Cryptocurrencies have been around for over a decade, rewarding early investors. These digital assets continue generating demand, and some crypto investors are accumulating their holdings with a long-term view. Likewise, individual retirement accounts align with a long-term mentality. These accounts provide tax breaks and can save you a lot of money.
You may have heard of Traditional IRAs and Roth IRA plans for stocks and mutual funds, but what about crypto? The crypto IRA space has grown in recent years, and self-directed crypto IRAs are more accessible. If you want to save on your tax bill while investing in crypto, a retirement account will help. We will share how self-directed crypto IRAs work and some important rules to know.
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 Self-Directed Crypto IRA?
A self-directed crypto IRA lets you buy and sell crypto within your retirement account. Self-directed IRAs allow investors to trade alternative assets, such as real estate, precious metals, and crypto. Some self-directed IRAs specialize in a single asset class. You don’t need a self-directed IRA if you only plan to hold onto stocks, bonds, and mutual funds. Investors who want to expand their horizons must use a self-directed retirement account. You can have multiple retirement accounts, including one for crypto.
Can You Have a Self-Directed Crypto IRA?
Self-directed crypto IRAs are accessible to any investor. You can buy crypto and accumulate your position over time. A self-directed traditional crypto IRA lets you use pre-tax dollars for your contributions. Using pre-tax dollars will reduce your current tax bill while increasing your portfolio. Investors will have to pay taxes on withdrawals, but if you report lower income during retirement, you will owe less in taxes.
Investors can also use a self-directed Roth crypto IRA. Contributions from these individual retirement accounts get taxed going into your portfolio, but you won’t get taxed on qualifying withdrawals. In addition, Roth accounts let you avoid capital gains taxes, a benefit that can provide significant long-term growth.
Types of Self-Directed Crypto IRAs
Investors can work with several crypto IRA providers, but each crypto IRA falls into one of these two groups.
Checkbook Control
Checkbook Control gives IRA holders greater flexibility. You can write checks that tap into available cash sitting in your crypto IRA. This structure makes it easier to pay bills and other costs with your self-directed crypto IRA. You can use your checks to purchase new assets for your retirement fund and provide better legal protection.
The checkbook control model results in a new LLC entity. You will have to create a separate bank account, filing system, tax ID, and other legal elements. Checkbook Control IRAs create more hurdles, but you can save money in the long run with this account.
Custodian-Controlled
Custodian-controlled IRAs require less time to set up, and a highly regulated financial institution will do most of the legwork. These custodians keep an eye on your holdings and make sure your retirement account complies with IRS regulations. Trying to stay under the radar or making regulatory mistakes can lead to a lot of headaches. Custodian-controlled accounts protect you from those scenarios.
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.
IRS Rule on IRA Crypto Investments
The IRS views cryptocurrencies as properties for taxing purposes. You will incur capital gains for trading crypto, but the holding duration impacts how much you pay. Investors would pay a lower capital gains rate if they held onto their investment for over a year.
Pros of Investing in a Self-Directed Crypto IRA
A self-directed crypto IRA provides many advantages. These top perks attract many investors to crypto retirement accounts.
- The potential for higher returns: Cryptocurrencies have outperformed the stock market over the past five years. The S&P 500 increased by 54% in five years, while Bitcoin is up over 337% during the same timeframe. Cryptocurrencies are new assets with a history of high performance. Some investors believe the future is bright and continue building their crypto positions. Crypto stands to gain as more governments accept the asset as legal tender or make it more accessible.
- Tax protection: Crypto retirement accounts offer tax protections that you can’t get with a brokerage account. You can either protect pre-tax contributions or avoid capital gains taxes, depending on which account you set up. These tax protections can save you thousands of dollars in the long run and help investors grow their portfolios.
- Greater portfolio diversity: Portfolio diversification minimizes your downside and increases your upside. Buying crypto allows you to diversify beyond stocks, mutual funds, and other popular assets you may own. You can make crypto a percentage of your portfolio that aligns with your risk tolerance and invest accordingly. Some crypto IRAs.
Cons of Investing in a Self-Directed Crypto IRA
Crypto IRAs present numerous advantages, but the best investors consider the pros and cons of every investment. Therefore, you should consider these disadvantages before setting up a crypto IRA.
- Crypto’s volatility is stressful for some investors: Although crypto has outperformed the stock market in the past five years, crypto has experienced significant price swings along the way. It’s more common to see a cryptocurrency rise or fall by 20%-50% than it is to see that type of movement in the stock market. Some investors won’t have the patience to continue with crypto if they see their wealth deteriorate, but some investors have a long enough time horizon to wait patiently. Investors who won’t retire for decades are in a better position to accumulate crypto, but each individual should assess their own risk.
- Some cryptos are scams: Not every crypto will go up in the long term. While the same truth applies to any investment, some people create cryptos with their personal interests in mind. Pump-and-dump schemes hurt many investors and enrich the few people who entered early or created the cryptocurrency. Crypto has fewer regulations to stop this type of behavior, so it’s best to stick with the crypto assets you know. You shouldn’t rush into a particular cryptocurrency just because it has significant gains within a short amount of time. Assets do not grow at astronomical rates forever, and some people get stuck holding the bag on crypto scams.
- Finding a custodian: Cryptocurrency IRAs are still new, making it more difficult to find a custodian.
How to Invest in a Self-Directed Crypto IRA
A self-directed crypto IRA provides tax benefits and lets you accumulate a rapidly growing asset. Crypto has comfortably outperformed stock market indexes over the past five years. Of course, the asset has been volatile since its inception, but investors who believe in crypto’s long-term potential would benefit from a crypto retirement account.
