Cryptocurrencies have quickly established themselves as one of the best assets for investors. And that is because they hold massive growth potential.
For perspective, the crypto market capitalization grew from just over $934 billion at the start of 2021 to more than $2.3 trillion in January 2022. And market experts agree that the industry has not reached saturation and will continue to grow.
Now, the potential of crypto as a long-term investment has led to the creation of a crypto-focused IRA. Basically, this type of IRA allows you to invest in crypto like Bitcoin, Litecoin, Ethereum, and so on while enjoying the benefits of individual retirement accounts.
Even so, there are mistakes you may make when investing in a crypto IRA that may end up being costly or inconveniencing later. So, let us look at some of them to help you make a more informed decision:
1. Not Consulting an Attorney for the Legal Bits
Many investors tend to consult inexperienced people or ‘non-attorneys’ on their IRA matters. A cryptocurrency IRA is an entity governed by a set of regulations. So, this mistake can result in you breaking the law and paying penalties or serving jail time. It may also put your portfolio and investment at risk.
2. Giving Away Control Over Your Crypto
While crypto IRAs are meant to be self-directed, giving you, the account holder, the power to make your own investment decisions, many custodians provide limited freedom. And, for the most part, newbie investors ignore control for lower fees and other ‘shiny’ benefits.
In the end, you realize that the restrictions on what cryptos you can buy, where you can trade, and most importantly, where you can keep your holdings is too big of a price to pay.
3. Opting to Create Your Crypto IRA by Yourself
You want the freedom to handle your own investment decisions but you still need a custodian to manage the IRA set up for you. Why? Establishing a self-directed IRA is a complicated process governed by particular laws. So, unless you are an expert in the field, you are bound to encounter several obstacles and risk breaking regulations without knowing.
It is best to create your IRA through a custodian. They will ensure you comply with the law, especially the IRS, and enjoy huge tax benefits.
4. Paying Unnecessary Costs
Many inexperienced investors often pay huge fees, which could otherwise have been avoided when establishing their cryptocurrency IRAs.
Top among them is withdrawing money from their traditional or Roth IRA to channel it into crypto, in which case, they pay early withdrawal penalties and taxes. However, you can buy crypto in your retirement account without cashing out through the right custodian.
5. Choosing Crypto-Unfriendly Banks
While crypto has gained more mainstream acceptance, some banks still do not allow direct crypto transactions. And transacting with a bank that prohibits crypto transactions can lead to account closure. So, you want to be sure that your bank has no restrictions concerning crypto.
Want to Avoid Problems Later? Establish Your IRA with an Experienced Custodian
Crypto or Bitcoin IRA is still the best way to invest in crypto safely and cost-effectively. However, you want to avoid common mistakes people make so that you do not experience problems later. That said, to make the best investment decision, always go with a reputed and trustworthy custodian. Most importantly, talk to a specialized attorney.