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Can You Use Bitcoin for Retirement?

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Last updated December 7, 2020

Interest in trading and investing in cryptocurrencies has been steadily increasing among investors all over the world. Bitcoin in particular has become the most popular and most commonly traded of all cryptocurrencies. But is this sort of investment strategy reliable and stable enough to use for retirement savings?

For some people, buying and trading Bitcoin is a novelty. The market is known to be highly lucrative, yet volatile, unpredictable, and risky. Bitcoin is unique in that it’s not traded through a centralized authority like other traditional trade commodities.

It’s exciting to dabble in, but what about for longer term security? Is there too much risk involved or are the risks and uncertainty worth the potential returns?

In order to fully understand how this sort of retirement strategy could work to your advantage, you need to become familiar with this nuanced market and the terminology that goes with it

What is a Bitcoin Retirement Account?

In simple terms, an individual retirement account (IRA) is managed by a third party, such as a bank or investment broker.

Traditionally, an IRA accrues and secures assets—such as stocks, bonds, mutual funds, certificate of deposits, and other traditional financial assets—whose monetary value is determined by a central authority. Bitcoin and other cryptocurrencies are like digital assets—their value is determined by current market trading prices, and they undergo peer-to-peer transactions.

With a Bitcoin IRA, cryptocurrency is added to the account via fast and efficient transactions that are facilitated by custodians. Bitcoin IRAs are self-directed as they’re considered alternative investments since cryptocurrency falls outside of the realm of traditional assets.

These IRAs also allow the owner of the account to diversify their investment portfolio with multiple cryptocurrencies and other unconventional assets in addition to Bitcoin.

How to Open an IRA for Bitcoin and Other Cryptocurrencies

Open an IRA for Bitcoin

Opening a crypto IRA is fairly simple—all you have to do is open a self-directed account through a secure online application that requires an e-signature

However, you do need to use a cryptocurrency platform in order to go through the process of starting and adding to an account. Some of the most popular crypto IRA platforms are:

  • BitIRA
  • Bitcoin IRA
  • Equity Trust
  • Regal Assets
  • iTrustCapital

A reputable and trustworthy crypto IRA platform will prioritize data privacy and be fully compliant with local tax laws and regulations.

Some providers, like BitIRA, will also offer insurance policies for your cryptocurrency investments and cold storage options. A common feature provided by highly rated platforms is a personal dashboard where you can monitor your investment transactions and activities.

Some platforms are more user-friendly than others, so it’s a good idea to do research on the various options and to make your choice based on your needs and your familiarity with crypto-trading technologies.

Once you have your digital IRA set up, you can start adding Bitcoin or other cryptocurrencies once the account has been funded by a transfer or roll-over from another account.

Other cryptocurrencies that are commonly traded are Litecoin, Ripple, Ethereum and Bitcoin Cash—but there are many more to choose from, depending on your preference and how widely you wish to diversify your investment portfolio.

Disadvantages of Bitcoin IRAs

It’s certainly risky to invest in a relatively immature currency market that demonstrates volatile price fluctuations, particularly if you’re new to crypto-investments.

Even experienced investors aren’t immune to the pitfalls and unpredictable nature of cryptocurrency markets. Protecting retirement funds is critical for long-term financial security, so you should always use caution when investing in a potentially unstable asset that can incur significant financial loss.

However, with high risks come high returns, which is part of what makes investing in digital currency so appealing.

Another disadvantage of Bitcoin IRAs is the fees that come from having and using an account. Fee structures vary depending on what platform you use, but most companies charge monthly fees as well as other charges for transfers, purchases and other routine transactions.

Bitcoin trading through an IRA isn’t the same as trading through cryptocurrency exchanges.

The risks incurred by having a digital IRA set up by a third party can also be disadvantageous. Platforms that offer custodial services aren’t responsible for any losses because they’re not fiducially bound the way traditional brokers legally are.

Comparison to Regular Retirement Accounts

While investing in regular IRAs doesn’t allow for as much diversification beyond traditional investments, the transactional fees and additional charges are much more reasonable than those that come with Bitcoin retirement accounts. Traditional IRAs also have more tax benefits—contributions made to your account may be partially or fully deductible, depending on your financial circumstances.

Cryptocurrency, on the other hand, isn’t treated the same way conventional currency is for tax purposes. Cryptocurrency is instead taxed similarly to the way property is taxed.

Cryptocurrency transactions are taxed each time there’s a trade or sale, just like stocks and bonds. It’s been this way since 2014 when the IRS began to consider cryptocurrencies as property once they’re added to retirement accounts.

There are a variety of IRAs besides traditional, including ROTH, SEP and SIMPLE IRAs. Each is structured differently to suit different factors like income thresholds and employment status. In this sense, there’s more flexibility around economic and financial criteria.

Cryptocurrency IRAs have more limitations as far as customization goes.

In Conclusion

With the COVID-19 pandemic still at large and global economies facing a lot of uncertainty, it’s understandable why many people are growing increasingly eager to jump on the cryptocurrency bandwagon.

That being said, there’s still significant skepticism about whether Bitcoin and other major cryptocurrencies on the market will continue to appreciate in value or even remain stable in the years to come. For optimists, the concept of investment diversification in their retirement accounts can seem like a smarter and potentially more profitable approach than the conventional route. Either way, it’s essential to understand and consider all the risks involved with any long-term investment strategy, and be very cautious about the economic stability of assets, be they tangible or digital.

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