The world of cryptocurrency is new and exciting territory for investors who are eager to explore. For those who are interested in crypto, the ability to place cryptocurrency within a retirement fund can seem like an attractive opportunity.
Fortunately, crypto IRAs, which are also known as Bitcoin IRAs, are a type of individual retirement account specifically for cryptocurrency. Investors can hold Bitcoin and other cryptocurrencies in a crypto IRA. People can choose to structure their crypto IRA as a traditional crypto IRA or a Roth crypto IRA.
Cryptocurrency is a promising alternative investment opportunity that’s often recommended in tandem with more established assets, such as stocks and bonds. Keep reading to learn more about how crypto IRAs work and whether or not this could be the right investment for you.
How Does a Crypto IRA Work?
A crypto IRA is a retirement account that holds cryptocurrency. This type of account is often structured as either a traditional IRA or a Roth IRA.
Whether you choose to structure your crypto IRA as a traditional account or a Roth account will impact how the cryptocurrency in the account is taxed. Cryptocurrencies cannot be contributed directly into an IRA account; however, you can use a self-directed crypto IRA to invest in virtual currencies, such as Bitcoin.
Review the most frequently asked questions surrounding crypto IRAs to get a better idea of the advantages and disadvantages of opening a crypto IRA.
How is a Crypto IRA Taxed?
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 depositing the money. In contrast, with a traditional crypto IRA, taxes are not paid on the amount put into the account but are owed at retirement age when the funds are withdrawn..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.
How Much Are Crypto IRA Fees?
Crypto IRA fees can be charged to cover account services. Fees often range from set-up fees to trade fees, maintenance fees and additional account fees.
The charges can vary, ranging from a flat rate for maintenance to percentage fees. Luckily, there are platforms that take a comprehensive approach to these fees by offering a service fee combined with minimal custodian and security account fees.
Before opening an account, make sure you have a thorough understanding of the potential charges and that you know if they are likely to increase based on the amount of crypto that you intend to invest.
Can You Withdraw From a Crypto IRA?
It is not recommended that you withdraw from a crypto retirement account until you reach the official age of retirement. The set retirement age in the United States is currently 59 years and a half. Withdrawing from a crypto IRA account before the set retirement age will likely result in tax-related penalties on your part.
Is a Crypto IRA Legal?
Yes, crypto IRAs are legal. Technically, you have the ability to hold crypto within select self-directed IRAs. One main reason behind the legality of holding crypto in an IRA is that it is not technically considered a coin.
Crypto does not fit the traditional definition of a coin. Rather, it more closely falls under the category of property for tax purposes. That said, it is recommended that you speak with a financial professional when contemplating the idea of opening a crypto IRA.
How to Choose the Best Crypto IRA
When choosing the best crypto IRA for you, take the time to compare investment requirements, potential fees, reviews and overall customer satisfaction rates.
Cryptocurrency investing in IRAs often comes with investment stipulations, such as mandatory minimum balance requirements, which vary from one platform or company to the next. It’s possible that you will face repercussions for going below the stated minimum amount or withdrawing funds before the indicated age of retirement.
Failure to comply can lead to unexpected fees, so read the fine print to learn about any additional investment requirements. For instance, take Bitcoin IRA as a prime example.
As the known leader of crypto IRAs, Bitcoin IRA requires either a minimum initial investment of $3,000, or a $100 monthly contribution for a Saver IRA. The platform has no maximum contribution amount. However, the IRS has a yearly contribution limit of $6,000 (or $7,000 if you're age 50 or older) for 2022. If you choose to use Bitcoin IRA as your platform of choice, keep in mind that BitGo and Lloyd’s of London, which Bitcoin IRA uses for insurance purposes, insure selected assets up to $700 million.
Types of Fees Associated
Although crypto IRAs can be attractive given their plentiful tax benefits, it’s important to consider the fees as well. The charges often include fees pertaining to account management, set-up processes and maintenance.
It’s common for crypto IRAs to include fees that are a combination of flat rates and percentages. Consider asking for a complete list of fees before opening an account. That way, you can better understand how much your account could cost you on an annual basis.
Research customer reviews on third-party websites like Shopper Approved to develop a stronger understanding of customer sentiments. Read the most recent views in combination with both the positive and the negative comments to get a well-balanced perspective of how customers feel about certain platforms.
Great Customer Service
Customer service is a key factor to consider when deciding on where to open a crypto IRA. Diversified methods of communication, such as an obvious phone number, social media presence, website chatbox and official email address, often indicate a company’s eagerness to communicate with customers.
Traditional Crypto IRA vs. Roth Crypto IRA
Traditional crypto IRAs and Roth crypto IRAs are two distinctly different account types for those interested in opening a crypto IRA. Traditional crypto IRAs are usually tax-deductible, and they will likely not require you to pay taxes until you withdraw funds from the account.
In contrast, with a crypto Roth IRA, you will likely not be required to pay taxes when you withdraw funds, but a crypto Roth IRA does not come with any tax deductions. Overall, both traditional crypto IRAs and Roth crypto IRAs provide useful benefits in terms of taxes, including capital gains tax and income tax on the funds within the accounts.
Crypto IRAs Offer a Bold Retirement Opportunity
Cryptocurrency can be a volatile investment choice that may appeal to more risk-tolerant individuals. That said, crypto IRAs have great potential when it comes to safeguarding investments by offering a wide variety of tax advantages.
Before investing, think about the amount of risk exposure that would best fit your lifestyle. From there, you can search for the type of investment account that will suit you and your preferences the most.
Frequently Asked Questions
Is a crypto IRA tax deductible?
Contributions placed into a traditional IRA have the potential to be tax-deductible.
Can you put cryptocurrency in a Roth IRA?
Yes, you can place cryptocurrency in a self-directed Roth IRA. In fact, Bitcoin IRA was the first company to offer a self-directed crypto IRA investing platform.
Is crypto IRA a good idea?
A crypto IRA has the potential to pay off in the future. But before opening an account, consider factors such as the amount of risk you are able to comfortably handle, account-related fees, customer reviews, and customer service. It is always a good idea to speak with a qualified tax advisor before making any big retirement account decisions.