If you have decided that the risks of Bitcoin (CRYPTO: BTC) are worth the rewards, you might be worried about getting paid a big tax bill. When you trade Bitcoin, you are subject to capital gains taxes, which could be significant given the wild ups and downs of cryptocurrency.

One workaround is to invest in a Bitcoin IRA, or individual retirement account. As with any IRA, you are immune from paying taxes on transactions within the account. But is that enough to justify the risks of investing your IRA funds in Bitcoin?

What is a Bitcoin IRA?

A Bitcoin IRA is basically just a self-directed IRA, which is an IRA that allows you to invest in alternative assets such as cryptocurrency, real estate, and physical gold. Although one platform has filed the name Bitcoin IRA, there are several brokerage houses that allow you to invest in crypto with a self-directed IRA.

According to IRS rules, you cannot transfer crypto holdings into a self-directed IRA. You will need to fund the account in US dollars and then purchase Bitcoin in your IRA.

A self-directed IRA can be a Roth IRA or a traditional IRA. Regular IRA contribution limits for 2021 apply: $ 6,000 if you are under 50 or $ 7,000 if you are 50 or over.

Imagine if you had maximized your Roth IRA with Bitcoin in 2016, when the contribution limit for someone under the age of 50 was $ 5,500. Even after last month’s crypto crash, as of June 6, 2021, your investment would be worth over $ 330,000 – all yours, tax-free in retirement if you follow the Roth IRA rules.

What are the disadvantages of a Bitcoin IRA?

The problem with investing retirement money in Bitcoin is that today’s $ 330,000 nest egg can be worth a lot less when you need it. Bitcoin is a very volatile investment.

The stock market undergoes a correction, that is, a decline of 10% or more, about once every two years. For comparison, Bitcoin has crashed by 50% or more six times since 2012, according to Visual Capital. Three times it has fallen over 80%. As evidenced by the example above, it has historically bounced back and generated huge returns over time so far. But these returns were very unpredictable.

Bitcoin remains speculative because its real world utility remains so limited, and there are thousands of other cryptocurrencies. Where Bitcoin will be in five or 10 years is a puzzle.

Bitcoin price data by YCharts.

Meanwhile, stock market returns are fairly predictable over the long term. the S&P 500 The index has generated average annualized returns of around 10% over the past 50 years. These returns may be pale compared to what we’ve seen from Bitcoin in recent years, but in planning for retirement, ensuring predictability is essential.

When does a Bitcoin IRA make sense?

First of all, investing in Bitcoin in an IRA or elsewhere only makes sense if you have carefully assessed your tolerance for risk and decided that you can handle huge fluctuations. You can assess your risk tolerance using this calculator. Bitcoin is only suitable if your risk profile is very aggressive.

Also, be sure to consider the high fees for investing in a Bitcoin IRA versus the tax benefits. Many charge setup fees, maintenance fees, and transaction fees, and they often have significant account minimums.

In general, speculative assets should not represent more than 5-10% of your overall investment portfolio. So if you have large crypto holdings outside of your IRA, avoid a Bitcoin IRA.

Only consider this if you’re on track to comfortably retire with savings from other retirement accounts, like a 401 (k) or 403 (b). If there is a chance that you will need your IRA money to fund your golden years, that money should not be invested in Bitcoin.

Likewise, avoid investing in Bitcoin if you plan to use the money for other purposes, like buying a first home or paying for your child’s school fees, both of which are popular uses for a Roth IRA.

Even though Bitcoin makes sense to you as an investor, a Bitcoin IRA is probably not a good way to invest your retirement money.