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What is a Bitcoin IRA?

With over 19 million in circulation, no cryptocurrency is as popular as Bitcoin.But if you’re new to Bitcoin, or have only limited knowledge of it, you may be wondering, what can you actually do with it?

For some buyers, they’re looking toward their future retirement and investing in Bitcoin IRAs.It’s possible that a Bitcoin IRA is right for you, too. But before you begin investing in crypto for retirement, here’s what you need to know about this special kind of IRA.

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What Is a Bitcoin IRA?

In a typical IRA (individual retirement account) an individual keeps their funds in a variety of securities such as bonds, money market funds, and stocks. With a Bitcoin IRA, an individual invests in cryptocurrency. Despite the name, a Bitcoin IRA may allow for investing in more than just Bitcoin. It’s likely to allow investing in other types of cryptocurrencies. These digital currencies could include Ethereum, Litecoin, Ripple, and more.

Most simply use the Bitcoin name because of the popularity and brand recognition of Bitcoin. A Bitcoin IRA is a self-directed IRA. Self-directed retirement accounts allow an individual to choose what asset classes to invest in. These alternative asset classes include cryptocurrency, startups, precious metals, real estate, foreign currency (forex), and tax liens and deeds on foreclosed properties.

Bitcoin IRAs vs Other IRAs

A Bitcoin IRA works very similarly to a regular IRA. Like other IRAs, there are annual contribution limits. For 2023, the annual contribution limit is $6,500. However, if you’re 50 or older, the contribution limit is increased to $7,500. Previously, the annual contribution limit was $6,000 or $7,000 for individuals aged 50 or older.

Some Bitcoin IRAs are traditional IRAs. Others are Roth IRAs. With a traditional Bitcoin IRA, you deduct your contributions and pay taxes on them later when you withdraw. With a Roth IRA, you don’t get a tax deduction for your yearly contributions. That means your AGI (adjusted gross income) isn’t lowered for the year. However, when you take your withdrawals during retirement, they are tax-free.

Essentially the key difference between the two is how they are taxed. If you think you will be in a higher tax bracket when it’s time to retire, a Roth IRA may be for you. You can pay the taxes now at a lower rate and withdraw funds tax-free in retirement. If you’re familiar with IRAs, neither one of these options should be new to you. However, there are a few differences between a Bitcoin IRA and a regular IRA. Since you are buying a digital product, a secure storage solution is needed. Many Bitcoin IRA providers include secure storage methods to protect your digital currencies.

For the most part, if you’re familiar with how IRAs work, a Bitcoin IRA shouldn’t be too difficult to understand. That said, there are pros and cons of a crypto IRA that you need to understand.

Pros of a Bitcoin IRA

Most Americans hold securities like bonds and stocks. While this is one way of diversifying a portfolio, crypto investment can be an additional method of diversification. Just like some choose to diversify by investing in precious metals, you can invest in Bitcoin along with stocks and bonds.

If you’re new to crypto or don’t currently own a lot of crypto, an IRA can be a good way to get started with crypto while simultaneously planning for your future retirement. You can buy and hold your crypto investments until you’re ready to retire.

Some digital currencies have the potential for a high return. Bitcoin is one of them. There’s no guarantee it will continue to rise in price, but with a limited number of minable coins (21 million), there’s a built-in scarcity.

Cons of a Bitcoin IRA

A major downside to Bitcoin IRAs is that you can’t move your current crypto holdings to an IRA account. Instead, you have to use a designated firm to make a purchase for your crypto IRA. This is for the sake of compliance rules. However, using a firm will add to the cost of each transaction. Along with trading fees, there may also be set-up fees.

If you already have a large amount of Bitcoin or other cryptos, there’s currently no way to move it to a new or existing IRA. Unless you plan on purchasing additional cryptocurrencies and holding them until retirement, this can be a negative. Finally, it’s no secret that cryptocurrency is volatile. This goes for all digital currencies, not just Bitcoin.

All investments come with risk, and a Bitcoin IRA is no different. Due to its volatility, a Bitcoin IRA may not be right for conservative or low-risk investors. If you’re nearing retirement, you may also decide to not make risky investments.

That’s not to say you can’t reduce your risk. You can use DCA or dollar cost averaging, to prevent decision fatigue and trying to time the market.

Using a Bitcoin Retirement Plan

A Bitcoin IRA isn’t right for everyone. While it can be part of your overall retirement investment, it’s best to diversify your investments and minimize risk. A Bitcoin IRA can be one part of your overall retirement planning strategy.

If you’re not interested in a Bitcoin IRA, but still want to save for the future, consider our Bitcoin savings account. It allows you to diversify by putting your crypto in a savings account. It’s a great way to build your long-term savings

Check out our Bitcoin savings account guide for more information.

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