PARIS, ILE DE FRANCE - NOVEMBER 20: In this photo illustration, a visual representation of the digital Cryptocurrency, Bitcoin is displayed in front of the Bitcoin course's graph of Bitfinex cryptocurrency exchange website on November 20, 2018 in Paris, France. Bitcoin is an electronic money that saw an incredible increase in 2017, its price rising up to 20,000 euros, but currently its price has dropped around 5,000 euros. (Photo Illustration by Chesnot/Getty Images)
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2018 was the year that showed investors just how fragile the economy still is. As the stock market went through record highs and lows, many investors began to look for other ways to diversify their financial portfolios in the seemingly unstable financial climate.

It was during the recession of 2008 and 2009 that Bitcoin proved that it was one of the most viable alternatives for investors who wanted to move past using the stock market as their only investment option.

The following guide will delve deeper into why using a Roth IRA to buy Bitcoin may be the best option for those who are seeking a Digital IRA. This guide will also provide benefits of the cryptocurrency and the different financial trends investors can expect to see with Bitcoin.

What Are The Benefits Of A Roth IRA?

One of the key benefits to this type of investment option is that, when compared to other IRAs, a Roth IRA offers tax-free gains. Another key benefit is that there are no required minimum distributions, or RMDs, once the account holder reaches retirement age.

These types of accounts are similar to regular IRAs, but they offer some differences and benefits over Traditional IRAs. With all IRAs, Roth or Traditional, there are yearly limits on contributions. In 2019, the limits are as follows – annual contributions are limited to $6,000 a year and $7,000 a year for account holders over the age of 50.

The primary difference is that the Roth IRA is taxed based on contributions and not distributions. On the other hand, Traditional IRA tax distributions and not contributions.

For freelancers, independent contractors and self-employed account holders, a SEP IRA is a retirement plan option. This type of retirement plan offers higher contribution limits.

So, why is a Roth IRA best for Bitcoin? If you are expecting that cryptocurrency will continue to make gains in the digital currency market over the next 10 years, you will expect to see your gains increase and all of these gains will be completely tax-free.

Roth IRAs also do not have RMDs as previously mentioned once an account holder reaches 70 1/2 years old. With Traditional IRAs, these types of distributions are mandated.

There are also some things to consider when you have a Roth IRA account. The first thing to consider is that the contributions to this type of account is not deductible.

There are requirements regarding income with Roth IRAs.

Self-Directed IRA

A Self-Directed IRA allows the account holder to choose the particular type of asset classes for their IRA. Although this gives the investor more flexibility, the investor is also held in higher compliance.

Investors with Self-Directed IRAs must still have their investments go through a custodian. However, it is up to the investor to ensure that only legally compliant investments are kept in the account.

This type of IRA account is different from retirement accounts that can be classified as conservative (mutual funds, money markets, bonds, etc.) or one that is dependent on an unstable market like the stock market.

So, what is allowed in a Self-Directed IRA? Besides Digital IRAs, other compliant investments include:

  • Certain real estate
  • Precious metals
  • Specific natural resources

An example of a non-compliant investment for a Self-Directed IRA is real estate that was purchased for the investor’s personal use.

Digital currencies are allowed in Self-Directed IRAs, and these types of accounts are called Digital IRAs as previously mentioned. This is one reason why Self-Directed IRAs are considered ideal for Bitcoin. The gains from this type of investment have a higher potential for growth, while also being deemed riskier. In addition, the distributions are tax-free.

The Advantages Of Investing In Bitcoin

Bitcoin is not only the most well-known cryptocurrency, but it was also the first cryptocurrency on the market. It was introduced to the public during the midst of the financial crisis of 2008-2009.

It was this backdrop that allowed Bitcoin to shine as fiat currencies were taking hard hits from the economy.

Bitcoin is a blockchain or a decentralized ledger of each BTC transaction. This ledger bypasses the cryptocurrency’s need to be regulated by regular banks and other lending institutions. This process is achieved by using cryptography instead of using humans as intermediates.

Because this cryptocurrency is decentralized, it is typically the responsibility of the investor to ensure that they have the necessary knowledge to make sure their individual Bitcoin is secure.

Even though Bitcoin works independently of financial institutions, there are some governments around the world that want to place regulations on the cryptocurrency. However, banking regulators in the United States have appeared to be hesitant to suggest restrictions and instead have embraced the growth and development of the blockchain industry.

As of 2019, there has not been a clear definition of how or if cryptocurrency should be considered an asset class. If there are any regulations that may appear later, they may cause Bitcoin to lose its appeal to investors with Roth IRAs.

It is important to note that the IRS does require that investors have documentation of each Bitcoin transaction no matter the size. This is because the IRS classifies this type of currency as property.

As a result, many Bitcoin investors are faced with the headache of having to keep track of their cryptocurrency transactions. On the other hand, if the Bitcoin is kept in an IRA, the IRS will consider the distributions to be income.

Opening A Bitcoin IRA

As previously mentioned, even if you wanted to place the Bitcoin in a Self-Directed IRA, you will need a custodian. However, there are some advantages to this process. There are some investment companies that will store the currency on your behalf.

In addition, some of these companies will even offer investors insurance coverage for their Digital IRA. These types of protections help to give investors peace of mind.

In order to open a Bitcoin Roth IRA, you will need to do a rollover from an existing IRA retirement account that qualifies. A financial advisor can assist you with this process.

As Bitcoin shows no signs of going anywhere and with the unsettling feeling that the economy could face another recession, investors are looking for ways to create more stability with their portfolios. A Bitcoin Roth IRA is an option for those who want to add cryptocurrency to their diverse financial portfolio.