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You may have heard about people investing in Bitcoin and other digital currencies with their retirement account.
It sounds strange. But it is possible.
You can purchase cryptocurrency through a self-directed IRA, which is a tax-advantaged retirement account used to hold alternative investments, such as real estate, commodities, and yes, even cryptocurrency.
But why hold such a volatile asset like Bitcoin in a retirement account?
The short answer: Tax breaks.
Owning digital assets like crypto inside this type of IRA helps shield traders from paying taxes on investment transactions made within the account. If you sell an investment inside an IRA, you won’t owe taxes until you withdraw the money.
In contrast, transactions made on cryptocurrency exchanges or broker platforms like Robinhood are subject to short-term and long-term capital gains tax — whether you withdraw the money or not.
But self-directed IRAs aren’t right for the average investor — or even the average crypto investor.
Even if you believe in the long-term growth potential of Bitcoin or other virtual currencies, self-directed IRAs are complex and come with high fees.
Read on to learn how these accounts work to see if a self-directed IRA is right for you.
What Is a Self-Directed IRA?
A self-directed IRA is a unique individual retirement account that lets you put your money in alternative assets.
Examples of alternative assets include:
- Cryptocurrency.
- Gold, silver and other precious metals.
- Real estate properties. (Note: There’s a slew of additional rules you must follow to invest in real estate with a self-directed IRA.)
- Startups and shares of privately-held companies.
- Tax lien certificates and deeds on foreclosed properties.
- Undeveloped or raw land.
- Promissory notes.
- Water rights.
- Mineral rights.
- LLC membership interest.
- Livestock.
Self-directed IRAs are intended for experienced investors. People use these accounts to chase higher returns and diversify their retirement…
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