What Is an IRA/Roth IRA?
The Individual Retirement Account (IRA) is a method of funding a personal retirement vehicle which was introduced in 1974. IRA allows you to select a part of your adjusted gross income (AGI) in your account and contribute to a specific cause. The IRA contribution is then subtracted from your taxable income at income tax filing time. The problem is that all capital gains and dividends received in the IRA become taxable when you withdraw the funds at retirement.
In 1998, Senator William Roth introduced the Roth IRA. The Roth IRA features no tax deduction for your annual contribution. However, all capital gains and dividends are not subjected to taxation when withdrawn at retirement.
Am I Able to Buy Bitcoin with My IRA?
The answer is YES. However, you must find a self-directed IRA in order to buy Bitcoin with it. You will also be required to create an IRA limited liability company (LLC). Your LLC is the medium through which you will be buying and selling Bitcoin for your IRA account.
Transferring any Bitcoin directly into your IRA LLC is not possible. You must sell the BTC, transfer the funds into your IRA LLC and then you are free to make Bitcoin transactions on your behalf. If you prefer a Roth IRA, the same rules must be followed.
IRA accounts have annual contribution limits. If the limits are exceeded, the IRS will penalize you. There might also be applied an early withdrawal penalty (usually 10%) if you withdraw funds from your IRA before reaching 59.5 years of age.
Bitcoin IRA Pros and Cons
– Advantages of Investing in Bitcoin with Your IRA/Roth IRA
- Income tax savings. If Bitcoin is treated according to Section 1256 , 60% will be taxed at long-term capital gains rates and 40% at short-term rates. This would provide a good reason to include Bitcoin in (non-Roth) IRAs.
- You can have a diverse portfolio with various assets (Bitcoin, stocks, bonds, gold, and cash).
- Long-term increase potential of Bitcoin.
- The contribution sums adjust as your income changes.
- Dollar-cost-averaging (DCA) strategies are compatible with IRAs.
– Disadvantages of Investing in Bitcoin with Your IRA/Roth IRA
- The Bitcoin price is volatile, which is not so good if Bitcoin represents a large part of your IRA.
- Your IRA LLC can get hacked.
- Establishing and maintaining an IRA LLC might not be cost-effective if you have a small account balance.
- No certainty regarding future government legislation for Bitcoin.
Investing Strategies for Your Bitcoin IRA
Trading/investing in an IRA can generally only be done long, but there is a way of bypassing that restriction. Here are some trading/investing strategies you can apply:
Dollar-cost-averaging (DCA). Purchase a fixed sum of Bitcoin on a monthly or weekly basis and simply hold for the long-term. If you start a DCA strategy when you first start working, this will let the coin increase in 35-45 years. If the market allows it, begin your DCA strategy after a big 50-60% drop in Bitcoin, especially if you have faith in its growing potential.
Trade a variety of Bitcoin strategies which follow trends. These strategies aim to produce big profits, but unlike a DCA, they use stop loss and trailing stop protection to limit losses and lock in profits. Swing trading, holding for short amounts of time then selling, is not a good strategy for any Bitcoin IRA account. This strategy may make you concentrate more on quick profits rather than on the slow, steady increase that you are looking as an IRA investor.
Inverse Bitcoin ETFs. If/when inverse Bitcoin ETFs will hit the market, you can invest Bitcoin in an IRA. If an ETF was made available in December 2017, you could have purchased the inverse Bitcoin ETF and made a profit from the current Bitcoin bear market. This strategy is only advised for highly experienced traders.
Bitcoin IRA vs Bitcoin Roth IRA
In order to determine which IRA account is suitable for you, you must envision a few situations in which your investment plans are put to the test:
- You’re imagining progressively rising income for the next 2-3 decades.
- You will reach the maximum of your annual IRA contributions in the same timespan.
- You’ve secured Bitcoin price gains for at least 20-30 years (12-15% average annual gains).
In this case, the Roth IRA will bring you more benefits when you retire. This is because you would have enormous capital gains on your Bitcoin, all of which would be withdrawn without incurring taxes. Those capital gains will be far greater when compared to the annual tax deduction that a regular IRA offers.
Another situation would be when:
- You have a modest income and you anticipate no progressive increase, or it might in fact decline.
- Your annual IRA contribution is expected to stagnate, or it might diminish.
- You believe Bitcoin will grow but expect an annual gain which is under 10%.
A regular IRA might be more sensible here, as the annual tax deduction for your IRA contribution can be used to better your current life quality. You will pay taxes on all IRA earnings when you withdraw them, but having a lower income means that you will have a lower tax bracket and a small tax bill at retirement time.
If you’re not covered by a company or union pension or 401k retirement plan, then IRA and Roth IRA accounts are your best alternatives. Supposing that you believe that Bitcoin has decades of growth potential, to integrate BTC in your retirement portfolio would seem like a sensible move.