How to Invest Cryptocurrency in an IRA for Retirement

What Is a Crypto IRA? 

An individual retirement account (IRA) is a savings account that enables you to save for retirement with tax advantages. A “Crypto IRA” or “Bitcoin IRA” is an account with similar benefits but is tailored to cryptocurrency investments. Instead of holding cash or traditional investments, Crypto IRAs allow investors to hold alternative assets like cryptocurrencies and provide tax benefits on the profits they produce when sold.

How Does a Crypto IRA Work?

In terms of processes and benefits, a Crypto IRA works in the same way that a normal IRA does. But instead of investing in mutual funds and other traditional financial instruments, you trade crypto.

First, you need to open a Crypto IRA. You can open a Traditional, Roth, Simple, or SEP IRA. After you go through the account creation process, you can start funding your account.

You can fund a Crypto IRA in the same ways you fund any other IRA:

  • Purchase the assets with your own funds
  • Rollover funds from another IRA

Crypto IRAs are subject to the same regulations that govern other IRAs, including gold IRAs. You will face the same annual IRS contribution limits, meaning you can only contribute $6,000 in 2021, or $7,000 if you’re 50 or older. You also need a custodian that follows all the normal IRS requirements.

The primary way a Crypto IRA will differ from its non-crypto counterparts is the process by which you acquire cryptocurrencies. If your Crypto IRA company doesn’t exchange cryptocurrencies, you will need to find an exchange to acquire them on. Cryptocurrencies are also stored differently than other assets. However, most Crypto IRA companies and platforms offer their own digital assets storage solution.

It’s up to you to find out which cryptocurrencies you can invest in with any given IRA. Most Crypto IRA providers will list which cryptocurrencies they offer or which they enable you to hold.

Advantages and Disadvantages of Crypto IRAs 

Advantages

  • Diversification. While digital currencies are still a young investment option, they provide an alternative to traditional investments. If your goal is a more diverse retirement investment portfolio, Crypto IRAs offer that, plus the tax benefits afforded to all IRAs.
  • Potential. Cryptocurrencies are more dynamic than most currencies and commodities. One of their biggest draws is how quickly their value often rises. The flip side of this is they can often crash quickly as well. But if you have a higher than average risk appetite, Crypto IRAs can help you grasp a high earning potential.
  • Tax Benefits. If you’re going to invest long-term, an IRA is a tax-advantaged account type to do it with.

Disadvantages

  • Volatility. Yes, cryptocurrencies can produce huge profits in a relatively short time. History has proven that. But overall, they are less predictable and more volatile than most of your other alternatives. You stand a higher risk of loss investing in cryptocurrencies.
  • Fees. Crypto IRAs typically carry fees that other IRAs do not. This can also expand into high minimum investments. Of course, different crypto IRA providers offer different rates, but the trend for crypto IRAs is higher expenses.
  • Potential Restrictions. Many Crypto IRA providers only offer a small list of cryptos for you to choose from. Due to regulations, there are very few circumstances where you can move cryptos you already own into a Crypto IRA.

Should You Open a Crypto IRA?

Opening an IRA is a personal decision with meaningful financial consequences. It is your responsibility to weigh the potential pros and cons and make a decision accordingly. 

People open Crypto IRAs for a variety of reasons and then benefit from the factors discussed above. If you appreciate the benefits they offer and are willing to accept the corresponding disadvantages, then you should consider opening a Crypto IRA.

The Differences Between a Traditional IRA vs. a Roth IRA vs. a 401(k)

These three retirement account types offer different tax advantages.

A Traditional IRA is funded with pre-tax income. You do not pay taxes on pre-tax funds deposited into an IRA, and you don’t owe taxes until withdrawing from the account during retirement.

A Roth IRA offers the opposite structure. You fund a Roth IRA with post-tax income, meaning you pay your taxes before you deposit funds into the Roth IRA. In exchange, you don’t need to pay any taxes when you withdraw them during your retirement.

A 401(k) is a sponsored retirement account. You must agree with your employer to have a percentage of each paycheck deposited into the account. Your employer will match all or part of your contribution. Because the money is deducted from your gross income, it can be reported as a tax deduction.

How to Invest Crypto in an IRA

Investing in a Crypto IRA is relatively easy. You just need to find a Crypto IRA company and open an account with them. This process typically takes some time and requires some paperwork. 

How to Open a Crypto IRA

To open a Crypto IRA, follow your provider’s instructions. This will require you to go through an ID verification process because you’re opening a financial account. Apart from that, you will need to follow the specific instructions laid out by the provider. It’s typically not difficult to open a new account as long as you meet the requirements.

For example, here is the process for opening a Crypto IRA with iTrustCapital. This self-trading platform allows you to invest in cryptocurrencies and precious metals in your retirement IRA accounts. You can set up an iTrustCapital account in a matter of minutes by following these instructions:

  1. Visit the iTrustCapital website and click on Make a Free Account
  2. Follow steps to verify your email address and identity
  3. Select the IRA account of your choice
  4. Add funds to your account 
  5. Electronically sign your application
  6. Start purchasing assets for your IRA account

FAQs About Crypto IRAs

How are assets stored in a Crypto IRA?

Assets are stored in a storage solution provided by the company. IRA providers are responsible for safekeeping the assets their customers’ deposit.

How do Bitcoin exchanges work with a Crypto IRA?

Usually, you access exchange through your provider. In the example we provided, iTrustCapital provides access to a long list of coins.

Can you buy crypto in a Roth IRA?

If you open a Crypto Roth IRA, yes, you can buy crypto. Ordinary Roth IRAs can offer a range of assets, but you must check with the company in question to know exactly what assets you can place in your account.

Can you hold cryptocurrency in an IRA?

Yes, you can hold cryptocurrency in a Crypto IRA. However, you need to take roughly the same steps as you would need to with a regular IRA. Once your account is set up, you can invest in cryptocurrencies and hold them in your account. You then receive all the tax benefits of your IRA.

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