If you want to diversify your retirement portfolio even further, you can do so by investing in cryptocurrency or Bitcoin. This strategy offers you a way to take advantage of the next big financial boon in retirement investing – contributions of decentralized currency.
So how do you make this happen? What are the differences in the purchase of Bitcoin when using a retirement vehicle, such as an IRA or 401(k)?
To better understand your choices, you need to learn more about Bitcoin investments and why you have to invest Bitcoin in IRA products that are self-directed rather than in a 401(k) retirement account.
Why 401(k) Account Are Not Set Up for Cryptocurrency Contributions
Most people set up a 401(k) retirement account at their place of business. This account normally features traditional investments, such as mutual funds, stocks, and bonds. Therefore, it is not designed to cover investments of Bitcoin or cryptocurrency.
For this asset class, you need to set up a self-directed IRA. This type of IRA gives you more control over your investments and is designed especially for alternative investments, such as cryptocurrency, artwork, real estate, gold, silver, and privately held equity.
According to the IRS, Bitcoin is not considered a currency, but as personal property. Therefore, you don’t pay on the gains earned on the currency when you hold it in a Roth self-directed IRA (SDIRA).
You will pay taxes on the Bitcoin in the SDIRA. However, you can take out distributions tax-free when you retire. This is good to know, as paying taxes on your money, during retirement, may lead to financial setbacks as you probably will receive a lower income.
If you currently have a traditional 401(k), it is best to rollover the money into a Roth SDIRA for investment purposes. This can be a good move, as you are assessed a tax on withdrawals, not on contributions.
By rolling over the money, you won’t have to pay taxes on allocations at retirement. The matching contribution made by your employer is also taxed-deferred, so if you want to enjoy tax-free earnings, during retirement, rolling over your 401(k) may offer a viable solution.
Establishing a Bitcoin IRA
While you will need to roll over your 401(k) to invest in Bitcoin, you can also set up an SDIRA through a company like Viva Capital that offers these IRA crypto services. When establishing your new IRA Bitcoin account, you will work with a custodian.
A custodian will process your application (which is convenient and fast) and follow your instructions for investing. Your custodian will manage both contributions and distributions on your Bitcoin retirement account.
A Hedge Against Inflation
Adding a Bitcoin investment strategy to your retirement portfolio can assist you in realizing further benefits besides tax advantages. Like gold, Bitcoin currency serves as a good hedge against inflation.
Unlike gold, you can easily stash the currency in a digital wallet and not worry about protection or storage. Blockchain technology supports each Bitcoin trade. Therefore, you can invest directly in crypto, unlike fiat currency or stocks or bonds, which are controlled by centralized banks.
Adaptive Scaling
Bitcoin has a predetermined limit on the number of mined tokens. Therefore, crypto is more difficult to attain as its supply grows. This model represents adaptive scaling – a process that is used to hedge what you buy in crypto against the impact of inflation.
On the other hand, the government can print money any time, which adds to inflation. In fact, the practice can lead to hyperinflation, which results when money is printed to accommodate spending. When you print more money then, it hikes prices, which can lead to spending that is out of control.
If you roll over your 401(k) into an SDIRA, you can protect your investment from inflation, as it will not be under the control of a central bank. Because blockchain technology is founded on decentralization, you are not dealing with an entity that may negatively affect your investments.
Safeguard Your Retirement Holdings
Crypto, such as Bitcoin, also offers a hedge against any adjustments made in the market on overvalued stocks. If you have not invested in the right securities, your stock investments in a regular IRA could take a hit. Therefore, rolling a part of a 401(k) into an SDIRA featuring Bitcoin can safeguard your retirement holdings.