Tax deferred retirement accounts may help you save on your current tax bill or shield your investment gains from any taxation in the future. Investors have used tax deferred retirement accounts to save money with stocks, bonds, and mutual funds for decades, but what about crypto?
Although crypto prices can be a rollercoaster, these digital assets have produced outsized returns for early investors. We are currently in another crypto bear market where Bitcoin has fallen over 70%, but this is nothing new for seasoned market participants. Bitcoin historically has returned to its all-time highs, and some investors see this as yet another buy-the-dip opportunity. Read on for a discussion on buying crypto in a tax deferred retirement account and important details to know before you get started.
What is a Tax Deferred Account?
A tax deferred retirement account offers tax relief and lets you grow your portfolio. It generally allows you to make pre-tax contributions to your retirement account now and pay taxes on distributions taken at retirement age.
How Does a Tax Deferred Account Work?
Investors may be able to trim their tax bill with these accounts, but deferral strategies do not let you avoid taxation. You make pre-tax contributions upfront and pay taxes when the funds are distributed at retirement age. In addition, the pre-tax contributions may be deducted from your gross income which may reduce the amount you pay on income taxes.
What are the Types of Tax Deferred Accounts?
Investors looking to retire early can select from multiple tax deferred retirement accounts. Some of the choices are outlined below.
Contributions to a traditional IRA reduce your pretax income. A lower pretax income reduces your tax bill and can put you in a lower tax bracket. You will owe taxes when you start making distributions from your IRA at retirement age, but your tax bill may be lower. This is because IRA distributions are taxed at the tax rate that applies to you when the distribution is taken. If you wait until retirement age to take distributions, you probably won’t have as much income to report to the IRS, which may put you in a lower tax bracket
Employer-sponsored retirement plans such as 401(k) and 403(b) plans have higher contribution limits than individual retirement accounts. 401(k) plans are for businesses that seek to make a profit, while 403(b) plans are for non-profit companies and some government agencies.
Is It Possible to Buy Crypto in a Tax Deferred Account?
Tax deferred crypto retirement accounts weren’t around when Bitcoin first launched. However, strong demand for virtual currencies has prompted financial institutions to take action. As a result, investors can select from several IRA providers, such as Bitcoin IRA (*) , to purchase crypto in a tax-deferred retirement account.
Pros and Cons of Crypto in a Tax Deferred Account
Crypto retirement accounts have been gaining momentum, but does this investing strategy make sense for your finances? We will discuss the pros and cons of a crypto tax deferred account.
Pros of Tax Deferred Retirement Accounts
- You save on taxes: You can save on your current tax bill and shield your portfolio from capital gains taxes. If Bitcoin continues its historical trend of reaching new all-time highs after 70% declines, you could realize significant gains.
- Crypto prices have dropped recently: The crypto bear market allows investors to accumulate more Bitcoin with the same initial capital. Growth stocks have encountered similar drops, so the bear market isn’t exclusive to crypto; still, crypto drawdowns have been deeper, in general.
- Crypto can come roaring back during the next bull market: Crypto often moves in a similar direction as the stock market. Bitcoin has thrived during stock bull runs and experienced challenges during market corrections. Accumulating crypto now can put you in a good position for the next run-up.
Cons of Tax Deferred Retirement Accounts
- Crypto is a risky asset: Crypto has rewarded long-term investors and comfortably outperformed the S&P 500 over the past 10 years. However, buyers have experienced high volatility that can test the emotions of any investor. You can mitigate this disadvantage by not putting all of your eggs in one basket. If you have a small percentage of your funds in crypto, it’s easier to be more patient and less sensitive to daily market movements.
- Demise of FTX: FTX’s bankruptcy has rippled across the crypto industry as investors grapple with Sam Bankman-Fried’s alleged crimes. Large collapses can be disturbing and often result from bad leadership and manipulation, but this does not change crypto as an asset. Cryptocurrencies remain the same, even when good assets find the hands of the wrong people. Many crypto exchanges and providers are positioned to survive the FTX debacle. As time continues its course, more investors will understand the difference between crypto as an asset and bad actors in the space. However, it can take time for more investors to make this connection.
- Fees: Crypto retirement accounts have fees to cover storage, transactions, and other costs. You can ask crypto IRA providers about their fees if they don’t list them on their website. This can mitigate paying more in fees than you anticipate.
How to Buy Crypto in a Tax Deferred Account
A crypto tax deferred retirement account may reduce your tax liability and can speed up your path to retirement. However, every investor should manage risk and consider how much they want to allocate to crypto and other assets. If you want to open a crypto retirement account, you can get started with Bitcoin IRA (*) . The crypto IRA platform offers over 60 cryptocurrencies and also lets you invest in precious metals. You can open a Bitcoin IRA account today by visiting their website.