Individual retirement accounts (IRAs) can be filled with multiple kinds of assets. Recently, cryptocurrencies have become an increasingly popular choice. More and more people are choosing crypto trading through IRAs and 401(k)s.
Among the cryptos coins that people prefer to invest in with retirement accounts, two choices – Bitcoin (BTC) and Ethereum (ETH) – stick out as the most popular choices (albeit for different reasons). With Bitcoin more known to date, let us instead briefly go over what Ethereum is, then go over the ins and outs of ETH in an IRA. Other digital assets you can have in an IRA include Litecoin, Bitcoin Cash, Bitcoin ETF or Ethereum Classic.
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What Is Ethereum (ETH)?
Ethereum is a cryptocurrency and a blockchain platform. The Ethereum blockchain is the platform from which many other cryptocurrencies and blockchain projects have been launched. As the first major smart contract-enabled platform, Ethereum has become a go-to technological solution for projects in digital currency, decentralized finance, smart-contract applications and much more.
In terms of market capitalization, ETH is second only to BTC. So, in addition to its underlying value derived from the Ethereum blockchain, ETH is the second most valuable cryptocurrency to invest in.
Going into 2022, Ethereum is set for some major changes. ETH 2.0 will transform Ethereum into a Proof-of-Stake (PoS) consensus. Ethereum is a constantly evolving platform that offers many uses outside of simple trading and investing.
The ETH cryptocurrency is used as a medium of exchange for apps built on the Ethereum platform. The possibilities the platform has unlocked, alongside its seemingly unbreakable security, have helped push Ethereum’s price to new highs.
For prospective investors, ETH is a promising asset that serves many meaningful uses. It is a source of innovation for cutting-edge new projects as well as an investment choice for millions of people.
Can You Buy Ethereum with Your IRA Account?
Yes, it is possible to buy Ethereum as an IRA investment. However, most traditional IRA providers do not enable cryptocurrency investments. The good news is that crypto/Bitcoin IRAs do allow you to invest in ETH while receiving all the regular IRA benefits.
What Is a Bitcoin IRA?
A Bitcoin IRA (aka Crypto IRA) is an IRA that includes Bitcoin and other cryptos as investment options. It’s important to make the distinction relative to traditional IRAs; there are no specific IRS-approved accounts just for cryptos. However, it is possible to invest in cryptos with a company that offers IRAs where cryptocurrencies are available.
From an IRS point of view, cryptocurrencies in an IRA are assets. When you buy them and have them in an IRA, their prices are subject to change. When their price rises, they have been subjected to a capital gain. That means that when the cryptos are withdrawn at a profit, they are subject to capital gains tax. When cryptos are withdrawn at a loss, you incur tax-deductible capital losses to a limit.
When holding cryptocurrencies in an IRA, they are sheltered from taxation and creditors seeking compensation. When you incur capital gains inside an IRA, you don’t need to pay taxes on them. A Bitcoin IRA, like other IRAs, offers tax deductions for deposits, then tax-deferred or tax-free growth on earnings, depending on the type of IRA.
Invest in over 30 cryptocurrencies from your checking account with no trading fees with the Current mobile app crypto feature.
Titan is an investment platform with a team of experts actively managing your portfolio based on your chosen strategy, including cryptocurrencies.
Alto IRA allows you to invest in stocks, bonds, mutual funds, ETFs, real estate, cryptocurrencies, and even gold for your retirement.
Pros & Cons of ETH in an IRA
Pros of Buying Ethereum in Your IRA
Tax advantages are the main draw to holding investments in an IRA instead of in a simple bank account (or a simple Ethereum wallet, in this case). However, in the case of any cryptocurrency, tracking tax obligations can be annoying. Selling any cryptocurrency for fiat currency at a profit triggers a taxable event. But each individual transaction must be accounted for to ensure you’re tax-compliant. That means recording every transaction and knowing exactly what was gained from each sale.
Putting your Ethereum in an IRA alleviates many concerns. You don’t need to worry about anything being taxed so long as it remains within the IRA. All the while, you get to benefit from their price appreciation, which isn’t lost to taxes. You then pay income tax when you withdraw your Ethereum in retirement. Your exact level of savings will depend on how much you withdraw but should almost invariably be significant. For 2021, the maximum long-term capital gains tax rate is 20% (on incomes over $441,450 if filing as a single, $496,600 if filing jointly).
If you’ve kept up with the news, the second significant benefit will come as no surprise. ETH has already shown massive potential for very high returns. The asset is volatile, like all cryptos. But looking at the history of Ethereum, it has shown very significant long-term growth. So, even if ETH is a small percentage of your retirement portfolio, it offers the potential to contribute a highly disproportionate amount to your retirement balance. Given the role Ethereum plays in the development of the growing blockchain industry, it offers strong underlying value that is likely to drive price growth even further.
Lastly, ETH is a unique asset, even in the context of the cryptocurrency markets. It can thus play an important role in diversifying retirement savings portfolios. Ethereum does not track any index, nor does it share the same drivers of price as USD, stocks, bonds, or any other financial instrument.
Cons of Buying Ethereum in Your IRA
The volatility and huge potential returns ETH offers come with a flipside – higher than average risk. Volatility can be less of an issue for long-term investors, but it is worth noting. Even in the course of 2021, ETH has regularly fluctuated faster than traditional financial instruments usually do, even in volatile times.
Cost is another issue. Bitcoin/Crypto IRAs usually come with higher minimum investment requirements than other IRAs. On top of that, management, account, and custodial fees tend to be higher.
How to Buy Ethereum in Your IRA as a Retirement Investment
The first step to investing in Ethereum in an IRA is to find the right Crypto IRA provider. Crypto IRAs cost money and come with varying levels of complexity, so choosing the right company will save you money and save you from a few headaches.
Typically, most companies offering Crypto IRAs will sell you cryptos. However, you cannot just buy ETH yourself and then give it to a new custodian due to regulations. So, it’s important to choose a company that enables ETH investments in a way you find agreeable.
Once you open an account with a Crypto IRA company, you can start filling the account with ETH. This process usually is quite simple, as the IRA company will walk you through how to purchase cryptos with them. The process of opening an account and buying ETH for it will vary depending on the company you go to.
