Nobody wants to work until their old age, so having a retirement plan ensures that you are financially secured and can live a stress free life. There are different types of retirement plans, but all require saving & investing your money now in order to use it later when it has grown. The most popular retirement plans include IRAs, 401(k), traditional pensions, etc.
However, now many are choosing to invest to grow their money faster and quicker through the profit they collect from properties, stocks, bonds, and most recently, cryptocurrency. Considering that your retirement lifestyle and demands will be influenced by the investments and plans you choose, it is important to compare the pros and cons of each.
What is Cryptocurrency?
It is a digital currency that uses cryptography to secure transactions and does not rely on a centralized system to uphold it. Anybody can use cryptocurrency without the hassle of paperwork as long as you have a crypto wallet and internet connection. It relies on blockchain technology to record information of transactions in the form of a digital ledger to store and secure the data.
Cryptocurrency and Retirement
As the demand for cryptocurrency keeps growing, many retirement plan providers are finding ways to allow their customers to choose a plan that accepts crypto. The best way to buy crypto in a retirement account is through tax-free, self-directed IRAs and solo 401(k) plans. Now, several companies specialize in IRA’s that are backed by cryptocurrency (e.g. BitIRA, IRA Financial, Equity Trust, etc.) that investors can choose from and will allow you to control what is in your account. Some will allow individual investors to invest in cryptocurrency, and some will require an investment management firm only. Always do your due diligence to find a good fit that will accommodate your needs.
Once you have found an IRA account that lets you buy cryptocurrency, it is time to fund your account by contributing to it in the usual routine you would with another retirement account. You can also use the funds to purchase or trade the cryptocurrencies. Using investment management services helps save you time and stress out of monitoring and managing it closely to ensure profits. They will also advise you on what coins are the best investment for your individual future financial goals.
Pros of Cryptocurrency for Retirement
- Cryptocurrency is another way to invest and diversify your retirement portfolio that when managed appropriately can compensate for the market’s downturn.
- A small allocation to cryptocurrencies in a diversified portfolio has the potential to boost returns because their value can rise dramatically in comparison to earnings from traditional investments.
- The growth potential accessibility of cryptocurrency is predicted to continue to rise in the future, and therefore is the reason why many are opting for this option.
Cons of Cryptocurrency for Retirement
- Price Volatility
Cryptocurrency prices tend to fluctuate because there is nothing intrinsic backing up its value. It is easily influenced by the supply and demand at a time, media hype, influencers, and fans. However, it is difficult to predict what will happen to its prices in the future making it a big risk for investors looking for stability in their retirement age. It is a risk worth considering especially when you are nearing your retirement time.
- Financial Risks
Even though cryptocurrencies are so volatile, there are several risks associated with this plan you should consider before making an investment. These risks are in the areas of concern that surround the longevity of the currency. You have no assurance that your money will be returned if you lose it because it is not secured. Other risks include market and fraud risks that may arise due to the nature of operations.
- Account and Trading Fees
Unlike standard IRA accounts, a cryptocurrency IRA account means you are
subjected to account and trading fees which may be hefty for an initial setup and the service trading partner. Check with your retirement plan provider to understand any information about the fees involved to ensure you are not losing a lot of money.
Tax Matters Involved with Cryptocurrency Retirement Funds
Finally, for your tax planning purposes it is important to consider what implications cryptocurrencies have when adding them in your retirement portfolio. The IRS considers all the profit from their selling or trading to be subjected to capital gains tax. However, depending on what type of account you have, you may be taxed upon contribution or withdrawal. For traditional IRAs, your contributions may be tax deductible and withdrawals taxable. For Roth IRAs, qualified withdrawals are tax-free while contributions are not tax deductible.
Saddock Advisory Can Help You Understand Investing in Cryptocurrency
It is challenging to determine the appropriate retirement planning techniques to use in front of how quickly technology and the financial market are changing.
Here at Saddock Advisory, we have tax experts ready to guide you to make the best financial decisions.