With Bitcoin exploding in popularity over the past few years, and becoming the fastest growing asset over the past decade, investors have been clamoring to find new ways to invest in this groundbreaking technology.
In response, there are several ways to invest in Bitcoin and other cryptocurrencies within your retirement account, but there is a catch — more than one, actually. Yes, you can buy crypto in an IRA account, but there are several things to keep in mind before you choose to do this.
In this article, we’ll cover the details of how and where to buy crypto in an IRA account, as well as the considerations you need to think about before buying crypto in your retirement account. If you’re still confident that adding crypto to your retirement portfolio is a good idea, you can check out the top Bitcoin IRA accounts to find one that fits your needs.
Can You Buy Crypto in an IRA?
Short answer: Yes, you can buy crypto in an IRA.
Long answer: There are very specific types of IRAs that allow this, and most major brokerages don’t offer this service yet.
Bitcoin IRA companies offer a specific custodial account that allows you to buy Bitcoin, and even trade other cryptocurrencies such as Ethereum within a traditional, Roth, or other IRA, keeping your crypto in tax-advantaged accounts until retirement. In addition to standard IRA accounts, there are brokerages that offer access to crypto through self-directed IRA accounts as well.
These IRA accounts can be any type of IRA, including a traditional IRA, Roth IRA, SEP IRA, or rollover IRA. Crypto IRA services typically offer highly secure platforms, with all cryptocurrencies kept in cold-storage digital wallets (offline), and are covered by third-party insurance to protect against loss due to theft or fraud.
Should You Buy Cryptocurrency in an IRA?
Cryptocurrency is a speculative investment with a massive amount of volatility, and honestly, some people just can’t handle the ride. On the other hand, crypto is also an insanely fast-growing asset class with a ton of new innovation, giving rise to huge gains for early investors who choose the right projects to invest in.
But should you risk your retirement by investing in cryptocurrency in your IRA?
Consider these pros and cons before #YOLOing all your retirement investing into crypto.
Pros of Buying Crypto in an IRA
Investing in cryptocurrency within an IRA has many benefits, and can help you save on taxes while incentivizing long-term investing. Here are a few advantages to buying crypto in an IRA:
- Tax Savings. Cryptocurrencies are treated as capital assets, much like shares of stocks, and therefore cryptocurrency gains are taxed the same way. Investing in crypto in a tax-advantaged account like an IRA protects you from capital gains tax on crypto trades, and in the case of Roth accounts, allows you to withdraw tax-free in retirement (after age 59 ½).
- Crypto Insurance. Most crypto IRA accounts are protected with insurance against theft or fraud. This is good news for investors, as cryptocurrency exchanges and services are getting hacked all the time, and having protection against these losses is a big deal.
- Incentive to HODL. IRAs offer tax incentives, but only if you avoid cashing out until age 59 ½. This helps investors avoid trying to cash out their retirement accounts and encourages crypto IRA investors to HODL for the long-term. Users can still sell crypto for cash within the account, but cannot withdraw funds until retirement age.
- Diversification. Simply put, investing in crypto gives you access to a brand new asset class outside of traditional sectors. This adds to overall portfolio diversification and can help spread your risk.
Cons of Buying Crypto in an IRA
Buying crypto in an IRA may sound like a day trader’s dream come true, but it may not be the best idea. There are plenty of reasons to avoid investing in crypto within your retirement accounts. Here are a few of them:
- Volatility. Bitcoin crashed from $68,000+ down to about $19,000 within less than a year. That’s over a 70% drop in value! If you are at or nearing retirement, you may not be able to afford your retirement account dropping by this much in a short amount of time.
- High Fees. Although some crypto exchanges charge as low as 0.1% trading fees, most crypto IRA accounts charge 1.0% or more per trade. There may also be monthly maintenance fees and other account setup fees involved.
- Penalties for Early Withdrawal. IRA accounts charge hefty penalties for withdrawing funds prior to age 59 ½. If you have massive gains you want to access, you can’t do so without paying a 10% penalty, plus applicable taxes. Ouch!
- Can’t Take it With you. Most crypto IRA accounts act as custodians for your crypto. This means you cannot withdraw the crypto from the platform, but are forced to sell for U.S. dollars to make your withdrawals. If you want to take custody of your crypto investments, then you may want to avoid Bitcoin IRAs. The only exception to this is opening a self-directed IRA account that allows you to take custody.
Verdict: Should You Buy Crypto in Your IRA?
Investing in crypto is not for everyone. There are plenty of reasons to avoid buying crypto within your IRA. As a hugely volatile asset class, cryptocurrency could be a terrible investment and cause your retirement investments to drop significantly. And locking away your crypto investments until you’re almost 60 might mean you miss out on access to those life-changing gains.
But crypto can be a good way to diversify your investment portfolio, and sheltering your crypto trading within a retirement account can save a boatload on taxes.
Bottom line: If you believe in the longevity of Bitcoin and other cryptocurrencies, buying crypto in an IRA can be a great way to diversify your long-term portfolio while saving on taxes. If you are a casual crypto investor who simply wants to trade, or if you are nearing retirement, buying crypto in an IRA may not be the best option.
How to Buy Cryptocurrency in an IRA
If you want to buy crypto in your IRA, you will need to open an account with a custodian. These companies offer Bitcoin IRAs and access to other cryptocurrencies, and most offer multiple types of IRAs. Here’s how to open an account and buy crypto in an IRA:
1. Open a Crypto IRA Account
Because crypto is not generally available in regular IRA accounts, you need to find a crypto IRA account that allows you to invest in cryptocurrencies. These accounts are also known as “Bitcoin IRAs” because it’s the most popular crypto.
You can sign up for the account just as you would any financial account, and need to provide the following information:
- Legal name
- Residential address
- Social Security number (SSN)
- Driver’s license (or other photo ID)
- Other documentation (varies by provider)
You also need to select which type of IRA to open. This could be a Traditional IRA, Roth IRA, SEP IRA, or a rollover IRA (if rolling over funds from a 401(k) or other retirement account).
2. Fund Your Account
Once your account is approved and open, you need to fund the account. This includes connecting your bank account and performing an ACH transfer or wire transfer into the new account.
Crypto IRAs require that you deposit U.S. dollars and then use those funds to purchase cryptocurrency within the IRA. You cannot deposit crypto directly into the account due to strict government regulations on IRA accounts.
Deposits can take up to five business days for most accounts, and trades cannot be made until the account is funded.
3. Place an Order
Once the funds are deposited into the account, you can now place an order for the crypto of your choice. Companies like BitcoinIRA.com offer access to dozens of cryptocurrencies to choose from.
To place an order, you can select which asset you wish to purchase, select the amount, and place a market order. Some crypto IRA platforms also allow you to place limit orders, which gives you the ability to set the price at which you wish to purchase the cryptocurrency.
Once your order is complete, you now own crypto inside your IRA account!
4. Trade Crypto (Optional)
Although retirement accounts are typically for long-term, buy-and-hold investments, some crypto IRA platforms offer trading. This allows you to buy, sell, or swap between crypto without the headache of capital gains taxes.
Trading inside a retirement account may sound appealing, but there are typically high fees associated with this activity — up to 3% fee per transaction — and there is a high risk of loss, especially if you are not a professional trader.
Let’s face it: investing in crypto is fun. And buying crypto in a retirement account seems like a next-level tax hack.
But tying your retirement to a speculative asset class could be disastrous if you don’t have an investment plan in place.
Understanding how to build a diversified investment plan for your retirement is imperative, and it allows you to understand how much you can invest in crypto without risking your overall financial health in retirement.
Overall, finding a good crypto IRA custodian can be just another piece to your financial puzzle and help you build an efficient investment portfolio. Just make sure you understand the risks involved before investing.