Why Use Retirement Funds to Buy Polkadot?
There are three main reasons to consider investing in Polkadot with your retirement funds: taxes, diversification and getting into an emerging asset class.
- Using retirement funds is the smart way to invest in Polkadot
- The top three benefits are tax treatment, diversification and investing in an emerging asset class
- You must invest with an LLC and can buy Polkadot on Coinbase
Tax Benefits of Buying Polkadot
Back in 2014, the IRS issued IRS Notice 2014-21, which classified cryptocurrencies, including Polkadot, as property, like stocks and real estate. This subjects them to the capital gains tax regime. When you use a Self-Directed IRA or Solo 401(k) plan to invest, you don’t need to worry about taxes.
When using personal funds to invest, you need to know the details of every Polkadot transaction you make. This includes the date you bought it, how much you paid for it, the date and price when you sold it, and how long each crypto was held. At the time of sale, you will either owe short-term capital gains (held less than 12 months) or long-term capital gains (held greater than 12 months).
When you use retirement funds to invest, you don’t have to worry about these details every time you transact with Polkadot. Why? Because, retirement plans are tax-advantaged, meaning you do not pay taxes on the investments held inside of them. IRAs and 401(k) plans can either be pretax or after-tax.
Pretax or Traditional IRA or 401(k) – Traditional retirement plans are funded with pretax money, meaning you will receive an upfront tax break. You don’t owe taxes on any funds you contribute to the plan each year. The taxes are deferred until you start distributing funds during retirement.
Roth IRA or 401(k) – Roth contributions are made with after-tax money. Because of this, there is no immediate tax break. The benefit of these plans comes on the back end. All qualified Roth distributions are tax free! To be qualified, you must be at least age 59 1/2 and have a Roth plan open for at least five years.
Any financial advisor or retirement specialist will tell you that you must properly diversify your holdings. As the saying goes, don’t put all your eggs in one basket. It makes good financial sense to spread across your investments, whether it be stocks, bonds and mutual funds, or alternative investments, such as real estate, metals and Polkadot.
If you are fully invested in the stock market and it takes a dive, guess what? So does your entire portfolio. Proper diversification allows one to ride through down periods with certain investments. For this same reason, you shouldn’t put all of your money into Polkadot. Cryptos have had a tumultuous ride since the start. Dramatic swings in the price can affect your bottom line if you are too invested.
Emerging Asset Class
Don’t miss out on the latest, emerging asset class. Imagine if you can go back in time and invest in Amazon, Tesla or Microsoft when they first went public? The cryptocurrency market, including Polkadot, is still in it’s relative infancy. The Blockchain technology behind them is improving all the time, so why not take a chance?
Of course, investing in Polkadot is not for everyone. There is an inherit risk in new asset types, especially something that not everyone is in favor of. It’s up to you, as the investor, to decide if the risk is worth the reward. Working with a financial advisor is your best bet before deciding whether or not to make a particular investment. Of course, it’s important that you do your own due diligence before investing in any emerging asset class.
Self-Directed IRA or Solo 401(k) for Polkadot?
You’ve decided you want to invest in Polkadot, so what plan should you choose? A lot depends on the type of income you earn. Are you self-employed or do you work for someone else? If you are self-employed, it’s a no-brainer; the Solo 401(k) is the best plan for you. For everyone else, a Self-Directed IRA is the way to go.
In order to utilize the Solo 401(k) plan, you must have some kind of self-employment income. This can be from your own business, contract work or gig jobs, among other things. The second requirement is that you have no full-time employees, other than a spouse or business partner. The Solo 401(k) is arguably the best plan for the self-employed and features a number of benefits.
The Solo 401(k) plan offers high annual contributions limits, the ability to borrow up to $50,000, a Roth option, UBTI exemption and limitless investment opportunities. So long as your investment is not a collectible and does not involve a disqualified person, you can probably make it. This, of course, includes investing in cryptos, including Polkadot.
Anyone with earned income can open and fund a Self-Directed IRA. In fact, if you already have a retirement plan, you can generally roll those funds into a Self-Directed IRA. Although it is not as feature rich as the Solo 401(k), there are no restrictions for who can open one.
When you choose the right custodian, such as IRA Financial, you can invest in almost anything, including Polkadot, with your retirement funds. A Self-Directed IRA can either be pretax (traditional) or after-tax (Roth). A traditional plan allows for upfront tax deductions since taxes are deferred until you withdraw from the plan. There is no immediate tax break with a Roth IRA, however, all distributions are tax free, assuming you are at least age 59 1/2 and any Roth IRA has been open for at least five years.
How Does it Work?
Although we feel our relationship with Bitstamp is the best way to invest in cryptos, not all tokens are available on the popular exchange. As of right now, Polkadot is one of them. However, you can still invest with the exchange of your choosing, such as Coinbase. When you use Bitstamp, you can open up your trading account in the name of your IRA or 401(k) plan. However, in order to invest on a different exchange, you need to open an LLC. While there is an added expense, it’s the best solution if you want to trade on another exchange.
Once the LLC is created, it will be wholly owned by your self-directed retirement plan. You will then create your exchange account in the name of the LLC. The one drawback is that it’s not immediately known that the LLC is owned by a retirement plan, and thus not subject to annual taxes. If ever questioned, you simply need to tell the IRS that your LLC is owned by your plan and you should have zero tax-reporting issues. Plus, there are no third-party broker fees. Once your plan is funded, the LLC is set up and your exchange account is created, you can start buying and selling Polkadot and other cryptos without worrying about taxes!
Why Choose Polkadot?
According to their website, “Polkadot development is on track to deliver the most robust platform for security, scalability and innovation.” It’s a recent crypto with a supply of just over one billion. While returns since it’s inception are up almost 100%, it has been subject to the volatility of the entire crypto space. The newcomer is not like the original crypto, Bitcoin. Instead, it’s more of a software platform.
The idea behind Polkadot is that it has “true interoperability,” meaning it “enables cross-blockchain transfers of any type of data or asset, not just tokens.” It’s much more scalable than its predecessors, one can create a custom blockchain in minutes, and can be upgraded without hard forks and can change based on new technology. Security is top notch as chains can remain independent and the network is user-driven. There’s a lot of potential for the new kid on the block, Polkadot.