How to Invest in Cryptocurrency With a Self-Directed IRA

Over the past few years, there has been an overwhelming amount of news regarding cryptocurrency, and the experience has been quite unpredictable. This latest form of digital currency has attracted numerous investors, and the avenues of procuring it have increased.

If you have an interest in cryptocurrency as an asset, then it’s a positive development that you have the option to make investments in “crypto” by utilizing your self-directed IRA (SDIRA). It’s possible to combine a tax-advantaged approach with a strategy for investing in cryptocurrency regardless of whether you choose to invest via your Roth IRA or traditional IRA.

What Is a Self-Directed IRA (SDIRA)?

A type of individual retirement account (IRA) known as self-directed allows for the ownership of alternative investments that are usually not permitted in regular IRAs. While a custodian or trustee oversees the account, it is managed directly by the account holder, giving it the name “self-directed.”

Self-directed IRAs are ideal for knowledgeable investors who wish to expand their portfolio with tax-advantaged options, available as a traditional IRA (enabling tax-deductible contributions) or a Roth IRA (providing tax-free distributions). These types of accounts are well-suited for individuals already familiar with alternative investments and seeking diversification.

Understanding a Self-Directed IRA (SDIRA)

An SDIRA differs from other IRAs primarily in the variety of investments that can be held within the account. Typically, conventional IRAs have restrictions on the types of securities that can be included, such as stocks, bonds, CDs, mutual funds, and ETFs.

Owning an SDIRA provides the opportunity to invest in a wider range of assets than traditional investment options. An SDIRA permits the holding of alternative investments such as precious metals, commodities, tax lien certificates, private placements, limited partnerships, real estate, and more.

As such, an SDIRA requires greater initiative and due diligence by the account owner.

Taxes, Withdrawals, and Contributions

Individuals can only contribute a specific amount annually to their self-directed IRA. By 2023, those younger than 50 years old are limited to contributing $6,500, while those older than 50 can contribute an additional $1,000 as a catch-up contribution.

If you withdraw funds before reaching 59½ years of age, you will be liable to pay income taxes based on your income level, in addition to a 10% penalty fee and income tax on the withdrawal amount.

Once you reach the age of 73, the IRS mandates that you commence withdrawals, which must adhere to specific minimum requirements subject to your account balance and life expectancy.

How to Open an SDIRA

Typically, IRA providers allow for the opening of a standard IRA (either traditional or Roth) and investing solely in common options such as stocks, bonds, and mutual funds/ETFs. However, initiating an SDIRA requires:

Find a qualified IRA custodian that specializes in SDIRAs.
Determine whether they offer the range of investments you want.
Set up the account and pay any fees.
Begin contributing to your account.

It’s important to keep in mind that SDIRAs are self-directed, therefore custodians are not authorized to offer financial guidance. Consequently, conventional brokerages, banks, and investment firms generally do not make them available to their customers. This implies that you must conduct thorough research. If you require assistance in selecting or administering your investments, you should consider collaborating with a financial advisor.

What is Cryptocurrency?

Cryptography secures digital currencies known as cryptocurrencies, which are created through the verification or processing of transactions on decentralized computer networks. These networks are founded upon cryptography and blockchain, making it highly improbable to duplicate or forge crypto.

The original purpose of this currency with decentralized architecture was to grant individuals greater authority over their finances, while avoiding dependence on intermediaries such as banks and other financial entities. In addition, it aimed to eradicate market vulnerabilities that stem from a singular point of failure.

Every day, fresh cryptocurrencies are produced, with thousands of digital currencies available in the market. While Bitcoin and Ethereum hold the top positions in terms of market capitalization, there are other popular cryptocurrencies like Tether, XRP, and Binance Coin.

Unique Advantages of Investing in Crypto

There is no minimum investment requirement. Investors can purchase small amounts of a certain coins to test out their strategy and appetite for risk.
There may still be room for growth potential because it is a developing asset class.
Some cryptocurrencies have a cap – or maximum number of units that can be created. This is sometimes viewed as a shield from inflation.

Due to its volatility and newness in the market, cryptocurrency is considered a novel asset that poses certain risks. Regulations and oversight for this asset are not yet fully established, and are thus subject to scrutiny, which further increases the level of risk involved.

SDIRA Cryptocurrency Investing Strategies

To invest in cryptocurrency, you need to utilize a digital wallet to store your crypto. Additionally, in certain circumstances, investors must monitor the keys to their wallet.

Your SDIRA offers three methods for investing in cryptocurrency.

Option 1: Buying Cryptocurrency Through an Exchange

SDIRA holders are able to buy and keep cryptocurrencies through an exchange. It’s important to confirm with your custodian whether they can provide direct access to cryptocurrencies before starting an account, as not all SDIRA providers can.

These are the main points on how the process functions.

Start by opening your SDIRA.
Complete the onboarding process .
Once application is approved, submit a new investment request.
Get notified once they credit these funds to your IRA trading account.

After the completion of the process, you will have the capability to take control of the wallet that contains your crypto assets.

Option 2: Investing in Digital Currency Funds

If you’re not interested in directly owning cryptocurrencies but still want to invest in them, then you may want to explore the option of investing in a digital currency fund. This approach enables you to leverage an investment product that you’re already accustomed to in order to invest in cryptocurrencies. These funds operate similarly to mutual funds, enabling you to invest in the equities of companies that either own cryptocurrencies or provide services related to them.

By investing in a digital currency fund, you can indirectly invest in cryptocurrency without the requirement of a wallet or keys.

This is a quick overview of the procedure.

Start by opening your SDIRA .
Fund your account via a transfer, rollover, or cash contribution.
Submit the subscription/purchase agreement provided by the investment sponsor and a Buy Direction Letter for Private Placement.

Your SDIRA is responsible for covering all fees, just like any other type of funds whether public or private. However, it is important to note that there might be constraints that can restrict your share selling capability and access to the fund.

Option 3: Buying Cryptocurrency via an IRA LLC

Investing in cryptocurrency using an SDIRA can also be done through an LLC, which provides benefits such as potential protection from liability and the ability to access retirement funds directly through checkbook control. However, establishing and maintaining an LLC comes with a cost.

To start, you must create a wallet. If you have an LLC, your SDIRA can either have a personal wallet or opt for one on any exchange platform. Although only specific cryptocurrencies are available on each exchange, this setup offers greater versatility if you want to invest in a cryptocurrency that isn’t available on commonly used platforms such as ErisX.

A summary of the process is provided below:

Start by opening your SDIRA .
Fund your account via a transfer, rollover, or cash contribution.
Set up an LLC. You can learn more about how to do that on our LLC page .
Submit the operating agreement and a Buy Direction Letter for Private Placement
Use your LLC to invest in cryptocurrency with a private wallet or on an exchange.

Investing in an SDIRA

By allowing for greater investment flexibility, self-directed Roth IRAs offer a plethora of investment options beyond the usual retirement portfolio assets such as stocks, bonds, cash, money market funds, and mutual funds. These alternative assets are now accessible to investors.

You have the option of purchasing investment properties for your SDIRA account, or owning partnerships, tax liens, or even a franchise business.

Several investments are not allowed in SDIRAs, including life insurance and S corporation stocks, regardless of whether it’s a Roth or traditional account. Additionally, any investments considered a prohibited transaction, such as those that involve self-dealing, as well as collectibles, cannot be held.

A vast array of objects make up collectibles, including but not limited to antiques, artwork, liquor, baseball cards, mementos, jewelry, postage stamps, and scarce coins (bear in mind that this impacts the type of gold allowed in a self-directed Roth IRA).

What Is a Self-Directed Individual Retirement Account (SDIRA)?

A self-managed individual retirement account (SDIRA) is an IRA that enables one to invest in assets that are not typically allowed, such as precious metals, commodities, and real estate. SDIRAs have the same annual contribution limitations as both traditional and Roth IRAs, with $6,500 or $7,500 for those 50 years and older (an increase from $6,000 and $7,000, respectively, for 2022).

How Do You Set Up an SDIRA?

As mandated by the IRS, a qualified custodian must hold all retirement assets, even those in SDIRAs. This custodian, which may be a financial institution, bank, or credit union, manages the SDIRA, keeps the account’s investments safe, and guarantees that the SDIRA is in accordance with IRS regulations.

Although it is possible to initiate an IRA or SDIRA account at practically any bank or financial institution, most significant custodians do not present alternative investments, including precious metals, cryptocurrencies, or real estate. Hence, it is crucial to search for an SDIRA custodian that provides the non-traditional assets that you prefer. Remember that these companies cannot give recommendations regarding investments, so undertaking the investment research is your obligation.