quite volatile.

And while investing has steadily become more popular over the years, it’s still relatively uncommon to hear about crypto being added to a retirement account. However, more and more people are beginning to ask what is the price of Bitcoin when they’re starting to build their retirement funds. While traditional accounts are limited by laws, regulations and long-term commitments that make them unfeasible for some people to access, cryptocurrencies are notoriously easy to use. As a result, plan providers and brokers have begun to create alternatives that accept digital money.

digital money

Find an IRA

Individual retirement arrangements are the preferred alternative when you’re considering a retirement account. Within the IRS, you’re not permitted to place securities or bonds in retirement accounts. Property is a different matter. You can use the funds to purchase real estate. Cryptocurrencies are traditionally considered property for tax purposes, so they can be added to an IRA.

However, you must be mindful of the tax consequences, as digital asset transactions are typically required to be reported on tax returns. Some of the transactions that include taxable gains or losses include:

  • Exchanging crypto for goods or services
  • Cryptocurrencies sales for fiat money
  • Transferring Bitcoin as a bona fide gift, particularly if the annual gift exclusion amount is exceeded
  • Digital assets as payments for goods and services
  • Any cryptocurrencies that are newly obtained via mining or staking

There are many companies that allow crypto accounts. No matter what you choose, however, you must first do your research. Make sure they are entirely legitimate and well-regulated. Because crypto is an online asset, it is still highly vulnerable to fraud or scamming.

How does it work?

Working mainly like any other IRA, you won’t find it very difficult to get the hang of a cryptocurrency account. However, there are still some differences that you should be aware of. There are three main components associated with this type of arrangement:

  • A custodian: This role is filled in by banks and other financial institutions serving the same purpose. The role of the custodian is to hold your Individual retirement arrangements account and be responsible for its safekeeping. It’s also their duty to ensure your account adheres to the specific regulations set up by government bodies as well as the Internal revenue service.
  • An exchange: Just like in the case of traditional cryptocurrency buying, selling or trading ventures, an exchange manages your Bitcoin trades. Similar to a stock market, this is the place where coins are traded. You must pick a trustworthy platform when you start building your account. While there are many options out there, don’t be lured in by a virtually unknown platform promising spectacular offers. You might run into a scam.
  • Storage solutions: Cryptocurrencies can be stored on the exchange platform, but, as a general rule, you will want to pick a wallet to store your coins. There are two main options, software- and hardware-based wallets. While the first option is more accessible, it is also less safe. Due to its internet connectivity, it is more likely to be targeted by hackers. Software wallets are also not a good idea if you plan to store a substantial amount of crypto. Hardware options are much safer.

The advantages

There are many advantages that come with starting a Bitcoin retirement account. The first and most apparent is that there’s a lot of potential for high returns. Bitcoin tends to be volatile, much like the altcoins that followed it as a blueprint and developed their blockchain systems. And while price fluctuations have traditionally been associated with capital loss, there’s also the potential for significant gains. There’s no need to look further than the end-of-the-year situation over the past two years. While 2020 and 2021 have recorded bullish tendencies, with investors beginning ventures consistently, 2022 has been a challenging year, and BTC dropped by 60% of its former values. The trend in 2023 has been toward growth, and investors hope the momentum will keep.

There’s also the issue of tax advantages. Anytime you sell at a profit, you owe taxes. This can be pretty troublesome, especially if you don’t have experience as a bookkeeper. The solution is a tax-advantaged account that can help alleviate this burden. You aren’t taxed on anything as long as the funds are stored in your account. Moreover, you can also benefit from compounding growth of value since you don’t have to worry about paying a high amount in taxes.

Crypto 401(k)?

Although it isn’t impossible to own BTC as part of a personal pension account, it’s quite unlikely that you’ll be given this option. The challenge comes from the fact 401(k) are employer-sponsored plans with a defined contribution. Alternative investment options, particularly the ones associated with high volatility, will typically not be allowed due to fiduciary rules and responsibilities.

However, that doesn’t mean there’s no room for change. Currently, both 401(k) providers and crypto exchanges have been working on plans that could allow investors to begin a retirement plan in crypto. Business owners sponsoring solo 401(k) saving plans have the option to include alternative investments like BTC. ERISA regulations typically don’t come into play here, but you must check the documents first. The contribution limits tend to be higher.

Before you start a pension plan that includes crypto, make sure you do your research thoroughly. Take the time to understand all the fees and undersides of the transactions. There are always aspects that are not immediately apparent from the websites. Moreover, you don’t want to focus on crypto as the only asset but instead, have a diversified plan that can withstand market shifts.

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About the Author: John Lucas