Unlike some other types of alternative assets, trading in Bitcoin and other types of crypto have some special requirements.
Secure storage is a must for cryptocurrencies. Your clients will need a secure place, often called a crypto wallet, to hold their crypto-assets.
A crypto exchange is where these assets are traded. It works much like a stock exchange, but digital currency exchanges are separate from standard investment markets.
Some self-directed retirement account firms may provide storage or access to a crypto exchange directly or via an alliance with another entity who does. In choosing the right self-directed firm for clients who will be investing in crypto-assets, you will want to verify their capabilities.
Beyond traditional and Roth IRA accounts, many self-directed retirement platforms offer accounts for self-employed clients including SEP-IRAs, Solo 401(k)s and SIMPLE IRAs. This should be a factor in deciding which self-directed platform is best for your clients.
Advantages of Bitcoin in Retirement Accounts
Potential advantages of investing in Bitcoin, Ethereum, NFTs and other crypto-assets in a retirement account include:
- Cryptocurrencies have a low correlation to traditional asset classes like stocks and bonds. They can provide an added level of diversification to your client's retirement savings.
- Tax issues as mentioned above. The tax situation surrounding cryptocurrencies continues to become more complex and confusing. Many investors find themselves triggering taxes unexpectedly on crypto-assets held in taxable accounts. With the volatile price fluctuations of Bitcoin, your clients may find themselves incurring short-term capital gains, which are taxed as ordinary income.
- Like any asset held in a retirement account, any gains from cryptocurrencies can continue to grow and compound in a tax-advantaged environment whether your client reinvests the gains back into Bitcoin or into another type of asset.
- Bitcoin and other crypto-assets carry a high degree of volatility but also offer the potential for high returns. The potential upside may be worth the risk for your clients as part of their retirement savings efforts, especially if digital assets comprise a small amount of their overall retirement account holdings.
Disadvantages of Bitcoin in Retirement Accounts
Potential disadvantages of investing in Bitcoin, Ethereum, NFTs and other crypto-assets in a retirement account include:
- Fees associated with holding Bitcoin and other digital assets in an IRA or other types of self-directed retirement accounts can be high. There may be account setup fees, transaction costs and other fees associated with holding digital assets in a self-directed account. This is an area where you can greatly assist clients by establishing a relationship with a solid self-directed retirement account provider.
- While your clients don't want to lose money, this is a possibility with digital assets. The tradeoff of being able to shelter gains in a retirement account is that any crypto capital losses incurred in a retirement account will not be deductible.
- If your client invests in digital assets or other alternatives in a self-directed IRA or other retirement account, they will generally need an additional retirement account at a conventional custodian to invest in more conventional investments like ETFs, stocks and mutual funds.
Asset Allocation and Asset Location
Ultimately, there are two recommendations advisors must make. First, is Bitcoin or other cryptocurrency an appropriate asset class for your client? While digital assets are different from selecting between an ETF or a mutual fund, it's still an issue of whether these assets are appropriate for your client. This may be colored a bit by your client's level of interest in crypto.
If digital assets are appropriate for your client, then the asset location decision comes into play. It is not an either-or decision where cryptocurrencies can only be held in a taxable account or in a retirement account. It's incumbent upon you as their advisor to look at the pros and cons of where to hold these assets for each client.
Summary
Bitcoin and other digital assets are all over the news. Your clients may be asking you whether these are appropriate for them, including as an asset in an IRA or self-employed retirement account. You will want to have a crypto strategy for clients for whom these investments are appropriate, including a self-directed retirement account provider that you have fully vetted.
