Is Investing Retirement Funds into Cryptocurrencies Risky or Smart?

If there’s one thing that’s consistently said about cryptocurrency investments, it’s that it’s extremely volatile and comes with its risks. 

But investing in cryptocurrency can potentially offer you higher returns and diversify your retirement portfolio. Before jumping into it, it’s important to understand that to invest your retirement funds into cryptocurrencies, you’ll first have to set up a self-directed individual retirement account that allows you to invest in alternative assets. 

This is because most, though not all, traditional financial institutions do not allow IRAs to invest in alternative assets, mainly because they earn their fees through traditional investments. We’ll explain a little more about this in the article.  

But don’t worry too much about the red tape or limitations. According to the Retirement Industry Trust Association (RITA), approximately 2-5% of IRAs are invested in alternative assets. So, you won’t be the only one. The question is, should you invest your retirement funds into cryptocurrencies? Is it a smart or risky decision? 

We’ll explain what it means to invest your retirement funds into crypto and some of the things you should know before making that decision. 

Is It Too Late to Get into Cryptocurrency? 

While the terms cryptocurrency and digital currency have been floating around the fintech atmosphere for a few years now, the asset is still considered to be in its infancy stage. Is there a potential for crypto to grow even bigger in the next few years? Definitely. 

Generally, it’s not too late to get into cryptocurrency, depending on the type of currency you choose to invest in. For example, some may say it’s too late to invest in Bitcoin now since it was first introduced in 2009 and has been popularized so much that it drove the price up. While that may be the case, the cryptocurrency market fluctuates so much that the price of Bitcoin has seen its highs and lows. This means it’s not too late to get into cryptocurrency, you’ll just want to watch the price before you make the jump.  

No one can really guarantee the rise or fall of crypto in the years to come as it’s still a very new market that isn’t properly regulated. There are now thousands of different cryptocurrencies in the market, showing the genuine growth potential of the asset. The benefits, returns, and excitement overshadow some of the traditional investments most IRAs prefer, like real estate or stock investments. 

So, if you’re thinking about investing in cryptocurrency, don’t worry about being late to the party. Some may say it’s too late now, but they’ll be saying the same thing in 2030.

Are There Tax Advantages with Cryptocurrency Investments? 

Cryptocurrency taxes can be a headache. You technically owe taxes each time you sell cryptocurrency at a profit, and it can be a bookkeeping nightmare to stay on top of all purchase prices and gains. Though there are some advantages with cryptocurrency investments because the asset is treated as property. 

IRAs in general already receive preferential treatment when it comes to taxes. These advantages can sometimes apply to your cryptocurrency investment, provided you wait until you are of retirement age. 

For example, your cryptocurrency tax bill will largely depend on your overall annual income, and how long you have had the crypto asset. If you’ve had Bitcoin or Ethereum for a year or less, these profits are usually considered short-term capital gains and can be taxed at your regular income tax rate. 

However, if you have received profits from your cryptocurrency investment which you’ve held on for more than a year, these are considered long-term capital gains which are generally taxed at a lower rate than most income taxes.  

How Much Should I Diversify My Portfolio with Bitcoin? 

It’s good to know that cryptocurrency is still considered a volatile and risky investment option that’s hard to predict and monitor. One example of this is when Bitcoin fell below $30,000, along with other cryptocurrencies back in June 2021. 

Despite the risks, experts are still saying you should diversify your portfolio and consider expanding your investments into cryptocurrency. But how much should you diversify? 

Diversifying your portfolio with crypto will depend on how interested and aware you are of the market. Cryptocurrency investors are divided into two main groups — crypto-savvy and crypto-curious. Experts advise those who fall into the crypto-savvy space to diversify up to 4% of their portfolio. 

However, those who are crypto-curious can choose to diversify 1% of their portfolio as a form of exploration before taking a deep dive. You can always add to your diversification as you learn more about the market and currency. 

With that being said, most experts prefer to err on the side of caution and advise against diversifying anything more than 5% of your portfolio into cryptocurrency. 

As with any investments, it’s important to do your research, understand the risks and market trends, and be financially capable before making your decision. 

Will Cryptocurrency Be a Good Investment in 2022? 

There’s an expectancy that there will be approximately one billion global Bitcoin wallets in 2025. This contributes to the speculation that cryptocurrencies are not just here to stay, but will continue growing in the next few years. 

Bitcoin has enjoyed steady growth for the last couple of years, but other currencies are emerging to potentially be better investment options than Bitcoin. For example, Ethereum has been seeing a faster adoption rate than Bitcoin since 2019. 

Though this market is considered risky, it has attracted a large number of users and investors. Deciding if cryptocurrency will be a good investment in 2022 will depend on your financial capabilities, interest, and portfolio. 

If you’re looking to diversify your investment portfolio with something other than traditional investments, it may be a good idea to look into cryptocurrency investments. Deciding which currency to invest in will be your next thing to consider. 

Can You Hold Crypto in an IRA? 

As we have mentioned, the primary, and possibly only logical way to hold cryptocurrency in an IRA is for it to be a self-directed Individual Retirement Account. While you may be able to hold cryptocurrencies in your Roth IRA or 401(k) plans, most of these options are not very friendly to alternative assets like crypto or gold. 

If you don’t already have a self-directed IRA, you can transfer capital from your current retirement account to an account set up by a self-directed IRA custodian. 

Optionally, you can invest with Bitcoin IRA which launched back in May 2016. The company offers investors the tax advantages of an IRA coupled with the return of a high-risk, high-reward alternative asset class. This is just like other IRAs but instead of being funded by gold, cash, or bond, it’s funded by Bitcoin. 

Bitcoin IRA doesn’t just deal with Bitcoin. It also includes a long list of other cryptocurrencies including Ethereum and Litecoin. 

Economic uncertainties, especially in view of the pandemic and how the market will react to it, should come into play when you’re considering investing your retirement into cryptocurrency. Though it’s not too late to get into the game, the cryptocurrency market is still considered highly volatile and will continue to be so for several years. 

As with any investments, if you are financially capable and have done your research, investing your retirement funds into cryptocurrency might not be a bad idea.