Crypto IRA: A 2024 guide to investing in cryptocurrency for retirement (2024)

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• A crypto IRA is a self-directed individual retirement account that holds cryptocurrencies.
• Crypto IRAs offer the benefit of portfolio diversification and the potential for rapid growth.
• Drawbacks of crypto IRAs include high fees, security risks, and extreme volatility.

A crypto IRA is a specialized self-directed IRA account that primarily invests in cryptocurrencies and other digital assets. These retirement investing accounts, available through some of the best cryptocurrency exchanges, have gained popularity among advanced traders seeking to leverage the potential of blockchain technology as means to boost retirement savings.

Crypto IRAs are offered by specialized custodians who sometimes offer crypto-specific IRA options such as a Bitcoin-specific IRA or Ethereum IRA. But the best Bitcoin IRAs can invest in other cryptocurrencies, like litecoin and bitcoin cash.

While crypto IRAs function similarly to regular IRA accounts, they have specific regulations, rules, and tax implications.

Benefits of a crypto IRA

There are plenty of positives to consider with crypto IRAs.

Potential for high growth

While there have been plenty of cryptocurrency downfalls, there have also been returns that outpace other markets. If its history weren't enough, the fact that only a limited number of each cryptocurrency can be ever be mined suggests the potential for high growth.

Let's take bitcoin, for example. Although the price of bitcoin fluctuates, it has generally trended up since its inception in 2009. Given its risk and volatility, individual investors should consider it a long-term hold. That means it may be a good fit for an account that you don't plan to access until retirement, anyway.

Portfolio diversification of crypto IRAs

Investing in cryptocurrencies tends to be "a great diversifier" for your financial assets, Victoria Bogner, a financial planner and director of client experience at Allworth Financial.Holding a bit of bitcoin "can be a good way to own something that doesn't move exactly like the rest of your investments move," she says.

It could also be a hedge against inflation as the dollar's value against some other currencies has declined.

"A self-directed IRA has a little bit looser IRS rules, so you can hold things like property," or other alternative investments, Bogner says.

Tax advantages of crypto IRAs

Similar to Roth or traditional IRAs, crypto IRAs offer tax benefits such as tax-deferred growth or tax-free withdrawals. The kind of tax advantages you receive depends on whether you fund your account with tax-deferred or after-tax dollars.

For example, the IRS taxes bitcoin as an investment, so it's subject to a capital gains tax when you sell it at a profit — but not if it's held in your IRA. That gain is tax-shielded, as any transactions within an IRA are. You only pay taxes on funds that you withdraw.

How to open a crypto IRA

As the "self-directed" implies, these IRAs are directly managed by the account holder (as opposed to a financial advisor or money manager). And your regular brokerage, bank, or investment app probably doesn't handle them. Self-directed IRAs are only available through firms that specialize in the type of asset you're interested in.

1. Choose a crypto IRA custodian

Some of the better-known, established companies that let you set up Bitcoin IRAs include:

• BitcoinIRA
• BitIRA
• CoinIRA
• iTrustCapital

You can visit the IRA provider's website or call its customer service line to confirm and compare its fee structure and operations. You should also ask how your assets will be stored and about security procedures and measures.

2. Open a self-directed crypto IRA

Once you find a provider, you will be required to provide essential personal information like your legal name, Social Security number, address, date of birth, and bank account information. You may also need to answer questions about your investment goals, risk tolerance, experience level, and estimated age of retirement.

3. Fund your crypto IRA account

Like with any IRA, you can fund your crypto IRA with either pre-tax or after-tax money directly from your bank account or via a rollover from an existing IRA, 401(k), or other tax-advantaged account.

A 401(k) rollover is one of the easiest ways to extend tax benefits without incurring high management fees.

4. Purchase cryptocurrency

Once you have funds in your account, you can purchase cryptocurrencies through your IRA provider. Which coins and tokens are available to you depends on the platform, but the process is similar to buying and trading crypto through an online custodian.

Risks and considerations of crypto IRAs

Yes, cryptocurrencies offer a potential for growth that has historically outperformed other markets, but their susceptibility to risk is just as high. Before opening a crypto IRA, there are potential issues you should consider.

Volatility

Cryptocurrencies are known for their volatile price swings. Unlike traditional assets that are tied to things such as the US dollar or gold, the value of cryptocurrencies is primarily driven by investor demand and speculation. So, if investor confidence in a particular cryptocurrency diminishes, its price can plummet rapidly, without any guarantee of recovery.

Security

Hacking, phishing scams, and other fraudulent activity is common in the crypto world since the crypto trading market and its regulatory systems are still in their infancy. Not only do exchanges and IRA providers lack certain jurisdictions, but individual investors are also vulnerable to tricks that may reveal sensitive information, such as their private keys.

Fortunately, industry-leading crypto exchanges like Coinbase and Kraken have implemented more advanced security protocols, such as external cold storage, two-factor authentication, and more reliable customer support. Crypto exchanges are also increasingly complying with anti-money laundering procedures to prevent illegal activity on their platforms.

Regulatory uncertainty

While they're called custodians, firms that offer self-directed IRA services — especially in the relatively young crypto IRA space — are not necessarily as responsible as conventional brokerages, registered investment advisors, and other financial services firms are.

Crypto custodians are not bound by fiduciary rules that demand they put your interests first. Until recently, crypto custodians weren't regulated at all by federal authorities. The SEC and Commodity Futures Trading Commission (CFTC) are among a handful of regulatory authorities overseeing these platforms.

Fees

Crypto accounts can cost more to maintain or set up than other IRAs. There can also be wallet-holding fees, transfer fees, and dues. All these fees can add up, eating into your returns.

Tax implications of crypto IRAs

Traditional crypto IRA

In some ways, bitcoin IRAs work like regular IRAs. While you can set one up with any amount of funds, they have annual contribution limits set by the IRS: In 2024, you can contribute up to $7,000 a year or $8,000 if you're 50 or older in 2024.

Like with a regular traditional IRA, any accumulated interest or capital gains generated by the investments within your cryptocurrency IRA grow tax-free. You won't be taxed until you withdraw during retirement. Still, you must be at least 59½ to avoid a premature withdrawal penalty.

Roth crypto IRA

Roth crypto IRAs function relatively the same as any Roth IRA: The account is funded with after-tax money for tax-free growth and withdrawals. Roth IRAs are preferred by investors who project they'll be in a higher tax bracket when they retire and start withdrawing money from the account.

Bogner says the Roth version might have an edge, especially "if you are of the mindset that bitcoin will explode" in future prices. Since the Roth is funded with after-tax dollars, it won't owe anything on its bitcoin gains — even if the currency has gone up 10 or 20 times.

FAQs about crypto IRAs