What is a Bitcoin IRA? Tax Free Bitcoin Trading (US Only)

The following video
is relevant for US citizens only and is meant for information purposes only. It is not intended to offer
any investment advice. Any action regarding
your financial future and IRAs should be done in consultation with
a financial advisor or tax professional. What is a Bitcoin IRA? Can I really use Bitcoin to save
for my retirement? Are there any risks I should be aware of?
And where do I even start? Well, stick around. Here on Bitcoin Whiteboard Tuesday,
we’ll tackle these questions and more.

Hi, I’m Nate Martin from 99Bitcoins.com
and welcome to Crypto Whiteboard Tuesday where we take complex cryptocurrency topics, break them down
and translate them into plain English. Before we begin,
don't forget to subscribe to the channel and click the bell so you’ll immediately
get notified when a new video comes out. Today's topic is “Bitcoin IRAs”. But in order to understand
what a Bitcoin IRA is, we first need to understand what an IRA is. IRA stands for “Individual Retirement Account”. It’s an investment concept
that started in the 1970’s to incentivize Americans
to save more for retirement. In simple words, it’s an investment portfolio
with great benefits, but in order to get those benefits you have to wait until you retire
before you cash it out.

What benefits? SIGNIFICANT tax benefits
such as tax-free trading, tax-deferred gains or tax-free gains. IRAs have been extremely successful
with several enhancements over the years. Today, investors hold over $9 Trillion dollars
worth of investments in IRAs. There are two different types of IRAs. First you have a “Traditional IRA”. Traditional IRAs were introduced with the Employee Retirement Income
Security Act of 1974 (ERISA) and made popular with
the Economic Recovery Tax Act of 1981. The traditional IRA gives you a tax write off
each time you invest money in it, commonly known as
making an “IRA Contribution”. Additionally, you can make an unlimited
amount of trades in this account without them being considered
taxable events by the IRS. With traditional IRAs, the income you deposit is not subject
to income tax: well…not yet. Instead, you pay taxes only on the amounts
you withdraw after you’ve retired.

However, if you decide to cash out your money
from a traditional IRA before your specific retirement age,
usually 59 and a half, you will get penalized by paying all of the income taxes you deferred
on the deposits and on any gains realized, as well as an early withdrawal penalty. The other type of IRA is the “Roth IRA”, which was introduced as part of
the Taxpayer Relief Act of 1997 by Delaware senator William Roth. The Roth IRA requires IRA contributions
to be made only from earned income which has already been taxed. Like a Traditional IRA, you can make unlimited trades in the account
without any tax implications. With a Roth IRA all the gains and withdrawals you make
during your retirement are tax-free since you already paid taxes on your deposits. Roth IRA’s are one of the most
powerful investment vehicles in the world, but it’s important to know that
unlike a traditional IRA, not all investors can open one.

Generally speaking,
the Roth IRA is not available for people who make over a certain amount of income
per year. For example, in 2020 you won't be able
to contribute to a Roth IRA if you have an income greater than
$139k dollars for a single or $206k dollars for married couples
filing jointly. However, those limits don’t apply to opening
and contributing to a traditional IRA. To sum it up the difference between a Traditional IRA
and Roth IRA comes down to this “Do you want to pay taxes now,
or do you want to pay taxes later?” This is something for you,
your financial advisor and/or your tax professional to decide.

Until recently, IRA’s were primarily used
to trade and invest in Stocks and Bonds but now investors are able to buy and sell
Cryptocurrencies in their IRA’s as well. This has birthed an entirely new industry, which frequently falls under the category
of “Bitcoin IRAs” or more generally – “Crypto IRAs”. Crypto IRAs are companies
that allow you to open an IRA and buy/sell cryptocurrencies
on their platform without having to worry about paying taxes
on each trade. For example, normally if you buy Bitcoin
at $5,000 and sell it at $10,000 – you’d make $5,000 of capital gains,
on which you would be required to pay taxes. In a Crypto IRA, however,
you wouldn’t owe any money on taxes, since tax-free trading is a unique benefit
of Individual Retirement Accounts. So if you are a believer in Bitcoin,
Ethereum and other Crypto Assets continuing to perform well as investments, it might be worth considering
whether a Crypto IRA is for you. While IRA’s can provide huge benefits
for investors, there are still a few things to consider. First, in order to build your IRA, you will need to contribute money each year
that will count as your IRA contribution.

Since IRA contributions are capped
at certain amounts per year, you can’t just put all of your money
into an IRA and receive the benefits. For example, in 2020, the IRA contribution cap is $6,000,
or $7,000 if you are over the age of 50. This typically increases each year, so you will want to do some research
on how much you can contribute. Second, there are some limitations
and conditions for withdrawing money from your IRA. With Traditional IRA’s, while investors have the ability
to trade between various assets, they can only withdraw money out of their IRA
and into their own personal bank by performing a process known as
a “Distribution”.

Distributions are normally reserved for people
who have reached their retirement age, which, for most people,
is defined in these tax laws as 59 and a half. While there are some exceptions,
including filing for early retirement, normally if one wants to take a distribution
before retirement age there will be an early distribution penalty. It’s important to talk with your tax
or financial advisor to learn more about how distributions work. For Roth IRAs, the principal can be withdrawn
at any time with no penalties. This means that if you Invested
a total of $6,000, and it turns into $12,000, you can still withdraw up to the invested
principal amount of $6,000 at any time. In addition to withdrawing the principle
at any time, investors can withdraw some profits
from their Roth IRA under certain qualifying circumstances.

These include a first-time home purchase,
medical expenses, higher education, and disability among others. As I’ve mentioned before, it’s important to talk with your tax
or financial advisor to learn more about such qualifying circumstances. So now, after understanding
the potential benefits and drawbacks, let’s talk about how you actually
start your own cryptocurrency IRA. There are 3 ways to start
a cryptocurrency IRA: First, you can start
a crypto IRA from scratch. This means you’ll open a new IRA account
and start making contributions to it. Second, you can fund your crypto IRA
with what is known as a “401k Roll Over”. This is where an investor takes a 401k or other retirement account
from an old employer and rolls it over into an IRA. This does not trigger a taxable event but simply gives you more flexibility,
as IRA’s are more flexible than 401k’s. Third, you can fund your crypto IRA
with what is known as an “IRA Transfer”. This is where an investor takes an Existing IRA
from another financial institution and transfers it to their new IRA,
that allows Crypto investments.

This transaction does not trigger
a taxable event but simply allows the investor to pair
with a new financial institution, one that likely allows investments
that the investor wishes to access such as cryptocurrency. Cryptocurrency IRAs require several factors
to come together – for example, you need a trustee
to hold your funds and to allow you to deposit contributions. You’ll need a trading platform
to manage how you invest and trade. You’ll also need a custodian
for your cryptocurrencies and access to a cryptocurrency exchange
for conducting trades. There are several companies out there
that act as facilitators and merge all of the elements
I just talked about together. It’s important that you do your own research
and find one that fits your investment goals. In the description below this video,
we’ve linked to some good places to start. Here are a few important things to consider
when choosing a company to manage your IRA: Initially, fees are one of the most
important things to consider when choosing a Cryptocurrency IRA provider. Be sure to investigate all of the fees
and get them in writing.

Here are the most common fees you’ll find: Initial Purchase Fees are fees
that may be charged upon your first purchase of the crypto assets. Trading Fees are fees that may be charged
each time you perform a trade or transaction. On-Going Fees include account setup,
storage, administration, platform fees and much more. If you’re looking into a Bitcoin IRA you’ll also want to research how the invested
cryptocurrencies are stored and secured. Important questions to ask are: Where are the coins held? What security measures are taken
to keep them safe? And who is the custodian for the coins
and what is their reputation? Custodians will usually have a whitepaper to help potential investors
understand the security available, so make sure to read that as well.

Finally you’ll want to take a look
at the trading platform that allows you to manage your IRA funds. The way trading is conducted
is incredibly important, you will want to test out the platforms
and find one that is easy to understand and use. Here are a few questions to answer: Is there a 24/7 trading platform, or am I required to call in
for every single trade? Can I test out the trading platform
before signing up? What cryptocurrencies are available
for trading or investing? Can I withdraw distributions
in cryptocurrencies as well as in dollars? If you want to get started with some research, we’ve linked to some popular Bitcoin
IRA companies in the description below. Well, that’s it for today’s episode
of Crypto Whiteboard Tuesday. Hopefully by now you understand
what a Bitcoin IRA is – A retirement oriented investment account that allows you to invest in cryptocurrencies
with substantial tax incentives.

You may still have some questions. If so, just leave them
in the comment section below. And don’t forget to check out
our IRA recommendations in the description as well. Finally, if you’re watching
this video on YouTube, and enjoy what you’ve seen,
don’t forget to hit the like button. Then make sure to subscribe to the channel and click that bell so that you’ll be notified
as soon as we post new episodes. It will really help us out a lot. Thanks for joining me here at the Whiteboard. For 99bitcoins.com, I’m Nate Martin,
and I’ll see you…in a bit..

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