Can You Put Cryptocurrency in an IRA? And Should You?
Dreaming of a retirement fueled by your crypto trading successes? You might wonder if you can put your cryptocurrency in an IRA to access the benefits of tax-efficiency. While it’s possible to do so, there are some potential caveats and barriers.
We all want to make sure we have enough money set aside for a happy retirement, and if you’re a diehard crypto investor, you might believe that digital assets are the best way to achieve that goal. So, what are your options? You might not be able to add crypto holdings to the average IRA account, but there is a workaround that makes it possible to do so.
Yet before you go ahead and stake your entire retirement plans on crypto, you should know what you’re getting yourself into and assess your circumstances and risk tolerance. We’ll run through everything you need to know.
Can you buy cryptocurrency in an IRA?
Before we get into our recommendations, let’s give a clear answer to whether you can put cryptocurrency in a traditional or Roth IRA.
The IRS only allows deposits into an IRA in cash form. So, considering that cryptocurrency isn’t cash (legally speaking), you can’t add it to an IRA directly. Your next question is probably: But can you buy crypto in a Roth IRA with the cash you add? After all, assets like stocks also aren’t cash, and you can still invest in them through an IRA.
There are no regulations that restrict purchasing crypto with cash already in your IRA. Ever since 2014, crypto has been categorized as property by the IRS, although some may believe it’s better defined as money or collectibles. This means they’re a permitted asset type to put in an IRA—and it also means you must pay tax on them if you’re investing in them outside of an IRA.
However, the reality is that things aren’t always so simple. Just because Roth IRA providers are legally permitted to provide you crypto for an IRA, it doesn’t mean that many organizations want to provide you the service.
Fortunately, there’s a workaround.
How to buy bitcoin in a Roth IRA
We’ve established that you can buy crypto in a Roth IRA (or standard IRA) in theory—now, it’s time to dig into how exactly to do that.
If you turn to a traditional IRA provider like Fidelity or Charles Schwab, you’ll find they don’t offer an easy way to purchase crypto directly (although some may offer indirect products like the bitcoin ETF).
The solution is something called a self-directed IRA (SDIRA), which gives you greater control over your investments. All IRAs require a custodian: A financial institution that looks after your assets. When you take out a “standard” IRA, the custodian also selects potential assets and invests in them on your behalf; but with an SDIRA, this restriction is removed since you choose your own investments. You’ll still need to work with a custodian, but you’ll handle the investing independently.
The challenge is finding an SDIRA custodian. If you specifically want to invest in crypto, you also need to make sure that you choose a custodian who specifically works with cryptocurrencies—this isn’t something all custodians support.
Some companies have been set up with this purpose, such as the aptly named BitcoinIRA, which was launched all the way back in 2016 and the first in the field. Other examples are BitIRA and Equity Trust. If you’re looking for the right fit, a useful resource is the Self Directed IRA website, which contains a list of specialist providers for crypto investing.
Drawbacks of SDIRAs
However, you should err on the side of caution before you opt for an SDIRA. They involve greater charges than standard IRAs, and when you want to trade crypto, fees can be even higher. You’ll have to weigh this up against the tax-free advantages of IRAs.
Plus, since you have to identify the investments yourself, you’ll face a greater risk of fraud—especially considering custodians can’t offer any advice about which assets to choose. You may choose to opt to work with a financial advisor if you don’t feel confident in navigating this.
Should you buy bitcoin in an IRA? Risks
When you believe in crypto, it’s easy to get blinded by optimism and go all-in. But no matter how sure you might be about the future of the blockchain, it’s important to remember that bitcoin has only been around for just over a decade, with many other digital currencies having even shorter histories. Meanwhile, depending on how old you are, you could have to wait multiple decades until you retire—and then the nest egg will have to last for multiple decades during your retirement.
The last thing you want is to think you’re retiring at age 60 with $500,000 in your IRA, only for its value to drop to $200,000 a few days before. In the crypto world, this is unfortunately a realistic scenario.
However, if you’re comfortable with the risks, you may be happy to add a small amount of cryptocurrency to your IRA as part of a diversification strategy. And if you’re going to invest in crypto regardless, you may as well go down the tax-efficient route by putting it in an IRA. Just make sure you look into other retirement investment options too so you can reduce the risks involved.
A safer way to invest in crypto
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