What Is a Crypto IRA and Why Should I Invest in One?
Given crypto’s historical upward trajectory and the tax advantages of IRAs, crypto IRAs are gaining popularity. Here, we answer the question, “What is a crypto IRA?”
Cryptocurrency and IRAs have been in the news a lot lately. From Coinbase’s public market debut to Bitcoin’s explosive growth, it’s already been a big year for crypto.
Given crypto’s historically upward, albeit volatile, trajectory — and the obvious tax advantages of individual retirement accounts (IRAs) — it’s not surprising that savvy investors are connecting the dots and asking, “Can you buy crypto in an IRA?”
The answer is, yes. And today, we’re explaining what a crypto IRA is and why the Alto CryptoIRA® could be the best way to invest in cryptocurrency.
What Is a Crypto IRA?
Also commonly referred to as a Bitcoin IRA, a crypto IRA is a self-directed IRA in which you can buy and sell crypto assets, typically through an exchange. For example, the Alto CryptoIRA is integrated with Coinbase to make 24/7 trading quick and easy. However, not all crypto IRA companies make it so easy.
A self-directed IRA (SDIRA) is subject to the same contribution limits, eligibility requirements, and tax rules (and benefits) as a normal IRA. Only, with an SDIRA, you or a financial advisor are responsible for choosing (or “self-directing”) your own investments. Until recently, that almost always meant a lot of time, frustrating paperwork, and often steep custodial and administrative fees. (More on that in a moment.)
The advantage of a self-directed IRA is that it allows you to invest in a variety of alternative assets — meaning those outside public stock and bond markets — that most traditional brokerages don’t allow. This includes potentially lucrative, long-term investments like:
- Real estate
- Pre-IPO businesses
- Cannabis and other high-growth companies
- Securitized art and collectibles
- Private equity funds
- Cryptocurrency
As mentioned, though, SDIRAs have historically been out of reach for most investors. Until now. That’s where Alto comes in. Alto is helping to unlock the world of tax-advantaged investing by streamlining and automating the self-directed IRA process so that anyone who’s eligible can invest in alternatives with an IRA.
Specifically designed for crypto investors, the Alto CryptoIRA is a self-directed IRA that allows you to buy and sell more than 90 cryptocurrencies through its integration with Coinbase, with more being added all the time. Alto’s integration with Coinbase custody means crypto assets are safe and secure within the United States’ largest crypto exchange.
Investing with an IRA also means tax advantages to you as an investor.
What Are the Advantages of Cryptocurrency in an IRA?
If you’re looking for an easy solution for how to buy crypto with an IRA, you may already know that by investing in cryptocurrency through an IRA — particularly a Roth IRA — your crypto earnings can grow tax-free, or at least tax-deferred.
Whether you’re a long-time HODLER or crypto curious, though, it’s worth taking a closer look at the distinctions between traditional and Roth crypto IRAs, and what they mean for you as an investor.
Traditional Crypto IRAs
As with a 401(k) plan, a traditional IRA allows you to contribute a certain amount each year ($6,000 in 2021 in the case of an IRA, and $7,000 if you’re 50 or older). Depending on your income level, your traditional IRA contributions can be taken as a tax deduction. Gains and income from traditional IRA investments are not taxed until the money is withdrawn from the IRA (typically after age 59 ½, often much later in life). This means gains in an IRA are typically not reported on tax returns, and — most importantly — they can be reinvested in full, enabling the retirement account to grow even more.
Upon making withdrawals, you will pay income tax on your distributions, much the same as you do on your paycheck now. But the tax rate that will apply will be based on your income at the time of the withdrawal.
As a result, a traditional crypto IRA makes sense for most people, as their income taxes could very well be lower in retirement than they are now. A traditional IRA is also a good option for those who earn more than the Roth IRA income cutoff.
Roth Crypto IRAs
Roth IRAs share the same contribution limits as traditional IRAs; however, there are a few differences.
The most notable of these is with regard to taxation. Unlike traditional IRAs, Roth IRA contributions are not tax deductible. Instead, you contribute funds that have already been taxed but pay nothing in taxes upon withdrawal. So long as you are at least 59 ½ years of age and your account has been open for at least five years, withdrawals from a Roth — including all your gains — are tax free. And unlike traditional IRAs, you are not required to begin taking distributions during your lifetime.
Obviously, the tax-free nature of a crypto Roth IRA is its biggest advantage. Especially when you look at just how much the value of cryptos like Bitcoin have gained over the past decade. (Note: Investing in cryptocurrencies involves risk, including risk of loss.)
That’s right — under current tax rules, regardless of how much your investment grows or how many times you buy and sell crypto within a Roth IRA, you’ll never pay a dime in taxes. This makes a Roth IRA a great choice if you expect to earn more in retirement than you do now.
So why doesn’t everyone open a Roth? Unfortunately, earners above a certain income limit are ineligible to make yearly contributions to a Roth IRA.
There are, however, ways to fund a Roth IRA even if you earn more than the cutoff. It’s possible to convert an existing IRA or 401(k) into a Roth IRA by making a one-time tax payment on the earnings in your existing retirement account and creating a so-called “backdoor Roth.” Though a Roth conversion can carry a significant upfront tax cost, with the right investments, this strategy can be well worth it, and many successful investors have famously done so.
Both Traditional and Roth IRAs Offer Crypto Investors Tax Advantages
Whichever individual retirement account type you choose, arguably the greatest benefit of a crypto IRA is what you don’t have to do: Namely, navigate the complicated and cumbersome process of reporting crypto earnings each year on your taxes.
We won’t go too far into detail here, but suffice to say, for every crypto sale you make outside an IRA, you’re required to report on your taxes the original purchase price — called the cost basis — and the sale price. (For more on cryptocurrency tax rules, read our recent post on how to not pay taxes on crypto.)
Obviously, it doesn’t take a lot of imagination to see how time-intensive this is for someone who regularly buys and sells Bitcoin or other cryptos. By investing in cryptocurrency in an IRA, you don’t have to worry about this annual reporting of gains and losses.
Of course, whether and how to invest in cryptocurrencies is an individual decision to be made carefully and with the right professional advice. For this reason, it’s important to do your research before making an investment, whether within or outside any IRA, and to never invest money you cannot afford to lose.
Invest In Crypto with the Tax Advantages of an IRA
Opening an Alto CryptoIRA account is easy. Once you’ve determined what type of IRA is best for you, it only takes a few minutes to set up your account. And with a $10 investment minimum, you can invest only as much as you’re comfortable with.
But what really makes the Alto CryptoIRA unique is the support you’ll receive. When you sign up, Alto will provide you one-on-one support setting up and managing your account. Because investing crypto in your IRA shouldn’t be complicated!
Discover the benefits of cryptocurrency in your IRA today.