Can You Have Bitcoin in IRA?

Experts on both sides of the cryptocurrency world agree on one thing: it’s still early to put these kinds of investments into retirement accounts, especially IRAs. A recent article from CNBC, “Want to put bitcoin in your IRA? Why experts say you may want to rethink that, explains why this temptation should be put on pause for a while.

Investors who have remained on the sidelines on cryptocurrency are taking a second look as this new asset class surpassed the $2 trillion mark in late August. Looking at retirement accounts flush with positive growth from stocks, it seems like a good time to take some gains and test the crypto waters.

However, the pros warn against using cryptocurrency in retirement accounts. “Not just yet” is the message from both bulls and bears. One expert says using cryptocurrency in a retirement account is like taking a delicate and exotic animal out of its natural element and putting it in a concrete zoo. Cryptocurrency is not like “regular” money.

The accounts are structured differently The average investor also won’t be able to hold the keys to their own cryptocurrency investment. It’s a buy and hold, with no individual ability to move the assets around. While there are some investment platforms working to change that, an inability to move assets, especially such volatile assets, is not for everyone.

Cryptocurrency is a much riskier investment. A quarterly look at account updates would be like only checking your retirement accounts every five years. Cryptocurrency values are volatile, and an account balance can change dramatically from one week, one day or even one hour to the next one. Crypto is a 24/7/365-day market.

Self-directed IRAs are allowed to have crypto assets, but just because you can doesn’t mean you should. Another reason: stocks, bonds and real estate have a stated market value, which means they are taxed when withdrawals are taken. However, the expected value of cryptocurrencies is not clear. They are not regulated, while IRAs are among the most highly regulated accounts. This is a big reason as to why most IRA account administrators don’t permit cryptocurrencies in their accounts.

Investment decisions are based on the eventual use of the funds. For IRAs, the intention is not to lose money, and ideally for it to grow, so there is more money for your retirement, not less. Separate margin or trading accounts are typically used for riskier investments.

One expert advised limiting cryptocurrency investments to 5% of your total retirement accounts. If money is lost, it won’t destroy your retirement, and any wins are extra money. Another expert says investing such a small amount won’t be worth the time or effort, so don’t even bother.

For those who are determined to get in the game, a Roth IRA may be preferable if you have an extended time horizon and can stand the ups and downs of cryptocurrency investments. The appreciation in a Roth IRA will be tax-free.

Reference: CNBC (Aug. 17, 2021) “Want to put bitcoin in your IRA? Why experts say you may want to rethink that

Will Inheritance and Gift Tax Exemptions Change in 2021?

The federal estate and gift tax exemption is applied to the sum total of a person’s taxable gifts during life and the assets they leave behind at death. In 2017, Congress doubled the exemption, starting in 2018. That number continues to rise with inflation until 2025, unless the laws are changed. According to the article “Estate and Gift Taxes 2021—2022: Here’s What You Need to Know” from The Wall Street Journal, the 2017 expansion cut the number of taxable estates from about 8,000 to about 3,000 in 2019.

Gift Tax Exemptions. In 2020, the exemption was $11.58 million per individual ($23.16 million per married couple). An inflation adjustment increased this amount to $11.7 million per person and $23.4 million per couple. For 2020 and 2021, the top estate-tax rate is 40%.

That increase is set to end in 2025, but both the Treasury Department and the IRS issued regulations in 2019 allowing the increased exemption to apply to gifts made while this increase is in effect, even if Congress lowers the exemption after those gifts were made.

Capital Gains After Death. Under current law, investments owned at the time of death are not subject to capital gains taxes. This is referred to as a “step-up in basis.” Congress and the Biden administration are now considering reducing or eliminating this benefit as a means of raising revenue.

Annual Gift Tax Exemptions. In 2020 and 2021, the annual gift-tax exclusion is $15,000 for each individual donor, for each individual recipient. You can give anyone up to $15,000 in assets per year and not owe any federal gift taxes. A generous couple with two married children and six grandchildren may give away $300,000 to their ten descendants. The couple could also give $30,000 to as many other people as they want, friends or family members or perfect strangers.

Above the $15,000 per donor, per recipient, gifts are subtracted from the lifetime gift and estate-tax exemption. Annual gifts are not deductible for income tax purposes and they are not considered income for the recipient. If the gift is not cash, the giver’s “cost basis” does carry over to the recipient.

Other Tax-Free Gifts. Another way to make a gift is to pay educational or health expenses for another person. The payment must go directly from the person giving the gift to the college, private school, or medical provider on behalf of another person. Otherwise, it will not have any tax benefit for the person giving the gift.

While a generous gift is always welcome, making a gift that is part of a holistic estate plan benefits you and your recipients. Speak with an experienced estate planning attorney about the role of gifting in your overall estate plan.

Reference: The Wall Street Journal (April 8, 2021) “Estate and Gift Taxes 2021—2022: Here’s What You Need to Know”

Roth IRA has a 5-Year Rule

Roth IRAs are popular for their flexibility and the simplicity of putting after-tax dollars in and not paying taxes on withdrawals during retirement. However, making the most of a Roth IRA requires paying attention to the details, according to a recent article “What is the Roth IRA 5-Year Rule?” from U.S. News & World Report.

More specifically, there are certain five-year rules that can undo all the good that comes from using a Roth, if you don’t know them. Avoid paying penalties or fees, by understanding how the Roth IRA rules work.

The Roth IRA five-year rule applies to investment earnings, and not to initial contributions. If you make withdrawals of investment earnings before the five-year time period, you’ll get hit with taxes and penalties, no matter how old you are. Many people think that once they turn 65 or 70, they can tap their Roth IRA whenever they want, but that’s not true.

Once you’ve opened and funded a Roth IRA, you’ll have to wait five years until you can start taking tax-free withdrawals of your investment earnings. The clock starts ticking on the date you open the account and make your very first contribution.

After five years, there are still certain requirements that must be met to take out earnings without a penalty. Before you can take out tax-free withdrawals, you will need to be at least 59½ or older.

That’s even if your first contribution was made the year you celebrated your 58th birthday. You’ll need to wait until age 63 before you may take qualified distributions from the account. The five-year rule applies, even if you opened the Roth IRA at age 70.

How is this time frame calculated? The IRS does it based on tax years. A tax year runs from January 1 to December 31. The deadline for contributions is the same as the deadline for filing taxes. Let’s say you funded a Roth IRA in April 2021 for the calendar year of 2020. The five-year rule begins on January 1, 2020. Apply the five-year rule, and you could begin taking withdrawals from the account on or after January 1, 2025.

What happens if you need to make withdrawals before the account hits that five-year mark? In that case, withdraw contributions to the account and not investment earnings.

If you’ve contributed money to a Roth IRA account, you can take that money out with no tax or penalty, no matter how old you are. However, make sure you meet all of the requirements. Remember that to avoid any taxes or penalties, you’ll need to leave the earnings in the account.

Reference: U.S. News & World Report (March 10, 2021) “What is the Roth IRA 5-Year Rule?”