Since the introduction of Bitcoin in 2009, cryptocurrencies have gained traction. Investors have attained multifold profits on their investments in cryptocurrencies and that has led to people thinking of whether or not they could include cryptocurrencies in their retirement savings portfolio. This guide will try to answer the popular question “Is crypto IRA a good idea?”.

Is crypto IRA a good idea?

We will go step by step in answering “Is crypto IRA a good idea”. 

Let us first understand whether the IRS allows cryptocurrencies in your IRA or not.

The IRS does not prohibit you from including Bitcoin and other cryptocurrencies in your IRA. However, it also does not promote investing in cryptocurrencies.

With cryptocurrencies in your IRA, comes the concept of self-directed IRAs. Let us explore what a self-directed IRA is.

What is a self-directed IRA

You might know that we need a custodian to open an IRA savings account. These are banks, trust companies brokerage firms, and other financial institutions which are approved by the IRS to act as IRA custodians of your account.

The custodians simply hold your assets and allow you to invest in traditional financial products like stocks, bonds, and mutual funds.

Some of the popular and approved custodians are Charles Schwab, Fidelity, JP Morgan, and E*Trade.

These traditional IRA custodians do not allow or offer an investment into cryptocurrencies. 

To offer cryptocurrencies in your IRA account, the term self-directed IRAs comes into the picture.

Self-directed IRAs allow you to invest your IRA funds into cryptocurrencies and other alternative financial products like precious metals, startups, NFTs, farmlands, and more.

But unlike traditional IRAs, in self-directed IRAs, you are solely responsible for picking up and analyzing your investments.

The self-directed IRA will only act as the custodian of your assets.

Unlike a traditional IRA, a self-directed IRA does not:

1. Give you any investment advice
2. Verify the legitimacy of any financial product that is promoted in the IRA

Some of the popular and trusted self-directed IRAs are given in the table below.

Hence, if you want to include cryptocurrencies like Bitcoin and Ethereum in your IRA, you need to go with a self-directed IRA.

You may open a separate self-directed IRA (SDIRA) other than your regular IRA to invest in cryptocurrencies.

Is crypto IRA a good idea? Advantages and disadvantages of a crypto IRA

A self-directed IRA (SDIRA) is also known as a crypto IRA.

Let us check whether a crypto IRA is a good idea by listing the various advantages and disadvantages of a crypto IRA.

Advantages:

Diversification: Incorporating cryptocurrencies into your IRA can be an effective way to diversify your investment portfolio.

Cryptocurrencies might act as a hedge against the inflation and the fall of the fiat currency. 

The consensus among industry experts is that cryptocurrencies are here to stay.

I understand the key here is allocating a small portion of your entire investment portfolio to utility cryptocurrencies, and holding onto them for an extended period.

Utility cryptocurrencies are those which have practical applications such as in DeFi, rather than purely speculative assets.

It is crucial to conduct thorough research before investing in cryptocurrencies.

Tax advantage: One of the most significant advantages of a crypto IRA is its tax benefits.

For tax purposes, IRS treats cryptocurrencies as property, and capital gains taxes are levied on them when you buy and sell cryptocurrencies in a normal scenario.

However, investing in cryptocurrencies via your IRA account may offset the Capital Gains (Roth option).

Furthermore, crypto IRAs, like traditional IRAs, offer deductions in your annual taxable income.

High potential returns: If we do our proper research and invest for the long term, cryptocurrencies offer high potential returns.

At present, cryptocurrencies are still in their infancy and have yet to reach their full potential. Over the next 20 to 30 years, they may experience exponential growth and increase significantly in value.

In the past few years, we have seen major rallies in prices for cryptocurrencies.

Bitcoin itself witnessed a whopping increase from a mere $0.09 when it started to its ATH of around $68,000 in just a matter of 10 years.

But volatility also causes significant downsizing of your investment. We should also be wary of the significant losses that might impact your portfolio.

Generally speaking, cryptocurrencies that have real-world applications can be trusted to give heart-throbbing growth to your investments. Although volatility along the way is also almost certain.

Disadvantages:

Volatility: We all know cryptocurrencies are volatile, which means that their values can fluctuate wildly in short periods.

This volatility could potentially lead to significant losses if you’re not prepared for it.

Lack of Regulation: The very purpose of the creation of cryptocurrencies was to build a currency independent of centralized control from the Federal government.

Hence it makes sense that cryptocurrencies are not fully abode by Government regulations. But this lack of regulation is a double-edged sword.

Although regulations are slowly been laid for cryptocurrencies. But still, there is no single authority that defines the regulations around cryptocurrencies.

The Commodity Futures Trading Commission treats Bitcoin as a commodity whereas the IRS treats Bitcoin as a property for tax purposes.

The lack of central regulations lead to manipulations and crimes such as money laundering.

The lack of regulations also means that literally, no one is responsible for any fraud and losses.

For instance, the FDIC insures the money that you save in banks up to certain limits (mostly $250,000).

But a similar approach is missing in the cryptocurrency space. Recent bankruptcies in the crypto space like the FTX collapse, and Genesis bankruptcy,  had given investors hard time.

Higher fees:  Unlike traditional IRAs, self-directed IRAs (SDIRAs) have different fees and charges like one-time set-up fees, recurring maintenance fees, and trading charges (usually 1% to 2%).

These costs are often not clearly stated on the platforms, which can give you a bummer at a later stage. In addition, there may be hidden fees that are not commonly seen in traditional Roth IRAs.

Other risks: There are yet other risks like liquidity risks, and heightened risks of fraud, complex tax rules. Unknowing events can cause penalties and often the tax-deferred status of the IRA is lost.

Conclusion

So what do you think? Is crypto IRA a good idea?

It is good if you have ample time to retire so that you can face fluctuations and any unprecedented regulations.

It is good if you stick to cryptocurrencies which are having real-world applications like Ether, Solana, and ADA.

It is not advisable for someone who is about to retire and hence cannot tolerate the brunts of the volatility of cryptocurrencies.

The amount of money that is invested in cryptocurrencies and even the Dapps that employ them is substantial, which alludes to the fact that cryptocurrencies are here to stay.

Cryptocurrencies can act as a hedge to the fluctuations in the fiat currency. As web 3.0 adoption increases cryptocurrencies will become mainstream in the coming times