If you like cryptocurrency and want to retire sooner, a crypto IRA can put you on the right path. These retirement accounts let you trim your tax bill and grow your portfolio at the same time. Investors have been using retirement accounts to grow their finances for decades, and many institutions have been adopting and offering crypto IRAs. Whether you’re on the fence or ready to take action, read on for facts to consider about crypto IRAs before you get started.
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.
What is a Cryptocurrency IRA, and How Does It Work?
Cryptocurrency IRAs function like other individual retirement accounts and let you invest in crypto. The best crypto IRA providers put your digital assets in cold storage and have extensive insurance policies for maximum protection. You can reduce your pre-tax income or shield your investment gains from taxation. Both routes serve the same objective of reducing your tax payments.
7 Facts You Should Know About Cryptocurrency IRA
Cryptocurrency IRAs let you use a tax-advantaged retirement account to invest in cryptocurrencies. Investors can select from multiple types of crypto IRAs, detailed below; these details will help you make the optimal choice for your finances.
1. Types of Cryptocurrency IRA
Investors can select from multiple retirement account options for their crypto tax-advantaged strategy. These are some of the popular types of crypto IRAs you can use:
- Traditional IRA: Contributions to a Traditional IRA may be tax deductible, depending on your situation. You save on taxes now, but you will owe taxes on distributions at retirement age. This IRA is popular for retirement because most people have less income to report when they start withdrawing funds.
- Roth IRA: This individual retirement account does not enable immediate tax relief. However, you won’t have to worry about capital gains or withdrawal taxes come retirement. If your portfolio doubles or you receive dividends in your Roth IRA, you will most likely not have to pay taxes to realize them.
- SEP IRA: This retirement account allows employers to contribute to Traditional IRAs set up for employees. This type of account is popular with self-employed individuals because a SEP typically has less operating costs than other retirement plans for businesses. Employers can also use these accounts to allocate retirement funds for employees.
2. Cryptocurrency IRA Rules and Regulations
The IRS treats crypto like property, so you will have to open a self-directed IRA to form a position. Some platforms do this for their users, and you can create a Traditional IRA or Roth IRA on their platform. You cannot contribute your existing crypto to an IRA but can send cash that you then use to purchase digital assets. This arrangement requires crypto IRA providers to store crypto in custodial digital wallets.
The IRS imposes limits on how much you can contribute to your crypto IRA each year. You can only contribute $6,500 per year across all of your traditional and Roth IRAs combined. This number goes up to $7,500 per year if you are 50 or older. The $6,500 annual limit is an increase from the $6,000 annual contribution limit in place from 2019 to 2022. The IRS can increase this limit at any time.
3. Cryptocurrency IRA Fees and Other Costs
Cryptocurrency IRAs typically have more fees than most individual retirement accounts. You will pay a monthly maintenance fee that covers security, storage, and other costs. For example, you can also expect a transaction fee from most crypto IRA providers. While the fees are more than other solutions, a crypto IRA can be a great investment for people who believe in crypto and want to use tax-advantaged accounts to minimize taxes.
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.
4. Benefits of Cryptocurrency IRA
Are you wondering how crypto can strengthen your portfolio? We have included some of its advantages below:
- Decentralization: Crypto and blockchain infrastructure is a decentralized network that gives each investor more control over assets, transactions, and the network itself. A central entity cannot influence the supply and cause rampant inflation, as seen with fiat currencies around the world. The decentralized nature makes some investors believe crypto has a compelling future as a universal digital currency.
- Strong historical returns: Bitcoin has comfortably outperformed the S&P 500 over the past 10 years. While it’s been far from a smooth experience, Bitcoin has resiliently reached new highs each time it’s dipped over 70%. Long-term investors can patiently wait out the bear markets, and traders can make a profit with good timing.
- Crypto trades 24/7: Because markets never close, there may be more opportunities to make money with crypto and watch your portfolio grow. If significant news emerges over the weekend, you can quickly get in or out of your crypto position. Stock investors would have to wait until Monday morning to rush out of their positions.
- Tax advantages: Crypto IRAs help you save money on taxes, and who doesn’t want to lower their tax bill? Investing in an asset with high potential while trimming your tax bill is a great way to build wealth in the eyes of many.
5. Risks of Cryptocurrency IRA
Crypto has many perks, but every asset has risks. We’ve highlighted some risks to consider before investing in a cryptocurrency IRA.
- Crypto is volatile: This asset class has been around for a little over a decade and yet has seen multiple instances of70%+ drops. Crypto’s significant volatility, historically, has generated incredible prosperity during bull markets but steep declines during bear markets. Digital assets can routinely swing 5% in a single direction each day, especially if you invest in smaller altcoins. Not everyone can stomach the volatility, but it does present buying opportunities, as the assets themselves do not change during price drops.
- Opportunity cost: You can only contribute $6,500 per year across your individual retirement accounts. This number goes up to $7,500 per year if you are 50 years or older. That’s money you can invest in stocks, mutual funds, bonds, and other assets for the same tax advantages. Crypto enthusiasts may not care about this disadvantage if they want to go all-in on crypto. Investors who want a more diversified portfolio can split their contributions across multiple retirement accounts so they can build a diversified portfolio filled with crypto, stocks, and other assets.
- Fees: You can typically expect more fees with a crypto IRA. Some people see these fees as a pathway to buying a high-risk, high-reward asset in a tax-advantaged retirement account. However, not everyone will be okay with the fees. Crypto IRAs store crypto in custodial wallets and keep them secure, which fees pay for.
6. Opening a Cryptocurrency IRA
If a crypto IRA sounds exciting to you, opening an account is the best thing to do. You can set up the account now while you consider and decide how much to contribute to your crypto IRA each year.
7. Rolling an Existing IRA Account to a Cryptocurrency IRA
You can either start fresh with a new IRA account or roll an existing 401(k) or IRA to a crypto IRA. You can roll over a retirement account by contacting your current provider after creating an account. Your current provider will typically send a check or wire to your selected crypto IRA provider for your benefit (“FBO”). Once the funds arrive in your crypto account, you can diversify your portfolio with cryptocurrencies or stick with your favorites.
Are Cryptocurrency IRAs Worth It?
Cryptocurrency IRAs help investors save on taxes and get access to high-risk, high-reward assets. The inherent risk of cryptocurrencies is higher than most investments and may not be suitable for everyone. Crypto is best for investors with more time before retirement, or significant risk tolerance, who can ride the volatility.
