What is a crypto IRA? If you aren’t familiar with retirement planning you might not recognize the acronym for Individual Retirement Account, which is a typical kind of investment plan used to prepare for maintaining income during the investor’s retirement years. A crypto IRA has some of the same features as a traditional IRA but may lack others.
How A Traditional IRA Works
How A Traditional IRA WorksSome sources compare the IRA to 401(k) accounts (often provided as a benefit for full-time employment) as both are used to encourage retirement planning. Traditional IRAs provide tax breaks, but they require you to keep the money you invest in the IRA until a specified age (59 and 1/2 with a five-year minimum account age) before you can withdraw it without a tax penalty.
Those who withdraw the money before then are subject to a substantial tax on the amount withdrawn. Traditional IRAs allow you to contribute and claim federal tax deductions for doing so but you are subject to annual limits.
When you start an Individual Retirement Account you have many options to choose from–there are Roth IRAs, traditional, “SEP” IRAs, and more.
Opening an IRA means choosing what kinds of investments to put your money in; you can choose from a variety of options including stocks, mutual funds, exchange-traded funds, self-directed IRAs, and more. Some risky investment types are not permitted with traditional IRAs but as we’ll see, there are some options for those who want to invest with crypto.
The self-directed IRA mentioned above is an important option for those looking for crypto IRA opportunities, we’ll explore how that works below.
How A Crypto IRA Works
Multiple sources, including Forbes, report on the growing interest in crypto IRAs. There are many names for this type of investing, you’ll read about Bitcoin IRAs, “Cold storage IRAs” (more of an informal term rather than industry jargon), and others.
What we are basically talking about here is not an offshoot of the crypto industry itself (as in, the industry has created its own retirement account options) but rather an offshoot of IRA investing.
Remember the term “self-directed IRA” we mentioned earlier? When you go to sign up for an IRA or review the account you already have, you may notice that self-directed IRAs are an option.
These IRAs have more flexibility than a traditional Individual Retirement Account and as such permit the use of certain cryptocurrencies (the nature of those rules will vary depending on what account you choose to use) as long-term retirement investments.
Putting your Bitcoin into a crypto Roth is akin to putting it in “cold storage”. You’ll find the results are the same, but with potentially different outcomes depending on your long-term plans for the money.
When you invest crypto in an IRA, you’re basically putting your retirement money in crypto the way you would for other types of IRA investments such as mutual funds. These funds are subject to the same limits and other rules as a traditional IRA and if you withdraw early you face similar penalties.
Self-directed IRAs are not limited to behaving as crypto IRAs. You can use a self-directed IRA to invest in real estate, commodities such as gold, and other things that might be locked out of a traditional IRA.
Adding crypto to your retirement portfolio makes sense from the standpoint of keeping your investments diversified, but there are some inherent risks you should be mindful of to make the most informed choices about your money.
The details of and rules for using crypto as a retirement investment may not be standardized among service providers. You may or may not be able to select your own crypto exchange, the type of currency, etc.
Risks Of A Crypto IRA
There are risks associated with any investment, but some are riskier than others. Crypto investing is one of those for reasons that have a lot to do with the volatility of the investment.
Remember when Elon Musk sent out a single Tweet that dramatically reduced the value of Bitcoin? However temporary that fluctuation may have been, the ability for a single investor to push the valuation of your cryptocurrency with a simple Twitter post creates a high degree of risk for loss. Name a single mutual fund with this degree of risk. Can you?
With a traditional IRA you may be able to protect yourself from a loss of capital (tax-related issues here which are subject to change year to year–consult a tax professional to learn what current loss offsets are possible in your federal taxes) but when it comes to investing in crypto–even with an IRA–you have no such option as the laws are currently written at publication time.
Joe Wallace has covered real estate and financial topics, including crypto and NFTs since 1995. His work has appeared on Veteran.com, The Pentagon Channel, ABC and many print and online publications. Joe is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News.
