Retirement planning is a topic that never gets old in the finance community. Similarly, there’s always some buzz around Bitcoin, the oldest and best-known cryptocurrency. So it’s no surprise that these two have come together to create a hot topic in the world of investing: the Bitcoin IRA.
Not sure what Bitcoin IRA is? Wondering if you should open one? Here’s a quick overview.
What’s a Bitcoin IRA?
You’re likely already familiar with the two main types of individual retirement accounts (IRAs) in the United States: the traditional IRA and the Roth IRA. Both offer citizens a way to save for retirement (and in many cases, save on taxes) without the need for an employer-sponsored retirement plan.
IRAs have traditionally been funded with fiat currency (government-issued money). However, in recent years, some IRA service providers have begun offering a new kind of IRA that the account holder funds with Bitcoin.
The pros of Bitcoin IRAs
Is there any merit to opening a Bitcoin IRA? Generally, yes. Here are a few of the main advantages.
You can create a hedge against inflation
Government-issued currency seems to constantly be losing purchasing power thanks to inflation. However, certain types of investments (like gold, for example) have long been touted as a way to hedge against inflation. Bitcoin is one of them—because it’s decentralized and only exists in finite amounts, it’s unlikely to be impacted by inflation.
There’s a potential for high growth
Like any cryptocurrency, Bitcoin can be volatile. But in that volatility lies the potential for exponential growth. For example, Bitcoin was worth less than a dollar when it was created, and it reached an all-time high value of almost $69,000 in 2021. It finished out 2023 with a value of around $43,000.
You can reduce your tax burden
Any time you sell cryptocurrency at a profit, you owe capital gains tax. However, if you trade cryptocurrency and earn a profit within an IRA, you’ll pay no taxes on those gains until you make a withdrawal.
You’ll diversify your portfolio
A diverse investment portfolio is critical for stability. Bitcoin’s performance isn’t correlated to the performance of most stocks and bonds, so putting some of your investment funds into Bitcoin can be a great way to protect yourself.
The cons of Bitcoin IRAs
Every investment has its downsides. Here are some to consider with a Bitcoin IRA:
Volatility can slash your savings
The inherent volatility of Bitcoin means you can reap huge gains. However, the currency has been known to drop precipitously in value. If that happens too close to retirement, you may find yourself facing financial difficulty.
High fees
Most providers charge fairly high fees for account setup, holding Bitcoin, maintaining your account, etc.
Exchange limitations
Most providers don’t let you purchase Bitcoin just anywhere—to use their IRA, you’ll need to purchase your Bitcoin at one of their preferred crypto exchanges.
Making the decision
Only you can decide whether it makes sense to create a Bitcoin IRA. Bitcoin devotees may try to convince you it’s all upside. Detractors will say it’s a great way to guarantee a loss.
In most cases, the truth is somewhere in the middle. When you take the time to consult with a financial professional, you can review your circumstances and determine which is the best choice for you now and in the future.
