The following video is relevant for US citizens only
and is meant for information purposes only.
It is not intended to offer any investment advice.
Any action regarding your financial future and IRAs
should be done in consultation with a financial advisor or tax professional.
What is a Bitcoin IRA?
Can I really use Bitcoin to save for my retirement?
Are there any risks I should be aware of? And where do I even start?
Well, stick around.
Here on Bitcoin Whiteboard Tuesday, we’ll tackle these questions and more.
Hi, I’m Nate Martin from 99Bitcoins.com and welcome to Crypto Whiteboard Tuesday
where we take complex cryptocurrency topics,
break them down and translate them into plain English.
Before we begin, don't forget to subscribe to the channel
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Today's topic is “Bitcoin IRAs”.
But in order to understand what a Bitcoin IRA is,
we first need to understand what an IRA is.
IRA stands for “Individual Retirement Account”.
It’s an investment concept that started in the 1970’s
to incentivize Americans to save more for retirement.
In simple words, it’s an investment portfolio with great benefits,
but in order to get those benefits
you have to wait until you retire before you cash it out.
What benefits?
SIGNIFICANT tax benefits such as tax-free trading,
tax-deferred gains or tax-free gains.
IRAs have been extremely successful with several enhancements over the years.
Today, investors hold over $9 Trillion dollars worth of investments in IRAs.
There are two different types of IRAs.
First you have a “Traditional IRA”.
Traditional IRAs were introduced
with the Employee Retirement Income Security Act of 1974 (ERISA)
and made popular with the Economic Recovery Tax Act of 1981.
The traditional IRA gives you a tax write off each time you invest money in it,
commonly known as making an “IRA Contribution”.
Additionally, you can make an unlimited amount of trades in this account
without them being considered taxable events by the IRS.
With traditional IRAs,
the income you deposit is not subject to income tax:
well...not yet.
Instead, you pay taxes only on the amounts you withdraw after you’ve retired.
However, if you decide to cash out your money from a traditional IRA
before your specific retirement age, usually 59 and a half,
you will get penalized by paying
all of the income taxes you deferred on the deposits and on any gains realized,
as well as an early withdrawal penalty.
The other type of IRA is the “Roth IRA”,
which was introduced as part of the Taxpayer Relief Act of 1997
by Delaware senator William Roth.
The Roth IRA requires IRA contributions to be made only from earned income
which has already been taxed.
Like a Traditional IRA,
you can make unlimited trades in the account without any tax implications.
With a Roth IRA
all the gains and withdrawals you make during your retirement are tax-free
since you already paid taxes on your deposits.
Roth IRA’s are one of the most powerful investment vehicles in the world,
but it’s important to know that unlike a traditional IRA,
not all investors can open one.
Generally speaking, the Roth IRA is not available for people
who make over a certain amount of income per year.
For example, in 2020 you won't be able to contribute to a Roth IRA
if you have an income greater than $139k dollars for a single
or $206k dollars for married couples filing jointly.
However, those limits don’t apply to opening and contributing to a traditional IRA.
To sum it up
the difference between a Traditional IRA and Roth IRA comes down to this
“Do you want to pay taxes now, or do you want to pay taxes later?”
This is something for you, your financial advisor
and/or your tax professional to decide.
Until recently, IRA’s were primarily used to trade and invest in Stocks and Bonds
but now investors are able to buy and sell Cryptocurrencies in their IRA’s as well.
This has birthed an entirely new industry,
which frequently falls under the category of “Bitcoin IRAs”
or more generally - “Crypto IRAs”.
Crypto IRAs are companies that allow you to open an IRA
and buy/sell cryptocurrencies on their platform
without having to worry about paying taxes on each trade.
For example, normally if you buy Bitcoin at $5,000 and sell it at $10,000 -
you’d make $5,000 of capital gains, on which you would be required to pay taxes.
In a Crypto IRA, however, you wouldn’t owe any money on taxes,
since tax-free trading is a unique benefit of Individual Retirement Accounts.
So if you are a believer in Bitcoin, Ethereum and other Crypto Assets
continuing to perform well as investments,
it might be worth considering whether a Crypto IRA is for you.
While IRA’s can provide huge benefits for investors,
there are still a few things to consider.
First, in order to build your IRA,
you will need to contribute money each year that will count as your IRA contribution.
Since IRA contributions are capped at certain amounts per year,
you can’t just put all of your money into an IRA and receive the benefits.
For example, in 2020,
the IRA contribution cap is $6,000, or $7,000 if you are over the age of 50.
This typically increases each year,
so you will want to do some research on how much you can contribute.
Second, there are some limitations and conditions for withdrawing money from your IRA.
With Traditional IRA’s,
while investors have the ability to trade between various assets,
they can only withdraw money out of their IRA and into their own personal bank
by performing a process known as a “Distribution”.
Distributions are normally reserved for people who have reached their retirement age,
which, for most people, is defined in these tax laws as 59 and a half.
While there are some exceptions, including filing for early retirement,
normally if one wants to take a distribution before retirement age
there will be an early distribution penalty.
It’s important to talk with your tax or financial advisor
to learn more about how distributions work.
For Roth IRAs,
the principal can be withdrawn at any time with no penalties.
This means that if you Invested a total of $6,000,
and it turns into $12,000,
you can still withdraw up to the invested principal amount of $6,000 at any time.
In addition to withdrawing the principle at any time,
investors can withdraw some profits from their Roth IRA
under certain qualifying circumstances.
These include a first-time home purchase, medical expenses, higher education,
and disability among others.
As I’ve mentioned before,
it’s important to talk with your tax or financial advisor
to learn more about such qualifying circumstances.
So now, after understanding the potential benefits and drawbacks,
let’s talk about how you actually start your own cryptocurrency IRA.
There are 3 ways to start a cryptocurrency IRA:
First, you can start a crypto IRA from scratch.
This means you’ll open a new IRA account and start making contributions to it.
Second, you can fund your crypto IRA with what is known as a “401k Roll Over”.
This is where an investor takes a 401k
or other retirement account from an old employer
and rolls it over into an IRA.
This does not trigger a taxable event
but simply gives you more flexibility, as IRA’s are more flexible than 401k’s.
Third, you can fund your crypto IRA with what is known as an “IRA Transfer”.
This is where an investor takes an Existing IRA from another financial institution
and transfers it to their new IRA, that allows Crypto investments.
This transaction does not trigger a taxable event
but simply allows the investor to pair with a new financial institution,
one that likely allows investments that the investor wishes to access
such as cryptocurrency.
Cryptocurrency IRAs require several factors to come together -
for example, you need a trustee to hold your funds
and to allow you to deposit contributions.
You’ll need a trading platform to manage how you invest and trade.
You’ll also need a custodian for your cryptocurrencies
and access to a cryptocurrency exchange for conducting trades.
There are several companies out there that act as facilitators
and merge all of the elements I just talked about together.
It’s important that you do your own research and find one that fits your investment goals.
In the description below this video, we’ve linked to some good places to start.
Here are a few important things to consider when choosing a company to manage your IRA:
Initially, fees are one of the most important things to consider
when choosing a Cryptocurrency IRA provider.
Be sure to investigate all of the fees and get them in writing.
Here are the most common fees you’ll find:
Initial Purchase Fees are fees that may be charged
upon your first purchase of the crypto assets.
Trading Fees are fees that may be charged each time you perform a trade or transaction.
On-Going Fees include account setup, storage, administration, platform fees
and much more.
If you’re looking into a Bitcoin IRA
you’ll also want to research how the invested cryptocurrencies are stored and secured.
Important questions to ask are:
Where are the coins held?
What security measures are taken to keep them safe?
And who is the custodian for the coins and what is their reputation?
Custodians will usually have a whitepaper
to help potential investors understand the security available,
so make sure to read that as well.
Finally you’ll want to take a look at the trading platform
that allows you to manage your IRA funds.
The way trading is conducted is incredibly important,
you will want to test out the platforms and find one that is easy to understand and use.
Here are a few questions to answer:
Is there a 24/7 trading platform,
or am I required to call in for every single trade?
Can I test out the trading platform before signing up?
What cryptocurrencies are available for trading or investing?
Can I withdraw distributions in cryptocurrencies as well as in dollars?
If you want to get started with some research,
we’ve linked to some popular Bitcoin IRA companies in the description below.
Well, that’s it for today’s episode of Crypto Whiteboard Tuesday.
Hopefully by now you understand what a Bitcoin IRA is -
A retirement oriented investment account
that allows you to invest in cryptocurrencies with substantial tax incentives.
You may still have some questions.
If so, just leave them in the comment section below.
And don’t forget to check out our IRA recommendations
in the description as well.
Finally, if you’re watching this video on YouTube,
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Thanks for joining me here at the Whiteboard.
For 99bitcoins.com, I’m Nate Martin, and I’ll see you…in a bit.