What is a cryptocurrency IRA account? Is it necessary to open one if you are investing in cryptocurrencies? Which benefits does it present that you should be well-conversant with? Welcome to today’s post in which we shall see what crypto IRA accounts have to offer, in a bid to equip you with sufficient information to help you maneuver this industry.
Planning for your retirement will in most cases entail opening some type of retirement account, defining your investment strategy, and maybe even hiring a financial planner. Historically, this has meant turning to traditional financial institutions for such needs to be fulfilled.
In the present day and time, however, many people believe that cryptocurrency is the way to go, in that it will play a very significant role in the exchange of value. This has in itself led to people thinking about investing in anything related to cryptocurrencies as part of the definition of the future financial world.
One of the products that are perfectly bridging the gap that exists between the future world and the traditional financial world is a cryptocurrency IRA. A crypto IRA is essentially a modern spin on the regular IRAs you may have already come across.
In the current world, having a financial product such as an IRA ( often perceived as traditional) being associated with cryptocurrencies ( which are quite digital by nature), may seem quite out of place. You will, however, be surprised to learn that investing in cryptocurrencies through an IRA may prove to be the best decision for you, more so due to the significant tax advantages that it presents.
How does a cryptocurrency IRA work?
Like any Individual Retirement Account, a cryptocurrency IRA is essentially a retirement account in which one invests and stores their cryptocurrencies. One faces the same procedures and standards as if they were investing in other asset classes, such as stocks and bonds, including the tax benefits.
There, however, maybe some differences in the case of the crypto IRA, such as:
- Storage – Your cryptocurrency assets are usually stored in a digital wallet
- Crypto exchange – To purchase your cryptocurrency assets
- Custodian – You will need to work with a custodian who supports crypto assets.
What are the advantages of using a crypto IRA?
A major benefit of cryptocurrency IRAs that cannot be overemphasized is the future potential of cryptocurrencies as an asset class. Even with there being several legal and environmental concerns, as well as an uneven global attitude towards cryptos, there is no denying that cryptocurrencies have gradually increased in value, popularity, and legitimacy.
If nothing tampers with this trend, then it is expected that the potential returns for those who invested in cryptos for their retirement years, could be huge. Besides the promise of high returns, there are several benefits of opening a cryptocurrency IRA.
For investors looking for ways to minimize cryptocurrency taxes, a cryptocurrency IRA is a good way to achieve this. The IRS classifies cryptocurrencies as property, hence your earnings are subject to capital gains tax. You can limit the amount of money you can pay in taxes, by opening a cryptocurrency IRA that takes either a Traditional or a Roth IRA structure.
It is worth noting that the timing of the reception of the tax benefits varies, depending on whether one opens their cryptocurrency IRA in a Roth or Traditional structure. With a traditional crypto IRA, you get immediate tax benefits, owing to the fact that the contributions to the crypto IRA are viewed as tax-deductible, hence you do not pay the taxes until getting to your retirement years,
With a Roth cryptocurrency IRA, on the other hand, the contributions you make are not tax-deductible. You, however, get to receive the tax benefits down the road, by avoiding paying any capital gains taxes on the increase in value of your portfolio.
If you work with a reliable crypto IRA service provider, then you can rest assured that your crypto assets will be stored safely. Most of such companies usually invest in state-of-the-art storage facilities that are heavily guarded. Also, the crypto assets are stored in cold wallets, which are very secure, and that hackers cannot access easily.
Diversification of your portfolio
A well-diversified portfolio that is designed to not only cater to your risk tolerance but to also meet your future and current goals, is a valid investment strategy. You can rely on a cryptocurrency IRA alongside your other assets, or your traditional IRA, to diversify your portfolio and to increase your income earning potential.
Are there any risks of investing in cryptos through a crypto IRA?
Investing in cryptos through a crypto IRA or through any other approach, will more often than not present the same types of risks. It is good to be aware of those risks so that you do not get surprised when your crypto holdings disappoint you.
Some of the common risks you will encounter as a crypto IRA owner include:
- High fees
- Limited use case in comparison to other assets
Volatility happens to be the biggest menace when it comes to investing in cryptos. The decentralized nature of these digital tokens makes the path of their prices highly unpredictable. It can take something as minor as a single tweet from one person to send the prices of cryptos soaring or tanking. This is true for most crypto assets, hence the need to diversify one’s crypto assets. Doing this ensures that bad press for a certain crypto company or the entire crypto sector, will not tank your portfolio.
If you, however, fail to take the need to invest strategically seriously, then a bad day could mean massive losses, that could lead to you never attempting to invest in cryptos again.
Frequently Asked Questions on What is a crypto IRA Account?
1. How can I fund my future using a cryptocurrency IRA Account?
To invest in cryptocurrency for your retirement years, then you need to open a self-directed IRA which supports crypto investments. A self-directed IRA that mainly allows investors to invest in cryptos is referred to as a cryptocurrency IRA. All you need to do is to contact the support staff at any reliable crypto IRA service provider to get started. Most of these companies have very streamlined services which make the onboarding process for new clients stress-free.
Are cryptocurrency IRA accounts tax-advantaged?
Yes. Like other types of IRAs, cryptocurrency IRAs are also tax-advantaged. Depending on whether you open a Traditional crypto IRA or a Roth crypto IRA, you can either pay the taxes on your contributions or upon retiring. This is better than having to pay capital gains taxes on the profits you make during your trades. A crypto IRA is to a great extent, the best option for all crypto investors who are out to minimize crypto taxes.
Which assets can I invest in a crypto IRA account?
This depends on the IRA service provider that you are dealing with. Some companies will only allow investors to exclusively hold cryptocurrencies, while others may allow you to hold cryptocurrencies and other assets. This means that you need to confirm whether the company you intend to work with allows for one to invest in other asset classes.
Is a 401(k) a cryptocurrency IRA?
No. Unless in very special cases, your employer-sponsored 401(k) will not allow for you to invest in other assets besides paper assets. You may, as such, have the opportunity to invest in crypto stocks, but not cryptos as assets. To invest in cryptos, you will need to rollover your 401(k) to a cryptocurrency IRA.
You are a smart person and I am absolutely sure that you will find the right company, that suits your needs the best and that you feel comfortable doing business with. Please ALWAYS make sure to do your research and COMPARE different companies against eachother, especially when it comes to fees. You might be surorised how much it can differ between the top IRA providers out there!
Read our review of the best crypto IRA service providers below:
That will be all for this article on what a crypto IRA account is all about. I hope you gained some insights that will help you get started on the right foot if you do decide to open your crypto IRA today. If you have any questions pertaining to today’s topic, drop them in the comments section, and I will get back to you ASAP.
I wish you well,
Eric, Investor and Team Member at Gold Retired!