Friday, October 15, 2021

Cryptocurrency and Retirement Planning - Is it Right for You?

Cryptocurrency is a topic which few Baby Boomers and older retirees understand.  It is an entirely new type of money, and many working adults wonder if it is something they should include in their financial planning.  As a result, this month's guest post by attorney Lyle Solomon should answer some of the questions you may have about cryptocurrency and help you decide if it is something you want to include in your investment planning.

As always, it is important everyone understands the risks involved in making any investment. This blog suggests you do thorough research before putting money into cryptocurrency. You may also want to read a book on cryptocurrency, such as the highly rated "The Only Bitcoin Investing Book You Will Ever Need" (Ad) or one of the other books on cryptocurrency (Ad) which are available, and make sure you fully understand this new type of currency before putting money into it.  It is also important to make sure your investment accounts are fully diversified into a wide variety of investments.  

With those thoughts in mind, I am sure that most of my readers will be very interested in this topic.  It contains very informative and helpful information about how you can get started investing in cryptocurrency. The guest post by Lyle Solomon is below.

How to Invest in Cryptocurrency for Retirement

by Lyle Solomon, attorney with Oak View Law Group

The cryptocurrency market has been maturing over the past few years. This is because of its newfound reputation as a meaningful long and short-term investment. For some people, cryptocurrency is the answer to the question, ‘how to deal with credit card debt?’ Furthermore, it is also becoming a valid retirement option.

Cryptocurrencies like Bitcoin have gained incredible momentum, proving itself to be a very profitable investment. Many still have reservations about its energy consumption and lack of regulation. But these issues pale in comparison to the 164% growth that Bitcoin experienced last year. For comparison, the S&P 500 and gold rose by 13% and 21%, respectively.

With the current state of the financial world, many young investors have decided to integrate cryptocurrencies into their retirement plans. More specifically, according to Core data research, 40% of millennials will add cryptocurrency to their plans. Therefore, the question is not if you should be investing in crypto for your retirement, but how.

Different Crypto-Related Retirement Plans

While there may be future alternatives, there are only three major options for retirement plans with cryptocurrencies. These include Crypto IRAs, Crypto 401Ks, or directly investing in cryptocurrencies yourself. Both IRAs and 401Ks will deal in Bitcoin, since it is easily the biggest token on the market.

Investing In Crypto Yourself

It is worth mentioning that you do not have to create a Bitcoin retirement account. Instead, you can simply buy the cryptocurrency of your choice, which in this case could be Bitcoin, and hold it. Most wallets do not have a limit on how long you can hold onto cryptocurrencies. So it is possible for you to simply do that until you retire.

Furthermore, by setting up a personal account, you will be able to completely cut out the middleman.  Most companies can charge you fees if you intend to take out money from a retirement plan before its duration.

You can also skip on contributing specific amounts to your account. Instead, you can take out money whenever you want and contribute as little or as much as you want. So if you are wondering how to deal with credit card debt, or other financial problems, you can take some of the cryptocurrency out of your account. 

Investing in crypto yourself also means that you can use third-party software to improve your financial position. But even if it does look very good, there are drawbacks to not getting an IRA or 401K. More specifically, you will have to pay more in the form of taxes if you decide to invest yourself.

You will also have to take responsibility for your own investments. So if the price starts to crash, no one will compensate you for it. 

A Bitcoin 401K

There is still a long time until bigger institutions start offering 401K plans with Bitcoin or other cryptocurrencies. But you can find smaller providers offering these types of plans. One of the most prominent providers is ForUsAll, which has entered a partnership with Coinbase. So customers that open a 401K account with ForUsAll will see 5% of their retirement funds go into a cryptocurrency account.

By definition, a 401K account allows employees to put aside a set percentage of their salary. The provider will usually take out the percentage before tax, and those funds then go into the retirement account. Your funds in the retirement account will be invested into mutual funds, bonds, and stocks as investments. And one of the other investments they can make on your behalf is Bitcoin.

Although they can make investments into other cryptocurrencies, no other provider offers that service. So in the meantime, a percentage of your retirement funds will go into Bitcoin alone, if you want to include a cryptocurrency in your retirement plans.

A Bitcoin IRA

Finally, the most popular option for investing in cryptocurrencies for retirement is through IRAs. IRA holders have the ability to choose where they would like to invest their retirement money. Many IRAs have already moved away from traditional forms of investments like stocks and bonds. Instead, some account holders choose to invest in precious materials as well as real estate.

Cryptocurrency IRAs work very similarly to regular ones. The major difference is that they are invested in cryptocurrencies. It is fairly similar to Roth IRAs in that you can pay the taxes upfront on the assets that you hold.

Since you will be paying the taxes upfront, you will not have to pay any taxes when you withdraw them, as they will hopefully have a higher value, then. A crypto IRA will also have a yearly contribution limit of close to $6,000, similar to other IRA plans.

There are three parts to a Bitcoin IRA. The first is the custodian. Their job is to manage funds in your account and ensure that you follow all IRS and government guidelines. The second is the exchange, which is where the account will be purchasing the cryptocurrency. Finally, the last part of an IRA is secure storage. You will need a place to store your retirement funds to protect them from hackers.

On the other hand, it might be worth mentioning the extra costs which come with a crypto-based IRA. Most providers will charge extra in terms of account management fees and setup fees. A good example to look at is Blockmint, a popular Bitcoin IRA. They will charge an annual maintenance fee of $195, along with a 1% selling fee, 2.5% purchasing fee, and 15% transaction fees.

Many of these self-directed IRAs also have more limitations compared to other plans. You might not be able to choose the asset that you want, or the exchange you want to buy it from. Moreover, unlike traditional IRAs, your provider will not offset capital gains by deducting your capital losses from a cryptocurrency.

Conclusion

Bitcoin and other cryptocurrencies are still very volatile, and that will not change anytime soon. This volatility also means that it carries significantly more risk than most other types of traditional investments. However, despite all of these very serious issues, it can still be a great investment for your future. So even if investing in cryptocurrency is not your answer to how to deal with credit card debt and other financial problems, it can still be useful during retirement.

About the Author: Lyle Solomon has considerable litigation experience as well as substantial hands-on knowledge and expertise in legal analysis and writing. Since 2003, he has been a member of the State Bar of California. In 1998, he graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, and now serves as a principal attorney for the Oak View Law Group in California.

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1 comment:

  1. Thanks for sharing this article. It was very helpful and answered many questions I had about cryptocurrency.

    ReplyDelete

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