Crypto IRAs for the Best Tax Advantages
Method 1: Self-Directed IRAs (with a Custodian)
Method 2: Do-It-Yourself Self-Directed IRA (Self-Custody)
If you are thinking about investing your precious retirement money in Crypto IRAs, you will want to understand how they work and why. First, and foremost, all IRAs in the US are required by law to have a licensed financial institution acting as custodian over the IRA’s assets. (A custodian is highly regulated bank, credit union, or non-depository bank permitted to custody assets in an IRA.) This law creates a problem for an IRA account holder who wants to invest in an alternate asset such as real estate or bitcoin, as financial institutions traditionally did not want to be custodians for these kinds of assets.
So self-directed IRAs, or SDIRAs, were born in the 1970s to handle this problem. In most self-directed IRAs, the account is directly managed by the account holder making it “self-directed,” but the account is administered by a custodian (or trustee, but we won’t go into that here, see here if you want to explore trustee-held IRAs). Self-directed IRAs are also referred to as “checkbook IRAs.”
Who holds the “keys”?
There are (so far) two main ways to hold bitcoin or other cryptocurrencies in a tax-advantaged account. The difference between the two methods is found mostly in who holds the Crypto Keys. A key is a group of random characters arranged in a particular order. A key is used to alter data to scramble it, and to make it so that only those who have the key can decode the data.
Let’s start with the most popular and by far the most common way: investing in a self-directed IRA account where the keys are held by a third-party financial institution.
Method 1: Self-Directed IRAs (with a Custodian)
A self-directed IRA (or “checkbook IRA”) is a tax-advantaged vehicle for investing retirement funds in cryptocurrency where the funds are held by a financial institution. In the case of crypto, the main distinction is that your Crypto Keys are stored by the financial institution and not by you. For the most part, checkbook IRAs are not difficult to set up, but they are not without their paperwork hassles.
Below is a list of companies offering checkbook IRAs with crypto. I will be checking and reporting back on these companies–and any new ones that I come across–keeping tabs on each company for changes in their business directions or anything else that might affect you as a crypto investor. More and more companies are offering Crypto IRAs using this method so be sure to check this page often.
- Alto IRA
- Bit IRA
- Bitcoin IRA
- Blockmint IRA
- Broad Financial
- Coin IRA
- Dorado IRA
- Entrust Group
- Equity Trust
- IRA Financial
- iTrust Capital
- Regal Assets
- Vivo Capital
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Method 2: Do-It-Yourself Self-Directed IRAs (Self-Custody)
The second method is for you to purchase bitcoin with tax-advantaged dollars while still holding your own keys–without a financial institution serving as the middle man. This DIY method is a very new form of Crypto IRA. If control is your thing, this might be for you. Unchained Capital is an example of this kind of firm (self-custody). There is still a financial institution involved; there has to be by law. But the way this company has configured their Crypto IRA is kind of brilliant but not without issues.
Method 3: Stay Tuned
More options to come, surely!
Step 1: Is Crypto Right for Me?
Properly assessing your personal risk tolerance is complicated, at best. You need to have a real “gut check.” Traditional risk tolerance calculations measure risk in terms of Investor Profiles and stocks, bond, and idealized cash portfolio percentages. They help you figure out how to “cut up the pie” in the proper allocations for your investing mindset, financial situation, and goals.
Risk is usually measured as you as an investor and applies to all your accounts, (retirement funds and regular, non-retirement investment accounts). Keeping a sense of your total picture can be very valuable. Cryptocurrency being a unique asset class on its own deserves a new kind of risk analysis. See here on several different ways to assess your response to risk.
Step 2. Is a Crypto IRA Right for Me?
That depends on you, on your risk tolerance, personal investing style, and a host of many other factors. First, you need to decide if Cryptocurrency belongs in your portfolio. Then, and only then, you need to ask the question: Is it the right investment for any part of my retirement fund? Retirement funds–being tax-advantaged–are unique vehicles for investing in crypto.
If IRAs are like family pets…
The Individual Retirement Account, or IRA, is a like a family pet by now. Familiar, lovable, and a great addition to the family. A traditional IRA was established in the United States by the Employee Retirement Income Security Act of 1974 (ERISA). These special accounts will turn 48 years old in 2022. The SEP-IRA came into being via The Revenue of 1978 Act which implemented the Simplified Employee Pension IRA (SEP-IRA). It provided for a contributory retirement account, aimed at small businesses.
Next, The Economic Recovery Tax Act (ERTA) of 1981 allowed for the IRA to become universally available as a savings incentive to all workers under age 70 1/2. The Roth IRA came last, in 1997, under the Taxpayer Relief Act of 1997.
And self-directed “checkbook” IRAs are their own animals…
Investing in cryptocurrency through a third-party institution is relatively new and different, but clearly doable. More and more companies are getting on the bandwagon.
Then “unchained” IRAs are like beasts
An unchained IRA (like from Unchained Capital) is one of the more innovative ways to invest retirement funds in crypto. It’s new and deserves consideration, as long as you understand the particular issues involved in investing using this method.
The 25 Most Important Cryptocurrency Terms To Know
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Disclaimer: All the information provided above and on this site is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.
Photo by Maria Ziegler on Unsplash