- Interest in cryptocurrency has grown significantly in the last year, with the price of bitcoin, the largest by market capitalization, reaching a new high in April
- The Internal Revenue Service also has rigorous restrictions in place governing which investments are banned in IRAs
- Aside from the hazards of a self-directed IRA, Jariwala advises against investing retirement funds in cryptocurrencies since it is volatile and risky
Interest in cryptocurrency has grown significantly in the last year, with the price of bitcoin, the largest by market capitalization, reaching a new high in April. With all of the hoopla, you might be wondering if investing in cryptocurrencies for retirement, especially in your individual retirement account, or IRA is conceivable – and desirable.
It’s conceivable with a self-directed IRA, which may be used to hold alternative investments like real estate or commodities that aren’t allowed in a regular IRA. Experts, on the other hand, typically advise against it. Because bitcoin isn’t widely available and doesn’t make sense for most investors, experts advise against investing in it through a self-directed IRA. Even if you don’t have any cryptocurrencies, they may be hazardous and expensive to maintain.
The Internal Revenue Service also has rigorous restrictions in place governing which investments are banned in IRAs. Because you handle all of the assets in a self-directed IRA, you’re personally liable if any regulations are breached. According to Anjali Jariwala, certified financial planner, certified public accountant, and founder of Fit Advisors, Self-directed IRAs generally require a specialist company or custodian, and the fees can be significant owing to the added compliance and IRA requirements.
If you don’t follow all of the requirements, your account’s tax-deferred status may be revoked. As the Securities and Exchange Commission, or SEC, has repeatedly warned, there is also the risk of fraud. While a wider range of investment alternatives may appeal to certain investors, individuals should be aware that self-directed IRA investments include dangers, such as fraudulent schemes, excessive fees, and erratic performance, the SEC said in 2018.
Aside from the hazards of a self-directed IRA, Jariwala advises against investing retirement funds in cryptocurrencies since it is volatile and risky. Cryptocurrency investors must be prepared to deal with large price volatility and the possibility of losing their entire investment. As a result, cryptocurrency may not be the greatest investment for a retirement account.
Because it may substantially raise your portfolio’s risk profile and possible drawdowns, it may make more sense as a tiny percentage of your entire portfolio. He believes in diversity and likes to participate in the markets through IRA-type accounts, Jariwala adds. If [an investor] has spare cash or money in a brokerage account, that money might be used toward more risky assets like bitcoin, but he wouldn’t try to invest retirement money.
Before you add bitcoin to your self-directed IRA, you should think about the prospect of extra regulation. At the moment, cryptocurrency is considered property, but if the IRS alters the asset classification, it may become an item that cannot be held in a self-directed IRA, Jariwala adds.
You could be stranded and compelled to liquidate at an inopportune moment or face significant tax issues if that happens. If you still want to invest in cryptocurrencies despite the dangers, start with a little amount that you can afford to lose outside of your retirement funds. Hedging risk and gaining exposure to bitcoin assets may both be accomplished by allocating a smaller percentage of your total portfolio to cryptocurrency assets.