How To Buy Crypto With A Self-Directed IRA

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Contributor, Benzinga
November 10, 2022

Investing in a retirement account is one of the best ways to prepare for the future. And as the cryptocurrency market and technology grow, many investors want to hold crypto in their retirement accounts. Self-directed individual retirement accounts (IRAs) allow investors to trade crypto and take advantage of their growth.

What is a self-directed IRA?

Self-directed IRAs (SDIRAs) are popular retirement accounts for savvy investors who want more control over the investments held in their IRA. In other IRAs, assets are handled by an account manager, but with a SDIRA, you just need a custodian willing to hold and process your investments. 

SDIRAs allow investors to hold assets that aren’t allowed in other IRAs. This includes property, precious metals, cryptocurrency and other alternative investments. Investing in alternative assets can enable investors to diversify their portfolios further and use other holdings to grow their retirement savings.

A SDIRA can follow the tax model of either a traditional IRA or a Roth IRA. Contributions to traditional IRAs may be tax-deductible, but distributions will be taxed. Contributions to a Roth IRA are not tax-deductible, but you will not be taxed when you take distributions at retirement age.

Rewards of Investing in Crypto With a Self-Directed IRA

SDIRAs are the only retirement accounts that allow investors to hold and actively manage crypto investments. Cryptocurrency offers a lot of growth potential and other advantages that could benefit a retirement account.

Tax Advantages

Cryptocurrency is treated as property when it comes to taxes within a SDIRA, meaning it’s taxed at the same rate as a piece of real estate. Depending on the type of SDIRA, a cryptocurrency investment has the potential to grow with tax-deferred gains, allowing for possibly larger returns. However, it may be taxed upon withdrawal, depending on the account type.

If held in a self-directed crypto Roth IRA, contributions will be taxed, but the investor may benefit from tax-free income in retirement. Choosing between tax-deferred gains or tax-free income can be difficult, and it may be tempting to put off paying taxes. Each investor should decide what’s best for them. If you think you’ll be in a lower tax bracket in retirement, you might save money by deferring taxes. However, paying them now may be best if you expect to be in a higher tax bracket.

Greater Diversification

Diversification in a portfolio helps lower risk by holding investments in different industries or assets in various categories. Alternative investments, in particular, can help balance out a portfolio in case the traditional investment market crashes. The same is true of crypto. The crypto market moves independently of traditional markets, and because it’s decentralized, politics and macroeconomic trends don’t directly impact it. So investing in crypto can help protect your portfolio by diversifying away from traditional markets.

Earnings Potential

Crypto and crypto technology are still growing and developing. As a result, there’s great growth potential in the crypto markets, especially if you believe in technology and its expansion. It’s likely that crypto will only keep growing in popularity, and investors can take advantage of that growth to increase their savings and wealth.

Risks of Investing in Crypto With a Self-Directed IRA

Holding a self-directed cryptocurrency IRA has the potential to benefit your retirement savings. But like any investment, it’s not without its risks. Crypto is known to be volatile. It can rise drastically in price just to crash the next day. And these swings in value can happen instantly, seemingly without reason. Plus, there’s no regulation to protect your investments. 

In investing, some analysts believe that the greater the risk, the greater the reward. However, a volatile investment like crypto could potentially lead to great loss. If you invest in crypto, including within a self-directed crypto IRA, you should conduct extensive research about your investments and keep an eye on overall trends in the market. 

There are also limitations to IRAs in general. For example, there are income limits you must meet to qualify for a Roth IRA. There are also penalties for withdrawals before the investor is 59 ½. With a Roth IRA, after five years you can withdraw deductions without penalty, but not gains. Traditional SDIRAs don’t allow any withdrawal before age 59 ½ without penalty. SDIRAs also tend to have larger fees than other retirement accounts, which can add up over time. 

Buying Crypto With a Self-Directed IRA: Step-by-Step

Buying crypto in your SDIRA may seem complicated, but it’s pretty straightforward. Here’s how to open, manage and invest with a self-directed Bitcoin IRA.

Step 1: Choose an IRA Platform

Perhaps the most difficult part of using an IRA to invest in crypto is finding the best self-directed IRA platform for Bitcoin. Many companies have SDIRA accounts and platforms specifically designed for holding crypto. You’ll want to open an account with a company that has good reviews and provides education, an intuitive platform, insurance and quality support. 

Step 2: Follow the Instructions For Opening an Account

Next, you’ll open your account. Every company will have a different sign-up process, but you’ll likely have to provide your personal information. After giving your name, email, phone number and other information, you’ll create a password.

Step 3: Connect Your Accounts

Once your account is created, you’ll need to connect with your other financial institutions. For example, connecting your bank account will allow you to easily contribute funds to grow your savings and make investments. This process will probably include inputting your bank’s routing number and your account number. 

Step 4: Deposit Funds

Once your financial institutions are connected, you’ll deposit funds. Then, you can contribute money from your financial institution easily. You can also transfer or rollover savings from other retirement accounts.

Step 5: Do Your Research

Before you make any investments, you’ll want to do your research. Many IRA platforms have free educational resources to help determine risk tolerance, discover different coins and choose an overall investment strategy. Different coins have different risks, and you’ll want to decide which is best for you. For example, if you have a higher risk tolerance, meaning you can tolerate losses now for more potential growth in the future, you could choose a more volatile investment. However, if you have a low-risk tolerance, you may want to choose a less risky coin.

Step 6: Start Trading Crypto

Once you’ve determined your investment strategy, you can start making trades. Ensure you’ve researched and are confident in your investment decisions. Remember, with a SDIRA, you’re responsible for your investments. This exciting opportunity requires due diligence, research and monitoring to succeed.

Take Control of Your Future With a Crypto SDIRA

SDIRAs allow investors to take more control of their retirement savings and invest in alternative assets like crypto. Investing in crypto has advantages and potential for growth but will require hands-on monitoring and research. If you feel you're up to the challenge, then it’s easier than ever to open a self-directed cryptocurrency IRA.



Can I buy Bitcoin with IRA money?


Yes. In a self-directed IRA, you can use your funds to purchase Bitcoin and other cryptocurrencies.


Can Bitcoin be held in an IRA?


Yes. Bitcoin and other cryptocurrencies can be held in a self-directed IRA.


How does a crypto IRA work?


A crypto IRA allows you to save money for retirement. Like any investment, holding crypto in an IRA has risks. The investor needs to conduct research before making any investment.