Many Americans have an old 401(k) that is not being utilized to its fullest extent. Therefore, a rollover may be the right option for those looking to breathe new life into their retirement account. A Crypto IRA offers many of the same benefits as a 401(k) and can be a great opportunity to gain exposure to cryptocurrencies for retirement.
What Is a Crypto IRA?
Recently, cryptocurrency investments have become a more popular retirement option. As such, Crypto IRAs are great options for those looking for a specific crypto retirement account.
A Crypto IRA is a tax-advantaged retirement account. The only real difference is that instead of holding U.S. Dollars or financial instruments like stocks, bonds, and GICs, they hold digital currencies, such as Bitcoin, Ethereum, Litecoin, and many more. Otherwise, the regulations governing the account and the tax advantages they offer are the same.
We will go over the specific benefits of a Crypto IRA soon. What you need to know right now is that they provide tax advantages and protect your account from being subject to taxable events – when trading within the retirement account. Depending on the type of Crypto IRA you set up, the taxable event will occur when funding your account or when withdrawing your account upon retirement after the age of 59 ½.
Invest In Crypto for Retirement
Where Can I Rollover My 401(k) Into A Crypto IRA?
There are a number of retirement companies that offer Crypto IRA rollovers, but iTrustCapital is one of the most trusted companies offering Crypto IRAs. Unlike other providers, their Crypto IRAs do not charge a monthly fee and include cold storage custody at no cost.
Advantages and Disadvantages of IRA Crypto Investments
Pros of IRA Crypto Investments
A Crypto IRA offers several benefits. They can be summed up as:
- Tax breaks
- High retirement account contribution limits
- Shelter from taxable events
- Contributions in retirement
Perhaps the most sought-after benefit of a 401(k) is the pre-tax contribution system. This same benefit is available with a Traditional Crypto IRA. When you deposit into a Traditional Crypto IRA, your contributions are tax-deductible for the tax year when you made them. So, if you put 5,000 USD in Bitcoin into a Crypto IRA in 2019, you would be able to deduct a part of that balance from your 2019 tax bill. Then, you wouldn’t pay any taxes for your deposit until you withdraw and sell your cryptos during retirement.
Crypto IRAs protect you from two forms of taxation:
- Staking rewards
- Capital gains
While staking inside of a Crypto IRA is not a feature fully available in most Crypto IRAs, the feature will become available in the near future. This can be an incredible long-term opportunity for those investing for many years.
Looking at historical data, cryptocurrencies can produce extraordinary and extreme capital gains. The most apparent example is Bitcoin. If you had invested $5,000 in Bitcoin in 2012, you would already be a millionaire. Typically, you incur capital gains when you sell an asset (capital) for more money than you bought it for.
There are two kinds of capital gains tax:
- Short-term capital gains (higher tax rate)
- Long-term capital gains (lower tax rate)
When you place your cryptocurrencies in a Traditional IRA, you don’t need to worry about any taxes until withdrawal. Normally, people withdraw less in retirement and thus incur lower taxes. So, by sheltering your cryptos in a Traditional IRA, you receive immediate tax breaks and hold off any taxation until you are in retirement. The lifetime savings this produces depend on your tax bracket in retirement. On the other hand, a Roth Crypto IRA is funded with post-tax dollars. This means that you pay taxes when adding funds to the account but pay no tax when withdrawing at retirement.
While trading cryptos contains additional risk due to their price volatility, long-term investments in cryptos have proven to be fruitful. Long-term investments in cryptocurrencies are more hands-off and do not try to outpace the market through active trading. As long as the trend continues upwards, the profit potential is significant. This makes Crypto IRA investments a good way of approaching crypto without the trading risk. When you add the tax benefits, they become a very attractive option for many investors.
A Crypto IRA can offer exposure to this alternative asset and help diversify your retirement portfolios. As an asset class, cryptocurrencies behave differently from all other types of assets and can be a great option for diversification. It’s never great to have all your eggs in one retirement nest, so diversification provides the benefits of all individual investments but with less overall risk.
Invest In Crypto for Retirement
Cons of 401(k) Crypto Investments
Most of the drawbacks associated with Crypto IRA investments are related to lost opportunities. Since Crypto IRAs are a newer type of retirement account, the yield generating benefits of decentralized finance is not yet available in these types of accounts. However, this ability will likely be available in the near future. However, as of right now, the only thing a Crypto IRA can produce is capital gains, therefore losing out on potential passive earnings.
While cryptos have produced huge returns for many people, the volatility can cause emotionally driven short-term traders to be shaken out of their positions and incur a loss. If a loss occurs inside an IRA, it cannot be written off as a loss in your taxes.
While this is more of an issue for day traders, long-term investors must also consider some risks. While the crypto markets are growing in popularity they’re adoption and utility is still speculative. This means that many strong contenders in the crypto markets may not survive in the long run, leaving you with a loss in your retirement account for that specific crypto. This is why it is crucial to do your own research for every investment.
Lastly, the costs associated with running a Crypto IRA are higher than they are for other alternatives. Those costs include various setup fees, custodial costs, transaction fees, and other potential fees such as withdrawal fees. However, providers like iTrustCapital have been a favorite due to their lack of any account, setup, or custodial fees.
Does a Rollover from a 401(k) into a Roth or Traditional Crypto IRA cause a taxable event?
Right now, cryptos are relatively available in 401(k)s. Some 401(k)s offer cryptos as an option for diversification but most do not. The best (and simplest) option to adding crypto to your retirement portfolio is to open a self-directed Crypto IRA and perform a rollover. These self-directed Crypto IRAs can be set up as a Roth or a Traditional IRA. Depending on your goals, you can rollover your 401(k) into either a Roth Crypto IRA or a Traditional Crypto IRA. A Roth Crypto IRA rollover will incur a taxable event during the conversion, but after that, final withdrawal from the account after the age of 59 ½ will be tax-free. A Traditional Crypto IRA rollover will not incur a taxable event during conversion. However, withdrawal from the account after the age of 59 ½ will be a taxable event.
To invest in crypto as part of a 401(k), the first step is finding a company that offers them. There are several options available, and they specialize in helping people reach their crypto investment goals.
Where to Open a Crypto IRA and Rollover Your 401(k)
Most companies offering a Crypto retirement account will have similar processes. As an example, let’s look at iTrustCapital. iTrustCapital specializes in providing crypto retirement accounts, commonly known as Bitcoin IRAs or Crypto IRAs. Their service provides a guided process for rolling over your 401(k) into a Crypto IRA.
You can set up an iTrustCapital account in a matter of minutes by following these instructions:
- Visit the iTrustCapital website
- Verify your email address and your identity
- Choose the IRA type
- Fund your account with a rollover
- E-sign the application
- Start purchasing digital assets into your account