You may already know that investing in a Roth IRA is a great way to save for retirement. You may not know that you can use that same account to invest in Bitcoin and other virtual currencies. It’s one more tool toward a secure future, as long as you follow strict rules and understand the risks. A Roth IRA — an acronym for “Roth individual retirement account” — is not strictly a retirement plan. It’s more of a personal savings plan with special features designed to let your savings grow tax-free. Hence, they have time to recover from any market dips and ultimately end up much fatter than if you had kept the money in a traditional IRA or other savings account. A Roth also offers advantages if you have high-income potential as an investor or small business owner.
What Is a Roth IRA?
A Roth IRA is a retirement plan in which you put money in a special account now, with the idea that you’ll withdraw it later, tax-free. Roth IRAs have some special features that make them ideal for small business owners and investors with high incomes:
A Roth IRA can be opened by anyone, regardless of income level or age. You don’t get an upfront tax deduction for your Roth IRA contributions, but the money you hold in a Roth grows tax-free in the future when it’s withdrawn during retirement. As a result, you can take out your Roth IRA contributions at any time without any penalties or hassle, no matter your age. Investing in a Roth IRA is a tricky proposition, however. You must follow certain rules to avoid paying penalties; buying cryptocurrencies with a Roth IRA is one of those rules.
Legally Buy Bitcoin in a Roth IRA
Bitcoin can be purchased using a Roth IRA by setting up a specialized brokerage account that will accept funds from your Roth IRA account. Several reputable investment firms do this, and you can find a list of some of the top Roth IRA cryptocurrency brokers here. Once you have an account set up at a brokerage that accepts Roth IRA funds, you will be able to transfer funds from your Roth IRA account to your brokerage account and purchase bitcoins as you normally would with any other brokerage account.
To buy bitcoin with a Roth IRA, you’ll need to set up an account with a Roth IRA cryptocurrency broker, find a third-party custodian that will accept Roth IRA funds, and transfer funds from your Roth IRA to your third-party custodian. Once you’ve completed these three steps, you’ll be able to purchase bitcoin with your Roth IRA funds.
How to invest in other cryptocurrencies with a Roth IRA
Roth IRAs can be used to buy and sell other cryptocurrencies as well, such as Ether, Litecoin, Ripple, and others. However, to do so you must use a third-party custodian to hold your Roth IRA funds since cryptocurrency exchanges like Coinbase and Gemini simply aren’t set up to receive Roth IRA funds directly. Several reputable third-party custodians will accept Roth IRA funds, including Fidelity, Schwab, and Vanguard. Once you’ve set up a Roth IRA cryptocurrency account at one of these custodians, you’ll be able to buy and sell cryptocurrencies just as you would with a regular brokerage account.
The risks of investing in cryptocurrency with a Roth IRA
The main risk of using a Roth IRA to buy and sell cryptocurrencies is that you’ll lose a lot of money due to market volatility. Unlike investing in stocks and other traditional investment vehicles, there are no regulations or government bodies to protect you from fraud or market manipulation. There are no regulations at all — it’s every investor for themselves. If you’re worried about the risks of investing in Roth IRA cryptocurrency, you may be better off simply putting the funds in a savings account or CD, which will offer a guaranteed return and little to no risk of loss due to market volatility. If you’re determined to use your Roth IRA to invest in cryptocurrency, you can take a few steps to minimize risk.
First, only invest money in cryptocurrency that you’re willing to lose. There is no guarantee that you’ll ever see that money again, so don’t put more into cryptocurrency than you’re willing to lose entirely. Second, use stop-loss orders to protect against extreme drops in price.
The benefits of investing in cryptocurrency with a Roth IRA
A Roth IRA can be an excellent way to invest in cryptocurrency because it allows you to take advantage of tax-free growth and tax-free withdrawals. Investing in cryptocurrencies with a Roth IRA could be extremely beneficial for your retirement because you won’t have to pay taxes on gains that occur as cryptocurrency values increase. Additionally, Roth IRA withdrawals are tax-free, so you won’t have to worry about paying hefty taxes on those retirement funds when you’re ready to start withdrawing.
Additionally, Roth IRAs don’t necessarily have a minimum investment requirement like some retirement plans. You can open a Roth IRA with just a few hundred dollars. Because cryptocurrencies can be very volatile in their infancy, you may also want to consider investing a small percentage of your Roth IRA funds in low-risk options as well. Roth IRAs allow you to do this, which could be ideal if you’re nervous about how cryptocurrencies will pan out in the future.
How to invest in different cryptocurrencies with a Roth IRA
The best way to learn about how to invest in different cryptocurrencies with a Roth IRA is to read the Roth IRA cryptocurrency investing rules and regulations. There are a few options for investing in cryptocurrency with a Roth IRA. The first is to put the funds you want to invest in cryptocurrency into a cryptocurrency-specific Roth IRA. Another is to open a traditional Roth IRA account and then purchase a cryptocurrency-related investment, such as shares in a cryptocurrency exchange or a crypto hedge fund. Depending on the number of funds you have to invest, you may be able to open both types of Roth IRA accounts simultaneously.
Cautions you need to take when investing in cryptocurrencies with a Roth IRA
You’ve probably heard about the recent bull market in cryptocurrencies and how a lot of people have made serious money investing in them. From Bitcoin to Ethereum, there are now more than 1,300 types of digital tokens you can buy. But, before you dive headfirst into this emerging investment opportunity, you must understand the risks and regulations surrounding such ventures. With that said, here are some cautions you should take before investing in cryptocurrencies with a Roth IRA.
- Estimate the Risk of Investment
As with any other type of investment, you must learn about the risks of the various cryptocurrency ventures you’re considering. For example, the risk of investing in an individual company’s stock is generally pretty low, while investing in a highly risky venture, like a startup pharmaceutical company, has a much higher risk of failure. The risk associated with each cryptocurrency is unknown, but you should at least attempt to determine it before investing. Undoubtedly, one of the most important risks to be aware of is the risk of hacking. Cryptocurrency exchanges are the primary targets for hackers, and many have been hacked — and some have failed. In addition, digital wallets can be hacked, as well as computer servers storing cryptocurrencies while they are being transferred. There are also risks associated with regulation, supply, demand, and several other factors that can affect the price of a cryptocurrency.
- Research the Company/Coins You’re Purchasing
If you decide to invest in a particular cryptocurrency, you should take the time to understand the company behind it. The company’s mission and vision are critical to determining whether or not the coin’s price will increase in the future. In other words, do you believe that the company behind the coin is successful in achieving its goals? Understanding the team behind the coin and their backgrounds are also important. You should also research the underlying technology used in the cryptocurrency ecosystem. If the technology is new and unproven, it could result in higher than normal failure rates, which can also lower a coin’s price. Additionally, before purchasing a coin, make sure that it can be used or exchanged for something of value.
- Understand How Taxes Work With Cryptocurrency Investments
Cryptocurrencies are considered property for tax purposes, which means that any gains that are realized from the appreciation of a coin are taxed as ordinary income. Meanwhile, capital gains taxes are not applied to the sale of coins. But, this could change in the future. However, if you hold a coin for less than a year before selling it and the price increases, the price increase is taxed as ordinary income. Meanwhile, any losses incurred after holding a coin for less than a year are not deductible. However, if you hold a coin for more than a year before selling it, the price increase will be taxed at long-term capital gains rates. Conversely, any losses incurred after holding a coin for more than a year before selling it will only be deductible against long-term capital gains.
- Don’t Mix Roth IRA Assets With Other Investments
It’s important to remember that the Roth IRA custodian does not hold the coins you purchase. Instead, they are held by the Roth IRA trust. This means that you can’t buy coins that are linked to assets that your Roth IRA trust can’t own. For example, your Roth IRA trust can’t own real estate, cash, stocks, or other types of investments. Likewise, you can’t buy coins that are tied to those types of assets. However, you can buy coins that represent a percentage of a company’s stocks, bonds, commodities, or other assets. Alternatively, you can buy coins tied to commodities, like gold, oil, and silver.
Is now the right time to invest in cryptocurrency?
Cryptocurrencies have risen in popularity in recent years due to their decentralized nature and ability to facilitate cross-border transactions. However, cryptocurrencies have also received increasing scrutiny from regulators and critics. You may want to invest in cryptocurrencies now because you think that the regulatory environment surrounding them will only improve, thereby increasing their value. In this sense, now is a great time to invest in cryptocurrencies, as digital tokens are still relatively new and largely untested. However, you also want to be sure that you’re not investing in something that’s too early.
If you put your money into an early-stage cryptocurrency, it could be years before you see a significant return on investment. Additionally, you may want to consider the size of your investment about your overall retirement goals. Cryptocurrencies are incredibly volatile and could have an incredibly large impact on your overall retirement portfolio.
A Roth IRA is a great way to invest in cryptocurrency, although you’ll need to use a third-party custodian to hold the funds. If you decide to use your Roth IRA to invest in cryptocurrency, be sure to only invest money that you’re willing to lose, and use stop-loss orders to protect against extreme price drops.
In short, yes. It’s important to remember that cryptocurrencies are very volatile and come with a high risk of loss. If you can accept those risks and are comfortable with the associated investment period, cryptocurrency-related investments may be a great way to continue investing after completing your 401(k) at work. It’s also important to note that the IRS does consider cryptocurrency to be taxable property. When you sell cryptocurrency for a profit, you’ll be taxed on that profit in the same way as if you had sold a stock for a profit. So, before you decide to invest in cryptocurrency with a Roth IRA, make sure you’re prepared for what comes with that investment.
Investing in cryptocurrencies with a Roth IRA is something that should be done with extreme caution. The risks of investing in cryptocurrencies are extremely high, and they can also be very rewarding. While you can’t invest directly in cryptocurrencies through a Roth IRA, you can purchase shares of companies that are developing technologies used in the cryptocurrency world. Alternatively, you can purchase shares of companies that own and operate mines that produce the raw materials used to create cryptocurrencies.