Can I Have Cryptocurrency in my IRA?

If you’re like most of us, building financial security for retirement is important to you. You may already have an individual retirement account (IRA) through your job, which you can grow by adding funds over time. But there are alternatives to the traditional IRA that promise even greater returns on investment.

Cryptocurrencies like Bitcoin, Litecoin, and Ethereum have recently lured many investors with the promise of higher (and faster) returns on investment. This promise of rapid and significant returns has caused many to consider a new form of retirement investment using cryptocurrency. Let’s take a look at how it works.

Can I Hold Cryptocurrency in My IRA?

As investors seek new ways to increase their returns, cryptocurrency has found a foothold in the world of retirement investment. An increasing number of investors have sought to bolster their retirement funds with investment in the crypto marketplace.

If you have a self-directed Roth IRA, you get the benefits of tax-free growth and tax-free withdrawals in retirement. Unfortunately Roth IRAs do not offer provisions for alternative assets such as precious metals or cryptocurrency. Also, a Roth self-directed account does not allow you to deduct annual contributions from your taxes. However, this is offset by the absence of taxation on your distributions. Additionally, there is no mandatory withdrawal at age 70½. Roth IRAs also allow you to take distributions of your principal without penalty after a 5-year holding period, regardless of age.

Generally, 401(k) plans steer clear of cryptocurrencies, but there are exceptions. For example, a small 401(k) provider called ForUsAll allows contributors to hold up to 5% of their IRA in any of 50 cryptocurrencies. Ask your IRA or 401(k) provider about their policies regarding cryptocurrency investment. Check with your employer to determine if they offer a crypto IRA option.

You can also set up your own crypto IRA through a broker or investment planner, though be aware that they do charge a commission for their services.

What Is a Cryptocurrency IRA?

Cryptocurrencies like Bitcoin have made a substantial mark on the world of traditional investment. Most IRAs, however, do not allow cryptocurrencies and traditional investments in the same portfolio. In response, many investors have chosen to open their own unique form of retirement account: a cryptocurrency IRA.

The main advantage of a crypto IRA over traditional investments is that one may hold a variety of cryptocurrencies in a single portfolio. It also allows you to convert those assets to cash and to reinvest that money in a traditional IRA. Or, conversely, you can roll funds from traditional plans into your crypto IRA to boost returns.

Because the IRS considers Bitcoin to be property, taxing cryptocurrencies like stocks and bonds, account holders are required to have a custodian to manage their IRA. This custodian holds your IRA and is responsible for its safekeeping along with ensuring your account remains compliant with government and IRS regulations.

Pros and Cons of Investing in a Cryptocurrency IRA

Let’s look at a few pros and cons of investing for retirement using cryptocurrency.

Pros

  • Diversify your portfolio. Cryptocurrencies offer you a new way to spread your investment dollars around, creating a diverse and recession-proof portfolio.
  • Potential for growth. Cryptocurrencies are volatile, and have shown great potential to drive significant earnings.
  • Avoid capital gains taxes. By including cryptocurrencies in your portfolio, you may be able to avoid significant capital gains taxes when you cash out.

Cons

  • Volatility. The crypto marketplace is highly volatile and is subject to dramatic swings in value. Investors lured by the promise of significant gains should be aware that the potential for loss is equally great.
  • Crypto hasn’t matched the hype. Once predicted to supplant traditional currencies, crypto has remained largely an investment vehicle.
  • Fees Fees Fees.Trading doesn’t come free, and setup and transaction fees can start to add up quickly. Fees can vary but typically are around 3–3.5% per transaction.

A Caution about Volatility

Finally it’s worth noting that the cryptocurrency market is extremely volatile, with dramatic potential shifts in value—both upward and downward. Successful investment in cryptocurrencies requires research and caution to avoid taking a significant loss. Those who lose money in cryptocurrencies often do so because they fail to take proper care when researching or because they rush in too quickly, without a clear goal or an understanding of investment timing.

If you’re entering the crypto marketplace for the first time, or want to set up a high-yield cryptocurrency IRA, you’ll probably have questions. At Moskowitz LLP, we help our clients navigate the financial and tax reporting landscape with confidence. Don’t risk your retirement to chance. Before you invest, give us a call.

To learn more about how you can make cryptocurrency work for you, see our recent glossary of common crypto terms

For more strategies on funding your pension plan, check out our blog post on 2021 retirement contributions


Remember a blog post or email blast is not a substitution for obtaining personal legal and tax consultation. This information is not intended to be legal or tax advice nor does it form an attorney-client relationship between us.

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