In this article, We will discuss Bitcoin IRAs, How Bitcoin IRA works, Laws and regulations, Service providers and future of Bitcoin IRAs.
The tax laws in US provide for a certain advantage for working individuals to save for retirement. IRAs (Individual Retirement Accounts) and 401(k)s are finance accounts that are exempt from taxes until the individuals’ retirement.
IRA (or Individual Retirement Account) is a financial fund which enables an individual to contribute pre-tax income towards his retirement via accounts offered by Financial Service firms. The amount of tax-deductibles depends on the taxpayer’s income, tax-filing status, and other factors.
A 401k is similar to an IRA, however, it is one that is offered by the employer which lets employees contribute part of their earnings from the company towards their retirement.
In the 1980s, 401(k)s were introduced as a supplement to pension plans offered by companies. Eventually, the cost of pensions grew past most company’s sustainable levels. Hence, they have replaced them with 401(k)s and other retirement benefits.
In most cases the companies providing a 401(k) match the contributions of the salaried individuals to a certain amount. That is, for e.g. upto 3% on one’s salary (lets say $1500), the company adds in an equal amount (making it to $3000) to the contribution made by the individual. Essentially, it is free money saved up for the long-term.
Trends with 401(k) and IRA
Nevertheless, a notable trend in the United States has been deflection of individuals and firms from their 401(k)s and investment in IRA accounts. In the 1970s, more than 60% of the individuals in the US had some sort of defined pension benefits that they received from their companies.
Currently, a report suggests that only 14% companies in the US had 401(k) plans for individuals and only about 4% working individuals of them had enabled it in 2012. According to ICI, in 2016, about 55 million American workers were active 401(k) participants (about 16%). According to another report from them, about 36% of US households have IRA accounts.
The total assets at the end of June 2019 in IRA accounts was $9.8 trillion. IRA assets represent nearly one-third of the $30.1 trillion US retirement fund. In contrast, 401(k) assets were $3.1 trillion and represent 17 percent of the US retirement market in 2010. Other assets that are managed under retirement schemes include employer-sponsored retirement plans and defined contribution (DC) along with stock options and annuities.
Mutual funds form a large part of the investments in retirement accounts. Other investments are placed in brokerage accounts or managed by banks or insurance companies.
Why Should All Individuals have Retirement Accounts
The money in the 401(k)s or IRA account can only be tapped on retirement. A penalty or tax is charged in case an individual decides to reap early benefits from these investment plans. The money invested in retirement accounts can be put before taxes and the accounts itself are exempted from taxes.
Furthermore, the 401(k) also comes with ‘matching’ from the companies which is essentially ‘free money’ for the future.
Veteran trader and financial expert, Tyler Jenks, who died last year in 2019 strongly advises individuals to max. out on the designated contributions to one’s IRA account. In 2019, the IRA account limit was increased to $6000 (under 50 years of age) and $7000 (if you’re over 50).
The basic sections of the IRS that include these investment plans are: 401(k), 403(b) and 457. If you leave a company that offered 401(k), one can roll into a rollover IRA or can be transferred to the existing company.
Nevertheless, there are restrictions imposed on when and how an employee can into the ‘extra’ funds added by the employer. Although, he is always liable to his contributions.
Bitcoin and Crypto IRAs
A Bitcoin IRA or a crypto IRA is an investment account that includes Bitcoin and other cryptocurrencies (most popularly XRP, Ethereum [ETH], Litecoin and Bitcoin Cash [BCH]). An IRA account requires a mandatory report to the IRS (Internal Revenue System) and are usually managed by investment management firms.
A few advantages of Bitcoin IRA include diversification of portfolios. Nevertheless, Bitcoin IRAs currently are usually expensive. In other words, Bitcoin IRA fees are typically fairly high, primarily due to CPAs and FS (Financial Services) firms, and their volatility adds risk to the portfolios.
Furthermore, cryptocurrency investments have become fairly attractive among millennials in the past few years. Adding Bitcoin and cryptocurrenices to retirement accounts can help in evading taxes, and the long-term realization of profits can effectively eliminate greed and fear in investors.
Laws and Regulations
Currently, the IRS treats cryptocurrency, such as Bitcoin, as capital assets. Hence, it can form a part of investments in retirement accounts subject to restrictions under 4975(c) of the IRS.However, there is a provision of ‘disqualified individuals’ and risk asset clause with restricts the addition of Bitcoin and other cryptocurrencies to retirement accounts.
Nevertheless, certain Financial Services firms have established ways to include crypto investments in their plans. For eg, GBTC – Graysacle Investment LLC offers Bitcoin Trust Fund index despite being a weak ETF alternative that can be included in IRAs.
The pending approval on ETF (Exchange Traded Fund) by SEC would necessarily give the go ahead to add Bitcoin across a wider range of retirement accounts, even mutual funds.
Jenks advises that about 15% can be used to put these values in Bitcoin via GBTC and learn how to manage the investment.
… knowing how to tackle the premium and add onto his profit in the retirement account without having to pay the majority of the taxes.
He adds that the funds must be added when the premium is less than 10% and sold above 40%, by a thorough repeat and rise process an individual can greatly benefit even for the risk asset.
Moreover, an investment to a retirement account can be made only via ‘earned income.’ This excludes certain forms of income like pensions, dividends, interests, and so on. Nevertheless, individual business owners, traders and farmers alike can set up an IRA account.
Service Providers to Buy Bitcoin IRA and Crypto IRA
Fidelity Investments are the largest 401(k) providers that partner with companies and offer these benefits to the employees. While Fidelity has begun providing crypto custody services to institutional clients, it does not provide Bitcoin or crypto IRAs.
The firm, Bitcoin IRA, is currently the largest long term investment fund offering cryptocurrenices. According to its most recent report,
“Since 2016, Bitcoin IRA has processed over $400 million in cryptocurrency transactions, opened more than 50,000 consumer accounts and performed thousands of individual trades for its clients.”
Apart from GBTC and BitcoinIRA (BBB rating of A+), other players in the market include
- IRA Bitcoin – which has a BBB (Better Business Bureau) rating of A.
- Coin IRA LLC, in California (BBB Rating: A)
- Noble Bitcoin in California (BBB Rating: A-)
- BitTrust IRA and BitIRA in California as well with an A rating from BBB
These firms have come into existence since 2016 and have received business accreditation as well. One other firm, known as Regal Assets also offer Bitcoin IRA accounts. However, according to an update from BBB, this business lacks accreditation and has posted false updates.
Hence, due diligence must be taken while choosing these investments in general as well.
Future of Bitcoin IRA
Bitcoin is readily being adopted as the gold standard in the scheme of things. Moreover, many leading financial figures have emphasized the importance of holding about 1-5% of Bitcoin in their investment portfolios.
Moreover, the last ten year return in Bitcoin along with the adoption curve of Bitcoin has been on an impressive rise. Allocating a small percentage of investment in Bitcoin could lead to lucrative gains with little risk.
Moreover, when the capital gains are hefty, so by implementing Bitcoin IRA, or simply buying a Bitcoin IRA, one can make tax free investments in cryptocurrencies as well.
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