A type of retirement account that contains cryptocurrency is called a “crypto IRA.” There are types of investment accounts that offer investors a way to diversify their wealth beyond stocks, bonds, and mutual funds. Plus, they provide a vital hedge against market instability.
Investing in a variety of assets is a good idea during periods of economic uncertainty. As of today, 14% of the population in the U.S. owns at least some cryptocurrency in their investment portfolio. This is not surprising given the rapid growth of the crypto sector in recent years.
Interested in learning more about a crypto IRA? Look no further. This guide will cover everything you need to know about Bitcoin IRAs and other cryptocurrency IRAs so you can make an informed investment decision.
What Is A Crypto IRA or a Bitcoin IRA?
An IRA account that contains cryptocurrency and provides tax advantages. However, these accounts are not only limited to cryptocurrency, but they also include conventional assets such as stocks, bonds, ETFs, and mutual funds.
Crypto IRAs can be made up of Bitcoin or other non-Bitcoin cryptocurrencies, depending on what the investor prefers. Even a portfolio that is mostly invested in stocks and mutual funds can be considered a “crypto IRA” if it holds any cryptocurrency.
Typically, crypto IRAs must be self-directed investment accounts. Typically, Vanguard and Charles Schwab do not offer these types of accounts. Cryptocurrencies are not typically allowed to be purchased through brokerages. To invest in cryptocurrencies through an IRA, you must first open an account with a provider that offers this service.
Benefits of Bitcoin Investing for Retirement
Bitcoin and digital currencies are traditionally seen as a high-risk, high-reward investment. This investment was not often promoted by brokerages and was often criticized by professional asset managers. Although it is not yet widely accepted, Bitcoin is gradually being seen as a valuable addition to any investment portfolio.
Don’t believe us? Some of the top benefits for retirement investors who own a crypto IRA account are listed below, along with relevant statistics and data points.
- Save on 20% Capital Gains Tax: IRS Notice 2014-21 indicates that cryptocurrencies are treated as an investment property for federal tax purposes. However, Bitcoin and altcoins (e.g., Ethereum, Ripple, Litcoin, etc.) are free from capital gains taxes when held within a Roth IRA.
- Bitcoin Volatility is Stabilizing: As of mid-August 2021, the 30-day Bitcoin Volatility Index (BVI) is 3.33% ; in December 2013, the BVI sat at 12.9% and in April 2020 it was 9.39%, thereby indicating that Bitcoin prices are gradually stabilizing.
- Diversification Outside the Stock Market: The price of Bitcoin has an extremely weak correlation with the U.S. stock market ( +0.29 with the S&P 500 ). Therefore, investors with holdings primarily in stocks could find a safe haven in Bitcoin if the equities market goes down.
- Lower Transaction Fees: If crypto IRA account holders want to take an early distribution and send funds overseas or to a foreign receipt, the relative costs of a cryptocurrency transaction are much lower than wire transfers. Plus, they don’t encompass any currency conversion costs.
Crypto Roth IRA vs. Traditional IRA
There are two main types of IRAs that can hold cryptocurrencies: traditional IRAs and Roth IRAs. The first group consists of funds that have not yet been taxed (i.e., pre-tax) and the second group of after-tax funds. The most important difference between a Roth IRA and a traditional IRA is the tax implications during retirement.
With a Roth IRA, the account holder does not need to pay taxes on the withdrawals made during retirement since the funds have already been taxed. Even though traditional IRA holders have reached retirement age, if they withdraw any of the money from their account, it is considered taxable ordinary income.
There are two types of IRAs – Roth and traditional – which offer different tax benefits. A Roth IRA allows your cryptocurrency to grow without being taxed, while a traditional IRA allows your cryptocurrency to grow and be taxed later when it is withdrawn.
Which Should I Choose: Roth Crypto IRA or Traditional?
The choice between a Roth and Traditional IRA is typically an easy one. A Roth IRA would be a good choice if you think you will be in a higher tax bracket when you retire. In contrast, if you think you will be in a lower tax bracket when you eventually take money out, a traditional IRA would make more sense.
When you’re just starting out, a Roth IRA is usually the better choice. People with lower incomes would pay less tax relative to their income if they paid taxes now instead of later when their tax bracket is higher.
Older investors are at the peaks of their careers. If you’re already earning a lot of money, it would probably make sense to choose a traditional IRA, because you would probably be in a lower tax bracket during retirement.
Funding a Bitcoin or Crypto IRA
If you want to invest in cryptocurrency through an IRA, the process of funding the account is not difficult. After applying for a self-directed Roth or traditional IRA through a reputable cryptocurrency IRA company , you can choose to fund the account via one of three ways:
- Direct Cash Transfer: Transferring cash from the account holder’s bank to the third-party custodian, which is then used to purchase assets held within the account.
- Custodian-to-Custodian Transfer: A “hands-off” exchange between one’s current IRA brokerage and the new crypto IRA custodian, requiring no intervention by the account holder.
- IRA Rollover: Withdrawing a portion of one’s current IRA holdings and depositing it into one’s new self-directed IRA, a process subject to strict rollover rules and regulations per the IRS.
The most efficient way to fund a crypto IRA is usually a direct IRA transfer because it reduces the chance of mistakes.
Token Options For Crypto IRAs
When deciding on a digital asset to add to their IRA plan, investors can often feel overwhelmed. There are thousands of options available, so making the right choice is key to achieving the desired goals and long-term investment strategies. Token options available for crypto IRAs include:
- Bitcoin (BTC): Bitcoin is the premier token of the crypto industry. The cryptocurrency has grown since its inception to become the most valuable digital asset by market capitalization. It is ranked amongst the most valuable assets globally, with many now considering it a hedge against inflation.
- Ethereum (ETH): ETH is considered Bitcoin’s primary challenger and the second largest cryptocurrency by market capitalization. Ethereum is designed on a unique blockchain network that allows developers to build applications on top of it. Despite also being a blockchain like Bitcoin, its inner mechanics differ significantly. This gives its native token (Ether) an incredible long-term potential as more people adopt it.
- Other digital assets available for crypto IRAs include Bitcoin Cash, Ethereum Classic, Chainlink, Litecoin, Zcash, Stellar Lumens, Aave, Basic Attention Token, The Graph, Livepeer, Maker, Yearn.finance, Decentraland, Dai, Uniswap.
Tax Advantages Of A Crypto IRA
The IRS classifies virtual currencies as property for federal tax reasons, similar to how they would classify stocks or real estate. Many IRA investors find virtual currencies appealing because they are classified as property and have a favorable tax climate. Taxes on transactions involving income or gains from purchasing and selling capital assets, such as stocks, mutual funds, real estate, etc., are not generally imposed on Individual Retirement Accounts (IRAs). This is the case regardless of whether the gain was realized over a short or long period of time.
Instead of having to pay taxes on the money in your IRA account, you can defer those taxes until you take the money out of the account. If you use retirement funds to invest in cryptocurrencies like Bitcoin, you may be able to avoid paying taxes on your investment, like with a Roth IRA.
There are four main types of IRAs, each with different tax advantages. The four types are traditional, Roth, SEP, and SIMPLE.
Traditional IRA
This means that you may be able to deduct the amount of your contribution from your taxable income. This means that you can deduct annual payments from your taxable income. Investors are not required to pay income taxes on their earnings until they receive a distribution. If you take your money out of the IRA before you’re supposed to, you might have to pay fees or taxes on it. The amount you can contribute to your IRA each year varies depending on your filing status and income.
SIMPLE IRA
Employees can contribute a percentage of their wages to SIMPLE IRAs in the same way as they can to other types of IRAs and employer-sponsored retirement plans. The money you save for retirement grows without being taxed, so it can compound faster.
Employers can receive a tax credit for half of the initial costs of setting up a SIMPLE IRA, up to $500 per year for three years. When they contribute to employee retirement plans, they also benefit from tax breaks.
SEP IRA
A SEP IRA will lower the company’s taxes, but not the employee’s. SEP IRA contributions can be deducted from taxes and are limited to 25% of an employee’s total compensation or $61,000 in 2022. If you are self-employed and make SEP contributions, the self-employment tax will be lower. A rise in business costs will lead to less net profit, and smaller self-employment tax and income tax.
Roth IRA
The advantage of a Roth IRA is that you have already paid taxes on the money you put in, so you can withdraw the entire balance tax-free when you retire.
How to set up a crypto IRA
To set up a crypto IRA using Alto’s CryptoIRA offering, follow the steps below:
Visit the Alto CryptoIRA website and click on the “Sign Up” button in the top right corner.
To create an account, enter your email address and password in the appropriate fields.
After you have verified your email address, you will start the process of identity verification. Click the purple button to start the process.
Step 4: Enter your personal information by following the prompts.
After your identity has been verified, you will be asked to select your Alto account. Choose the Alto CryptoIRA option on the left side.
Step 6: Fill out your account information.
Verify that your information is correct, sign the document and click the button to create your Alto Crypto IRA.
How to roll an IRA account into a crypto IRA
Moving funds from one retirement account to another is called a “rollover.” Below we cover step-by-step instructions on how to complete an IRA rollover using Alto’s CryptoIRA:
To transfer funds from your Alto CryptoIRA account, select “Transfer Funds” from the dashboard.
In the “Start the Transfer” window, select “Alto” from the dropdown menu.
Choose the type of IRA you would like to transfer from the “Account Type” drop down menu, or select “Make a cash contribution from a bank account” if you would like to fund your account in that way. Click “Continue” when finished.
Next, you will need to fill out your custodian information, including the name of the financial institution and your account number. After that, you will need to input the amount of money you wish to transfer, as well as the delivery method. Then click “Continue.”
After completing your Transfer of Assets form, you will be asked to upload a current account statement. Complete this step and click “Continue.”
In some cases, all you need to do to request an IRA rollover is follow the steps above. For many, though, you will need to also provide a wet signature along with your paperwork:
- Begin by printing the signature page of your Transfer of Assets form.
- Using black ink, sign your name next to your e-signature in the “Owner’s Ink Signature” box. Please note that filling out this exact box is important as signatures placed in any other field may lead to your form being rejected.
- Scan the signed document and upload it to the Alto platform as a “Wet Signed Version.” Click “Submit” to complete the process.
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