Should You Use a Roth IRA To Invest in Cryptocurrencies?

You can invest in crypto with a Roth IRA, but it isn’t right for everyone

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A Roth IRA is an investment account where you can put money away for retirement with a tax advantage. With a Roth IRA, contributions aren’t tax-deductible, but qualified withdrawals in the future are tax-free. Some specialized Roth IRA accounts allow you to buy cryptocurrency directly, but it’s not possible with most major brokerage firms.

If you are thinking about putting crypto in your retirement accounts, it’s crucial to weigh the pros and cons and consider your investment strategy. Here’s a look at investing in cryptocurrency with a Roth IRA, the pros and cons of a cryptocurrency Roth IRA, and some of the risks involved with cryptocurrency in a retirement account.

How To Invest in Cryptocurrency With a Roth IRA

You can invest in cryptocurrency using a Roth IRA is not as straightforward as buying stocks or bonds.

Though not specific to cryptocurrencies, the IRS places some investment restrictions on IRAs. Most brokerages do not allow you to directly invest in cryptocurrencies using a Roth IRA.

If you’re looking to invest in a cryptocurrency Roth IRA, you will have two main types of self-directed Roth accounts to choose from. Those are a specialized cryptocurrency Roth IRA account or a self-directed checkbook Roth IRA where you can invest in almost anything, including digital assets.

The steps to establish and fund the account are similar. How you buy cryptocurrency with your Roth IRA is different with each type of account. A cryptocurrency IRA is likely cheaper and easier in the long run but gives you fewer investment options than a checkbook IRA. These steps are for a crypto-specific IRA.

  1. Research cryptocurrency Roth IRA accounts: Start by picking the best cryptocurrency Roth IRA for your needs and goals. Focus on costs and fees and available cryptocurrencies when choosing your account.
  2. Open your crypto Roth IRA: Once you’ve picked your preferred account, go through the steps to open the account, generally online or using the provider’s mobile app. Plan on submitting personal details, including your contact information and Social Security number.
  3. Connect your bank account and add funds: Follow the instructions to connect your bank account, often through an instant process. Once connected, you can add funds. Even if your brokerage doesn’t enforce limits, keep in mind that the IRS enforces annual contribution limits on Roth IRA accounts. Those with a high income may not be eligible to make Roth IRA contributions.
  4. Research and choose your cryptocurrency investments: Now, it’s time to go through the cryptocurrencies supported by your account and pick your assets. That can include Bitcoin, Ether, Dogecoin, or other supported currencies.
  5. Enter a buy order: Once you’ve finished researching and understand the risks of what you’re looking to own, it’s time to enter a buy order. Double-check the details, as cryptocurrency transactions can’t be reversed once entered in most cases. Once you’re sure everything is correct, click the button to buy your crypto.

Cryptocurrency Roth IRA Alternatives

If you want to invest in cryptocurrency with an existing Roth IRA from a major brokerage, you have a few options to move forward.

  • Cryptocurrency investment funds: Investment companies offer mutual funds and ETFs focused on cryptocurrencies. An example is the Grayscale Bitcoin Trust. However, a $50,000 minimum investment and 2% annual fees here make this type of investment less attractive than directly investing in Bitcoin with a crypto-specific account. The ProShares BITO Bitcoin Strategy ETF offers exposure to Bitcoin through futures, which differs from the performance of buying Bitcoin directly. Investing in futures may add another layer of risk. Another way would be to consider blockchain ETFs that invest in companies dealing with the underlying technology for cryptocurrencies.
  • Cryptocurrency-related stocks: You could also consider gaining exposure to cryptocurrencies in your Roth IRAs by purchasing shares in companies that work directly or indirectly with cryptocurrencies or even own cryptocurrencies. That includes Riot Blockchain, PayPal, and Tesla, among others.

Pros and Cons of Investing in Cryptocurrency With Roth IRAs

Pros
  • Tax advantage

  • Convenience

  • Secure crypto custodian

Cons
  • Risk and volatility

  • Somewhat complex setup

  • Not all can invest in a Roth IRA

Pros Explained

  • Tax advantage: Roth IRA accounts enable your investments to grow with no capital gains taxes for qualified withdrawals.
  • Convenience: You can buy cryptocurrency through a trusted company without worrying about buying directly with a cryptocurrency wallet.
  • Secure crypto custodian: When you run your own cryptocurrency wallet, there are some risks of losing access to your assets. With a custodian, technology and security are taken care of for you. However, you should maintain a strong, unique password for every site and use two-factor authentication to keep cybercriminals out of your holdings.

Cons Explained

  • Risk and volatility: Cryptocurrency is a relatively new and highly risky asset. It’s also quite volatile and may not suit your retirement account.
  • Somewhat complex setup: Starting a new account is quick and easy if you’re comfortable with computers but can be more challenging for those unfamiliar with managing their investments online.
  • Not all can invest in a Roth IRA: If you earn too much or contribute to another IRA, you may not be able to make additional contributions during the same year. If you make excess contributions, you may have to pay an annual 6% penalty.

Should You Use Your Roth IRA To Invest in Cryptocurrencies?

When it comes to investing, there’s no one strategy that works for everyone. Consider your financial situation, your goals, and your risk tolerance while evaluating investment decisions. 

When it comes to cryptocurrencies in your Roth IRA, its no different. Such an investment doesn’t make sense for everyone and no one strategy works well for everyone who chooses to invest.

Why Avoid Cryptocurrencies in Your Roth IRA

Due to the volatility and risk of digital currencies, there’s a good chance of losses. While cryptocurrencies could see enormous gains, they could also go to zero or fall victim to government regulations.

Your retirement accounts are some of your most important investments, and you will likely rely on them during your golden years. By investing in risky assets, you may lose out on the ability to follow your retirement plan.

When Cryptocurrency Makes Sense in a Roth IRA

If you strongly believe in the future of cryptocurrency and fully understand the risks of losses, you may be in a position to invest in crypto in your retirement account. You can consider investing a small amount in a cryptocurrency IRA and keep the rest with more traditional investments. It’s up to you to figure out what makes the most sense or work with a trusted investment professional to help you through the process.

Frequently Asked Questions (FAQs)

How is cryptocurrency taxed?

Cryptocurrency transactions follow different tax rules in an IRA compared to a taxable cryptocurrency account. In a Roth IRA, investment gains are not taxable if you follow the rules and only make qualified withdrawals. Outside of retirement accounts, cryptocurrency gains are taxed similar to property.

How does cryptocurrency gain value?

Open marketplaces and cryptocurrency exchange users determine the prices and value of cryptocurrencies like Bitcoin. If demand for cryptocurrency increases and buyers are willing to pay more, the price and value increase. If more people are looking to sell, prices will likely decrease. This follows similar market principles to other asset markets.

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Article Sources

  1. Internal Revenue Service. “Roth IRAs.”

  2. Internal Revenue Service. “Retirement Topics-Prohibited Transactions.

  3. Grayscale. “Grayscale Bitcoin Trust.”

  4. ProShares. “BITO Bitcoin Strategy ETF."

  5. Internal Revenue Service. “Retirement Topics-IRA Contribution Limits.”

  6. Internal Revenue Service. “Frequently Asked Questions on Virtual Currency Transactions.”