As cryptocurrency becomes more popular, investors are wondering if it is safe to buy crypto in an IRA. The answer may be yes, if a crypto retirement account meets your investment goals. For many investors, a crypto IRA can be an excellent and safe way to kickstart a digital currency portfolio or build long-term retirement wealth. Cryptocurrencies can be highly profitable investment assets. Combined with tax-advantaged individual retirement accounts (IRAs), they can be a viable retirement investment vehicle.
However, as with any investment, buying crypto or Bitcoin in an IRA is not without risk. The high volatility that characterizes this asset class means your accumulated gains can be reversed during market downturns. Let’s examine how crypto IRAs can drive your retirement portfolio, the risks involved, and how to optimize your crypto IRA to turbocharge your retirement investment returns.
Reasons to Buy Crypto in an IRA
There are a variety of reasons to buy crypto in an IRA, including tax-advantaged savings, diversifying your portfolio, and hedging against inflation. Typically, digital assets are treated as property for tax purposes and, therefore, subject to short- and long-term capital gains tax in line with IRS guidelines. When you trade cryptocurrency or Bitcoin, you may owe tax on profits you make.
The amount can be substantial, considering the volatile nature of the crypto market. Suppose you invested $5,500 in Bitcoin in September 2016 when the currency was trading at $604.52. If you sold in September 2022, you would have earned a profit of $177,993.67 — assuming no commission, trade fees, and other charges. If you earned no other income in 2022 ($0.00 in income tax), your capital gain tax in 2022 would amount to $19,622.80 — a significant sum.
Tax-advantaged Individual Retirement Accounts
Tax-advantaged individual retirement accounts provide investors with an excellent opportunity to work around a hefty tax bill. The timing of this tax advantage depends on the type of IRA. In Traditional IRAs, you contribute your gross or pretax income and then pay tax on the distributions when you withdraw at retirement age. However, in Roth IRAs, you contribute your net or after-tax income and typically pay zero tax on the distributions at retirement age.
Traditional and Roth IRAs may include traditional types of investment offerings like stocks, bonds, and exchange-traded funds (ETFs), and can be overseen by private fund managers. Self-directed IRAs (SDIRAs) offer the investor more control and allow alternative investment instruments like cryptocurrency. Most crypto or Bitcoin IRAs are SDIRAs with cryptocurrency as one of their investment vehicles. SDIRAs are available as either Traditional or Roth IRAs; the account type determines the timing of the tax advantages.
If the account in the example above had been a Roth SDIRA, you likely wouldn’t have needed to pay any income tax during withdrawal in September 2022. Investing in crypto in a Roth IRA might make sense there since you would legally avoid paying taxes on earnings in that Roth account.
Crypto Brings Diversification
Besides the potential to maximize tax-free gain, a crypto Roth IRA can be a great way to diversify your investment portfolio without sacrificing your portfolio’s profit potential. This typically means having exposure to different types of assets and asset classes, and with cryptocurrency’s ability to decorrelate at times from other large and mainstream markets, it can be a great choice in meeting diversification goals.
Crypto Can Hedge Inflation
Crypto IRAs can also hedge against inflation and the dollar’s declining value. While cryptocurrencies may be volatile in the short term, their long-term track record has demonstrated superior, oftentimes outsized performance against dollars. Given the long term nature of retirement savings, crypto as an inflation hedge within a retirement account may be a perfect match for many. Of course, investors must always do their due diligence to avoid losses, as crypto assets are speculative and can be highly volatile.
Risks of Buying Crypto in an IRA
Regardless of the potential for high rewards, potential risks exist with Bitcoin or crypto IRAs. Let’s review some of these risks.
Cryptocurrencies are highly speculative and can be volatile. Prices can fluctuate widely with highs and lows. It is possible for crypto assets to experience double-digit percentage losses or gains in price value in a short timeframe.
Oversaturation of the Crypto Market
Over 21,000 different cryptocurrency coins exist across diverse sub-sectors, from metaverses to decentralized finance (DeFi). Given the sheer numbers of available assets, you can end up with coins that lack the potential for long-term gains. Meme coins, for instance, are a core part of the crypto space. These coins can trade mostly on hype and public sentiments.
It’s important to conduct comprehensive research on a coin before adding it to your IRA portfolio.
Account and Trading Fees
IRA providers charge account and trading fees like exchanges or brokerages to cover their services.
The fees can take various forms through the investment process, from initial setup fees to custody and trading fees. Others include annual maintenance, wire and unit transaction fees. Check with your IRA provider to determine your fee structure.
How to Buy Crypto While Minimizing Risks
From carrying out due diligence to adequate diversification, you can minimize the risks involved in crypto IRAs — here’s a look at some approaches that can help.
Diversify Your IRA
Diversification is an age-old strategy that reduces investment risk by spreading your investment across various assets. Because of the volatile nature of cryptocurrencies, you may want to limit your exposure to crypto depending on your risk tolerance. You can also implement diversification within your crypto IRA portfolio by spreading your capital among various individual coins.
That way, you can cushion the market’s volatility effects since every coin doesn’t necessarily move in the same manner. And while diversification of your crypto portfolio doesn’t guarantee against loss, it can help you reduce risks, maximize returns, and improve portfolio performance long-term.
Do Your Crypto Research
Knowledge is power – this adage holds true even in investing. While the crypto market is unpredictable, indicators may reveal the market’s potential direction and how individual coins may perform long-term. Therefore, before buying a coin or investing, you should conduct constructive research to understand the coin’s purpose and the team behind it.
A cryptocurrency’s whitepaper is an excellent place to start. It gives you an idea of the plans for the asset, whether as a utility asset, a security asset, or something designed with performance in mind. Researching the long-term prospects and fundamentals of your coins of interest can help minimize the risk of investing in a project.
You should only invest what you can afford to lose. This fundamental risk management rule holds for all asset classes, including cryptocurrencies.
Look Into Insurance Plans
Crypto-specific insurance plans are another excellent risk mitigation approach. This service covers damage inflicted by unpredictable events such as security breaches, price devaluation from cyber hacks and more.
Different service providers provide varying levels of insurance for custodial funds. Bitcoin IRA, for instance, provides up to $700 million in custody insurance for select digital assets.
Turbocharge your Retirement Portfolio with Bitcoin IRA
Despite its risks, a crypto IRA offers investors unique opportunities to grow long-term retirement wealth tax-deferred. However, to leverage this opportunity, you need a trusted provider that doesn’t just offer a crypto-enabled SDIRA plan but also conforms to the existing regulations. That’s where an account with Bitcoin IRA comes into play.
As the first and largest crypto IRA platform country-wide, Bitcoin IRA helps turn your Roth IRA or Traditional IRA into a SDIRA at a low cost, offers you access to over 60 tradable coins, and ensures your funds’ safety via its $700 million custody insurance. Its features enhance diversification and create a crypto-IRA investment-friendly ecosystem that you can leverage to grow your retirement wealth.
Can you buy crypto in an IRA?
Yes. You can buy crypto in Traditional and Roth IRAs, using self-directed IRAs.
What crypto should I buy?
The specific type of crypto to buy depends on several factors, including your risk tolerance and long-term investment goals. Some of the most popular cryptos to buy based on market capitalization include Bitcoin, Ethereum, Cardano, and Solana.
Where can I buy crypto in an IRA?
You can buy Bitcoin and other cryptocurrencies in an IRA directly through cryptocurrency retirement account providers like BitcoinIRA.