What Is a Bitcoin Roth IRA?

The popularity of cryptocurrency continues to soar, pushed by a younger generation of investors who see it as the future of currencies, despite the volatility and warnings from financial regulators. As support for digital currency grows, some investors are asking financial advisors if it can and should be part of their retirement plans. Cryptocurrency can be part of your individual retirement account, but that doesn’t necessarily mean that it should.

What Is Cryptocurrency?

Cryptocurrency is a digital currency, that, like paper currencies, can be used to buy goods and services. There are a variety of different cryptocurrencies, but the most well known is Bitcoin. Other cryptocurrencies include Ethereum, Dogecoin and Binance Coin. “People invest in crypto because they are speculating, want to use it as a payment method or they think it is the future of currency,” says Carlos Legaspy, president and CEO of Insight Securities in Highland Park, Illinois.

[Read: How to Open a Roth IRA.]

Can You Buy Bitcoin in a Roth IRA?

You can’t contribute cryptocurrency directly to your IRA, but you can trade it within the IRA. However, not all IRA providers will allow you to purchase cryptocurrency. “And so a new industry of custodians for alternative investments has popped up, and these custodians are now offering to invest in crypto as an alternative investment,” Legaspy says. “This is kind of a meshing of two different worlds.”

Investors have the option of holding Bitcoin and other cryptocurrencies in a traditional or Roth IRA. “At its core, it is a Roth IRA in which you can add Bitcoin specifically and other cryptocurrency assets as well,” says Sam Zimmerman, founder and CEO of Sagewell Financial in Cambridge, Massachusetts. “Originally there were only a few players, but at this point some incumbents are even offering Bitcoin-based IRAs.”

[Read: IRA Contribution Limits for 2022.]

The Benefits of a Bitcoin Roth IRA

Cryptocurrency gains are usually subject to income tax. Storing your cryptocurrency in a Roth IRA can help you avoid having to pay income tax on the investment gains.

Holding your cryptocurrency in a Roth IRA can be especially beneficial if you trade frequently or experience large gains in the account over time. “In a regular account, every gain, if it’s short term, is taxed at a regular marginal income tax rate. If you’re buying and selling, you could accumulate a sizable tax bill,” Legaspy says. “So, if you’re not intending to use it for means of payment, if you really have a long-term horizon, or if you want to be actively trading it, doing it with a qualified account is of interest.”

[Read: A Guide to Self-Directed IRAs]

The Risks of a Bitcoin Roth IRA

Governments and financial regulators around the world have warned investors about the risks of cryptocurrency. “One risk of having a Bitcoin IRA is that the legal status for Bitcoin and other cryptocurrencies is the U.S. and abroad is still evolving,” Zimmerman says. “And so what is legal or copacetic today might not be that way tomorrow.”

Cryptocurrency doesn’t have as much oversight as other types of investment products. “You might get regulation with other sorts of products. You don’t get that here,” Zimmerman says. “And so that means that your fees for your Bitcoin IRA can be massive and increase quite a bit.”

Cryptocurrency is a new and volatile asset. “There are patterns that occur with other currencies, and there’s a lot of uncertainty about Bitcoin,” Zimmerman says. “We don’t even know necessarily how it might respond or how it has historically responded.”

Cryptocurrency can add diversification to your retirement portfolio, but retirement investors should carefully consider whether the high fees and extreme volatility make a crypto Roth IRA worth the cost.

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What Is a Bitcoin Roth IRA? originally appeared on usnews.com

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