How Can I Hold Cryptocurrency Inside of My SDIRA
When it comes to setting up your self-directed retirement account, variety is the key to success. Exploring alternative assets is an excellent way to build up your SDIRA portfolio for maximum growth and a solid nest egg. Beyond the traditional investment assets such as stocks, bonds or treasury, self-directed IRAs give you the chance to invest in alternative markets. While the most common assets are real estate, precious metals, or private lending, technology has introduced a new wave of investment options: cryptocurrency.
Digital currency, like Bitcoin, has been gaining traction and IRA investors are interested in reaping the benefits. As you build your retirement plan portfolio, cryptocurrency could be the best investment option. But what exactly is cryptocurrency and how can you use it to benefit your SDIRA?
What is Cryptocurrency?
If you are interested in investing in cryptocurrency using your SDIRA, there are a few things you should know. It’s a digital currency used in a world-wide exchange to purchase goods or invest. Called “the future of money,” cryptocurrency has surged in popularity recently due to the sudden interest in Bitcoins. The sudden boom has brought digital currency to the mainstream making it a viable option for investment.
In the cryptocurrency market, coin owners can their assets to make purchases, and any purchases can be traced back to an account. This provides a bit of extra security for any purchases using this payment method. In addition to Bitcoins, investors can buy up Ethereum, Litecoin or others like it. As the market grows, there are more opportunities to invest.
Cryptocurrency is generated by “mining” or using your computer to solve block algorithms in order to accumulate currency. Depending on when you mine your currency, the profit can be substantial. Unfortunately, the cryptocurrency market is fairly new, and can be a risky venture for investors. With the rise of Bitcoin, investors are becoming more interested in taking the risk for a decent payout.
Buying Cryptocurrency with an SDIRA
If you are looking to purchase Bitcoins using your SDIRA, there are few steps you can take. Before you invest, you must have an SDIRA account that allows for investment in alternative assets. From there, account holders can transfer their funds into a limited liability account to take advantage of “checkbook control.”
Cryptocurrency is a fast-moving market and requires your funds to be at the ready, and as a manager of your SDIRA LLC, you can make purchases in the name of your account. All of your cryptocurrency will be funded through the LLC, and your account will be treated as a separate entity for tax purposes. However, you still cannot buy up Bitcoins until you set up a digital wallet.
Digital wallets allow you to store the encryption keys to your cryptocurrency. Wallets allow you to use and store your digital cash, and everything will link back to your account. There are limited digital wallets that will allow you to purchase bitcoins using your LLC account’s name. Also, though in a smaller capacity, it’s important to choose a custodian who is experienced with cryptocurrency to avoid any prohibited transactions.
Benefits of Buying Cryptocurrency
When it comes to purchasing this asset using your IRA, it could prove to be very beneficial.
Depending on the account your own, you may not have to pay any taxes on your cryptocurrency. Any digital money purchased using your IRA would be tax-deferred, or it’s possible to have the tax waived.
These benefits come from trading, not mining. As the currency sits in your account, much like precious metals, it will grow. Additionally, in the case of Bitcoin, the supply is capped. There will never be more than 21 million bitcoins. Using your LLC, you can own your currency separately from your custodian, and self-manage your digital wallet. Be sure to keep your custodian up-to-date on the ‘fair market value’ of your cryptocurrency to avoid any account penalties.
Drawbacks of New Age Alternative Assets
When considering a new investment, it’s crucial to perform your due diligence before making a purchase. With cryptocurrency being a fairly new asset, there is a certain amount of risk when buying in. First, the purchase would be your LLC’s name. While all digital wallets will allow you to purchase Bitcoins or other cryptocurrency, you have to find one that will allow you to purchase in your account’s name. Any purchases must be made through your retirement account, otherwise you risk IRA penalties. Aside from SDIRA risks, the cryptocurrency platform is ever-changing.
In addition to it being a high-risk investment, another issue with digital currency involves security. All digital currency is kept in digital wallets with transactions marked on a public ledger, or Blockchain. Additionally, all mining, selling, or purchasing is logged through the system. Having a complete digital presence is open to cyberattacks, making overall security an issue. Also, any cryptocurrency mining could be subjected to the UBIT tale rules. When investing in alternative assets, it’s best to perform your due diligence to get the most out of your investments.
Planning For the Future
When exploring alternative assets for your retirement, it’s up to you to build a solid portfolio for a secure retirement. While traditional investments can be beneficial, it’s important to look to the future for opportunity. As you prepare for the future, remember that technology is paving a new way, and cryptocurrency is just the beginning.