401(k) and Cryptocurrency: How to Boost Your Retirement Fund with Bitcoin

Securing a future is possibly more difficult now than it ever has been for many people throughout the world. This is how  Bitcoin offers another choice for the future.

As a young person, discussing topics like 401(k)s and IRA can be so overwhelmingly boring and seemingly superfluous that few actually begin their investments early. Couple that with the idea that bitcoin and other cryptocurrencies are a “young person’s game” and you can quickly see why the concept of Bitcoin IRAs isn’t often discussed.

However, as more and more exchange platforms, like the renowned Bitvavo, start to see a rise in the adoption of bitcoin portfolios for mature investors, the market for retirement schemes involving bitcoin has flourished. Much like the need for easy to use, mature audience, and tech simple platforms has grown, so have cryptocurrency trusts. Hoping to teach many an old dog very new tricks, while at the same time addressing concerns of less tech-savvy- but still genuinely interested- parties.

401(k) and IRA Quick Overview

In the United States, a 401(k) functions as a pension that operates under subsection 401(k) of the Internal Revenue Code. These accounts are retirement savings accounts where contributions are provided by an employer and deducted from an employee’s paycheck prior to taxes. Some 401(k) contributions will be matched by employers to certain amounts.

An IRA is an individual retirement account, one that isn’t dependent on employer participation. The tax exemption rules of a 401(k) also apply to IRAs, allowing IRA users to dedicate a portion of their income to their future – tax-free.  Introduced in 1974, contributors could invest in specialized US bonds or annuities that began to payout at 59 years of age. Or, contributors could invest in a trust maintained by a bank or insurance company. Current restrictions state that IRAs can only be funded “with cash or cash equivalents” making the attempt to transfer any other type of asset strictly prohibited. There are also limits placed on what type of funds can be used to contribute, allowing only “taxable compensation” to be added.

How to Create a Bitcoin IRA

After considering what these investments are, as well as the limitations placed onto them, it may seem more than a bit difficult to create a bitcoin funded IRA. Particularly because the US government views bitcoin as a property asset, as opposed to a type of currency. While it is difficult to create- it’s not impossible.

In order for a contributor to include cryptocurrency in their retirement account, they must enlist the help of a custodian. A custodian in this sense being a financial institution that holds customers securities for safekeeping. Which then adheres to the “investing in a trust maintained by a bank or insurance company” limitation of IRA contributions. While it can be difficult to find a custodian that fits the bill for a bitcoin IRA, they do exist. Becoming increasingly popular as bitcoin adoptions begin to spread worldwide. A few of these companies are the same that can also help set up beneficiary trusts needed to pass your bitcoin on to future generations in the form of inheritance.

Pros and Cons of Bitcoin Retirement

Looking into the ability to create a bitcoin IRA, one must consider both the advantages and disadvantages of investing in cryptocurrencies in this way.

Advantages of Bitcoin IRAs

Diversification in retirement portfolios and IRAs has always been a pushed narrative. Largely because having a widely diverse portfolio can help an investor’s assets grow and evolve alongside rapidly changing markets, providing unlikely hedges against surprising and unforeseen downturns.

Maybe more relevant than diversification, many mature investors are starting to appreciate bitcoin and other cryptocurrencies as a lasting investment. One that is capable of maturing well over time. With IRAs being an excellent vehicle in which to practice HODL techniques. This type of investment is predicted to show long term gain to investments made now, as adoption continues to propel prices forward. For IRA investors, it may also be beneficial to look towards diversification of cryptocurrencies within a portfolio as well. Choosing underperforming altcoins based on the technology they represent in order to offset capital gains tax burden, while still investing in futures you believe in.

Disadvantages of Bitcoin IRAs

Unfortunately, bitcoin and other cryptocurrencies are still realistically a nascent market. Compounded by the fact that valuations are extremely volatile, despite bullish comebacks seemingly following each bearish downturn. The market has yet to solidify its staying power, but each year brings a better promise of just that.

Investing in any asset, stock, or bond, is never without risk, so some would look at the inherent instability of cryptocurrencies merely as a risk that exists in any other form of investment as well. Investing in bitcoin through an IRA may also only serve to increase FOMO reactions, making it difficult to gauge how best to manage such an investment and could lead to quick frustrations with custodians.

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Disclaimer: Blockmanity is a news portal and does not provide any financial advice. Blockmanity's role is to inform the cryptocurrency and blockchain community about what's going on in this space. Please do your own due diligence before making any investment. Blockmanity won't be responsible for any loss of funds.