Some people see crypto as an asset class with potential for outsized gains that can be used to save for the future. Others may be wary of investing in crypto with their retirement savings. Like any investment, crypto has pros and cons.
For example, crypto allows investors to diversify their portfolios with a decentralized investment. However, crypto can be volatile, and lack of regulation can cause significant swings in value.
If you want to hold crypto in your IRA account, you should explore your options and understand the risks and benefits. This way, you can make a fully informed decision about investing your retirement savings.
What Does it Mean to Hold Crypto in an IRA?
With a Traditional IRA, you fund the account and use those funds to invest in stocks, exchange-traded funds (ETFs), and other assets. When you hold crypto in an IRA, you use your funds to purchase cryptocurrencies, like Bitcoin or altcoins. As the price of crypto rises or falls, your IRA’s value fluctuates.
The goal is to get a return on your investment, meaning the value of your crypto or other assets will grow and be worth more than what you originally purchased. By the time you retire, you want to have enough in your account to sustain your lifestyle to compensate for the lack of income .
Top Advantages of a Crypto IRA
Every investment has advantages and disadvantages. Here are a few of the benefits of crypto investing with an IRA.
Security
All crypto exchanges utilize blockchains which are decentralized ledgers. Blockchains record every transaction, and anyone can view it. This process means that crypto transfers are secure. For example, when you purchase Bitcoin, the blockchain will show how much you purchased, when the transaction was made, and who you purchased it from. In addition, blockchain technology makes any transfer easy to track and verify.
Tax Benefits
Crypto IRAs are typically taxed in relation to the specific type of IRA that you open. For example, withdrawals made from a Roth crypto IRA after the age of retirement are not usually taxed because income taxes are paid before contributions are made. In contrast, with a Traditional crypto IRA, taxes are not paid on the amount contributed, but are owed at retirement age when the funds are withdrawn. In addition, one of the main benefits of a crypto IRA is that investors don’t have to pay capital gains tax on cryptocurrency when held in a retirement account. This can be a great perk for crypto enthusiasts who may be subject to capital gains taxes in other types of trading. However, just as with other IRA accounts, if you withdraw your funds before retirement age, you could pay a penalty and any taxes owed.
Portfolio Diversification
Diversification is important in any investment portfolio. One way to diversify an investment portfolio is to hold stocks in different industries. You can also diversify by holding different types of investments. For example, the crypto market can act and move differently than traditional markets, so having crypto in your portfolio may protect you from downside in other areas of your portfolio.
Decentralization
One of the biggest appeals of crypto is that it is decentralized. It’s not backed by any government, and the investor is given more control over their finances. No government has control over its value. It may not be directly impacted by some macroeconomic trends, such as inflation. Crypto’s value is typically based on investor sentiment and supply and demand. Having a decentralized currency in your IRA can give you more hands-on control of your investments.
Potential Risks of a Crypto IRA
Crypto is an exciting investment opportunity. However, it isn’t without risk. Here are some of the potential risks of holding crypto in IRA accounts.
Volatility
Crypto can be a volatile investment, with huge surges in value and deep lows. These changes can happen rapidly. In a retirement account, you want your account to grow in value to prepare you for the future. A cryptocurrency IRA does have the potential to help you achieve those goals, but it’s crucial to keep an eye on your investments and trends in the overall crypto market.
Potential Risks
Cryptocurrencies are decentralized, so they aren’t backed by businesses, governments or other currencies. This decentralization gives investors great freedom over their finances, but lack of regulation can also cause huge swings in value.
For example, the American dollar can change in value, but only little by little because regulations and monetary policy typically prevent it from changing too much at once. No such safety measures are in place for crypto. This risk is what allows people to achieve major gains on their investments, but they may also endure significant losses.
Fees
Typically, you’ll hold crypto in a SDIRA account. These types of IRAs also come with more fees than Traditional and Roth IRAs. SDIRAs may require initial set-up fees, which include the cost of creating your crypto IRA account, as well as ongoing fees. SDIRAs also charge custodial fees, maintenance fees and trading fees. Before creating an account, you should research how much you expect to pay in fees. Fees vary among cryptocurrency IRA companies.
Planning Your Path to Retirement
Every investment has its risks. Without risk, a substantial reward is unlikely. Cryptocurrency can be especially volatile and has little regulation. For some people, those factors might make it too risky to include in a retirement account. However, others may acknowledge the risk, see the potential for outsized returns, and feel the advantages outweigh the risks.
No matter what you decide, you should think carefully about every investment decision.
Frequently Asked Questions
Q: Are crypto IRAs safe?
A: Every investment has some level of risk. Cryptocurrency can be a volatile investment, so closely monitor your IRA and trends in the crypto markets.
Q: Are contributions to a crypto IRA tax deductible?
A: Yes. Contributions made to a Traditional crypto IRA may be tax deductible. The deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels.
Q: Can a self-directed IRA invest in crypto?
A: A self-directed IRA, or SDIRA, can hold cryptocurrency. Cryptocurrency is treated as property for tax purposes in an SDIRA.
