I'm Donny. I'm a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.
As traditional stocks have stagnated and cryptocurrencies have skyrocketed in price, some investors wonder whether Bitcoin and other cryptos might be better for their individual retirement accounts (IRAs).
In 2014, the Internal Revenue Service (IRS) classified cryptocurrencies and other digital assets as property, similar to real estate or other assets.
Now, these are investments that you can add to your IRA. Therefore, you can purchase crypto for your IRA in the same way as other stocks.
An IRA containing a cryptocurrency investment is often called a crypto IRA.
Crypto IRA Definition (also known as a Bitcoin IRA)
A crypto IRA allows you to invest in digital currencies and other assets in your IRA. It can be your additional investment vehicle.
The IRS classifies digital assets as property, and you may purchase properties with certain types of IRAs. Therefore, you may use your IRA to purchase digital assets such as crypto.
How Does a Crypto IRA Work?
Crypto IRAs are an alternative investment for retirement. A crypto investment can be highly volatile, so it requires additional security and special expertise in digital assets.
Not all IRA custodians and companies will allow you to use your IRA to purchase digital currency. An IRA provider will decide which cryptocurrencies it will allow you to include in your IRA.
The following cryptocurrencies are more reliable than others, so IRA custodians allow investors to buy from this list:
- Ethereum (ETH)
- Bitcoin (BTC)
- Litecoin (LTC)
- Solana (SOL)
- XRP (XRP)
In a crypto IRA, investors can use cash or a rollover from another account to purchase Bitcoin. IRS annual contribution limits apply to all kinds of IRAs, including crypto IRAs.
So, you must roll over from an existing account to contribute more than the limit. Aside from their escalating volatility and a need for an IRA company with specialized expertise, crypto IRAs work like any other IRA.
The maintenance fees are more, but storage fees are less than you would have with a precious metals or collectibles IRA. You can make trades to maximize your capital appreciation when you have money in your crypto IRA.
Most crypto IRA companies require you to keep a certain amount of cryptocurrency in your account, so you cannot liquidate your entire investment until you close out the account.
As with any other IRA investment, investors can take qualifying tax-free distributions when they reach retirement age.
Example of a Crypto IRA
You may want to invest in a crypto IRA because it is a tax-deductible way to purchase cryptocurrency. In addition, you can diversify your retirement savings to include more future-focused options.
Whatever the reason, there are a few crypto IRAs to choose. One of the most popular choices is Bitcoin IRA, sometimes called BitIRA. Bitcoin operates this IRA but allows you to purchase other cryptocurrencies, not just Bitcoin.
In a Bitcoin IRA, you may open an account using a rollover from another qualifying account, or you may use cash. After you have set a budget and opened an account, you can choose from more than 60 cryptocurrencies.
Now you can make trades and grow your wealth tax-free. When you reach retirement age, you can take a qualified distribution from your account.
5 Most Popular Cryptos to Put in Your IRA
Advantages of Crypto IRAs
- Portfolio diversification: Cryptocurrencies are a unique investment and not easy to represent in a conventional stock portfolio unless you use indirect investments.
- Tax advantages: One of the primary benefits of IRA investing is that you don’t pay tax twice (first on income used to purchase and second during the sale). Purchasing crypto in an IRA is one of the only ways to avoid double taxation.
- Decentralization: Crypto companies do not have a centralized operating head to make decisions. Cryptocurrency enterprises make decisions over distributed networks.
- Capital appreciation: It may be riskier, but a crypto investment can increase in value much faster than other investments.
- Security: Distributed networks called blockchains manage cryptocurrencies to give your crypto IRA better protection than one centralized operating place.
Disadvantages of Crypto IRAs
- Price volatility: Cryptocurrencies and other digital assets are notorious for high volatility. If you’re close to retirement or have a low risk tolerance, you should invest in safer options that are less likely to suffer significant losses.
- Account and trading fees: Only certain companies approve the inclusion of crypto in IRAs, and most charge higher annual fees than the more conventional IRA companies.
- Complexity: Because of complex reporting requirements and the extra work associated with crypto investing, navigating the crypto investing system can be complex and expensive.
- High risk: Cryptocurrency prices are speculative and not based on tangible goods. Therefore, digital assets can drop in price with less warning than other stocks.
How to Invest in Cryptocurrency IRAs
- Set a budget: The first step to any significant investment should always be to set a budget. Remember that no investment has guaranteed returns. Don’t invest more than you can afford to lose.
- Choose a company: While most conventional IRA companies don’t offer crypto IRAs, there are still various options from which to choose. It’s essential to do your due diligence and choose a company that works with your retirement planning.
- Choose a cryptocurrency: Many crypto IRAs will accept multiple types of cryptocurrencies in their accounts. You may have many options, so you must understand each crypto to make the right choice.
- Open your account: When you know what you want to invest in, your chosen company will help you open your account.
- Perform a rollover from an existing account: If you need to invest more than the annual limit, you will need to have a rollover from an existing account that qualifies, such as an existing IRA or a 401(k).
Are Crypto IRAs a Good Investment?
Crypto IRAs can be a high-yield retirement investment and a beneficial way to increase your retirement savings.
If you’re considering adding alternative investments such as virtual currency to your retirement funds, talk to a financial advisor about opening a crypto IRA account.
Crypto IRA FAQs
These are the most common questions asked about adding cryptocurrency to a retirement portfolio.
How do crypto IRA taxes work?
Can you buy Bitcoin in a 401(k)?
Can you buy crypto in a self-directed Roth IRA?
Can you put crypto in a Roth IRA?
Some companies will allow you to use crypto in a Roth IRA, but most will not. You may have to open a specialized account for this.