Digital gold for golden years: Investing in a crypto IRA

For some early crypto adopters, holding Bitcoin (BTC) has always been the strategy of choice. Rather than worrying about market timing, these “buy and hold” advocates focused on Bitcoin’s long-term potential to deliver gains. The data backs up their approach: between 2013 and 2023, Bitcoin achieved an average annual return of 49%, outpacing traditional assets like the S&P 500 index. 

With Bitcoin’s sustained price growth and the broader crypto market's expansion, it’s no surprise that more people are exploring digital assets as part of their retirement savings strategy. Beyond simply buying and holding cryptocurrencies, today’s market offers innovative options like crypto-friendly retirement products. Among these, crypto individual retirement accounts (IRAs) stand out for those confident in the long-term potential of digital assets. 

But before opening a crypto IRA, it’s important to weigh the benefits and risks to ensure it fits within your broader retirement goals. In this guide, we’ll tell you what you need to know.

What is a crypto IRA?

A crypto IRA is a type of individual retirement account designed for long-term investments in cryptocurrency. Like traditional IRAs, crypto IRAs allow individuals to make yearly contributions and benefit from tax advantages, either during their working years or at retirement. What sets crypto IRAs apart is their focus on digital assets like Bitcoin, Ethereum (ETH), and Solana (SOL), offering an alternative to the traditional paper assets such as stocks, bonds, and mutual funds typically found in standard IRAs.

How does a crypto IRA work?

While the IRS doesn’t permit cryptocurrency investments through standard IRAs, investors can use a “crypto self-directed IRA” provided by specialized IRA companies. These accounts offer the same tax benefits as traditional IRAs but allow legal cryptocurrency investments. In a crypto self-directed IRA, custodians facilitate transactions between the account holder and the cryptocurrency market, often in partnership with centralized crypto exchanges (CEXs) like Coinbase or Gemini. Account holders can buy, hold, and sell digital assets, gaining price exposure to their chosen cryptocurrencies.

The tax benefits of a crypto IRA depend on whether it follows a traditional or Roth IRA structure:

Traditional IRAs

• Potential earnings: Grow tax-deferred until withdrawn
• Contributions: Tax-deductible
• Withdrawals: Taxed as income
• Required minimum distributions: Minimum withdrawals required starting at age 73

Roth IRAs

• Potential earnings: Grow tax-free
• Contributions: Made with after-tax funds but not tax-deductible
• Withdrawals: Contributions withdrawable tax-free and penalty-free; withdrawing earnings taxable unless 59½ or older or meet certain exemptions, such as being disabled or a first-time homebuyer
• Required minimum distributions: None

Crypto IRAs are subject to the same rules as standard IRAs regarding contributions and early withdrawals. For 2024, annual contribution limits are $7,000 for individuals under 50 and $8,000 for those 50 and older. Early withdrawals before age 59½ typically incur a 10% penalty, except in specific circumstances like covering qualified medical expenses, purchasing a first home, or paying for higher education costs.

How to open a crypto IRA

Setting up a crypto IRA is slightly more complex than opening a standard IRA, but self-directed IRA providers are making the process more accessible. Once you’ve selected a trusted crypto IRA company, the steps are straightforward: follow the provider's instructions, choose digital assets, and monitor the portfolio over time. Here’s a more detailed look:

Research crypto IRA providers

The first step in opening a crypto IRA is selecting a reputable provider. Companies like Equity Trust, iTrustCapital, and Bitcoin IRA are well-known in the industry, but it’s important to compare providers based on fees, features, and asset offerings. Taking the time to evaluate multiple options will help ensure you partner with a company that aligns with your needs and preferences.

Submit info and fund a crypto IRA account

After selecting a provider, complete the onboarding process by submitting personal and financial information, such as a Social Security number, government-issued ID, and contact details. You’ll also need to choose the type of IRA – traditional, Roth, SEP (Simplified Employee Pension), or SIMPLE (Savings Incentive Match Plan for Employees) – based on your tax strategy and provider. Then, provide banking and other relevant financial details to fund the account via a direct contribution, transfer from an existing retirement account (a 401(k) rollover, for example), or both.

Choose digital assets

Once you’ve added funds to the account, select which cryptocurrencies you want to include in your portfolio. Most providers offer popular options like Bitcoin and Ethereum. After purchasing, the assets go to your crypto IRA, where their value fluctuates with the market.

Keep track of portfolio performance

Although IRAs are designed for long-term investment, regular monitoring helps ensure alignment with financial goals. IRA holders often log into their accounts to track performance, assess market conditions, and adjust holdings as needed, such as rebalancing portfolios or purchasing assets during dips.

Advantages and disadvantages of a crypto IRA

If you're considering a crypto IRA, you're likely looking for a tax-efficient way to grow your retirement savings. While these accounts offer distinct advantages, their restrictions and fees might not suit every long-term investor.

Pros of crypto IRAs

• Tax efficiency: Crypto IRAs offer significant tax advantages compared to trading digital assets on exchanges. Traditional IRAs allow you to deduct yearly contributions from your taxable income, while Roth IRAs let you withdraw funds tax-free in retirement. Additionally, you can swap cryptocurrencies or cash within the account without triggering capital gains taxes – although early withdrawals may still be subject to income tax and penalties. 
• Growth potential: Cryptocurrencies like Bitcoin and a few altcoins have historically outpaced traditional benchmarks like the S&P 500 over the past decade. While past performance doesn’t guarantee future results, crypto IRAs give you access to an asset class with the potential for significant long-term growth.
• Diversification: Adding crypto to your retirement portfolio provides diversification beyond traditional assets like stocks and bonds. Certain cryptocurrencies can move independently of traditional markets, offering a hedge against economic downturns. While more volatile, crypto also offers higher growth potential than standard IRA holdings.
• Ease of access: Crypto IRA platforms are designed to be user-friendly, even for those with minimal crypto experience. Many providers offer educational resources and dedicated support teams to guide you. Also, with custodians managing your assets, you don’t have to worry about private keys or crypto wallet security.

Cons of crypto IRAs

• Fees: Crypto IRAs often come with additional fees, including trading, transfer, and custody charges, which aren’t typical for standard IRAs. Carefully review your provider’s fee schedule to understand the impact on your returns. 
• Contributions and withdrawals: Again, depending on your age, annual contribution caps range from $7,000 to $8,000, limiting how much you can invest. Also, withdrawing funds before retirement age incurs a 10% penalty, making these accounts less liquid than other investment options.
• Limited token selection: Most crypto IRA providers offer access to well-known cryptocurrencies like Bitcoin and Ethereum but exclude niche or high-risk assets such as memecoins, NFTs, or ICOs to comply with IRS regulations.
• No self-custody: Unlike regular crypto wallets, a crypto IRA requires a third-party custodian to manage your assets. While this simplifies security, it also exposes you to risks like hacks or mismanagement by the custodian, and you can’t use these assets in decentralized finance (DeFi) applications.

Maximize crypto tax efficiency with CoinTracker

Whether crypto plays a central role in your portfolio or is just a small part of your investments, CoinTracker makes it easy to monitor performance, track transactions, and simplify tax reporting. Accurate records not only help you track gains and losses but also file compliant tax forms. CoinTracker’s portfolio tracker makes it easy to monitor your crypto activity in real time and generate detailed IRS-ready forms. Plus, our tax-loss harvesting tool identifies strategic opportunities to lower your tax burden.

Get started with a free account today and discover how effortless crypto tax reporting can be.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.