What Is A Crypto IRA?

Planning for retirement can be an enjoyable experience when you’re picturing your time on the beach, the golf course, or wherever you plan to spend your golden years. However, the quality of life you lead once you stop working will depend on just how much you were able to save in your retirement fund.

One of the more popular investment vehicles people use to save for retirement is the Individual Retirement Account or IRA. While traditional IRAs have been around for decades, crypto IRAs are a newer vehicle that is becoming popular among investors looking for more diversification and a better return.

What Exactly is an IRA?

Before we get into the ins and outs of cryptocurrency IRAs, let’s first define a traditional IRA. An IRA is a personal savings plan that offers certain tax benefits.

The two most common types of IRAs are the traditional IRA and Roth IRA. With a traditional IRA, you make contributions with pretax dollars and pay taxes on the money when you withdraw it during retirement.

A Roth IRA is funded with after-tax dollars, so you don’t get a tax deduction on your contributions. But the money grows tax-free, and you won’t owe any taxes when you withdraw it in retirement.

With both traditional and Roth IRAs, contribution and income limits determine whether you’re eligible to open an account. These vary depending on your filing status and age.

Other types of IRAs, such as SEP IRAs and SIMPLE IRAs, are designed for small business owners and self-employed individuals. But for the purposes of this guide, we’ll be focusing on traditional IRAs and Roth IRAs. Now that we’ve answered the question “what is an IRA,” let’s move on to crypto IRAs.

What is a Crypto IRA?

A crypto IRA is a retirement account that is just like a traditional IRA, except it allows you to hold cryptocurrency instead of more traditional investments, like stocks or bonds.

Like a traditional or Roth IRA, crypto IRAs have contribution limits. For 2022, the contribution limit is $6000 per year (or $ 7000 if you’re 50 or older).

With a crypto IRA, you can choose to invest in any type of cryptocurrency, including Bitcoin, Ethereum, Litecoin, and Ripple. In addition to these 4, My Digital Money also supports an additional 14 coins that you can learn about here.

The main benefit of a crypto IRA is that it allows you to diversify your retirement portfolio with a new asset class that has the potential to grow at a higher rate than more traditional investments.

For example, let’s say you have a traditional IRA invested entirely in stocks. If the stock market crashes, your retirement savings will take a hit along with it.

However, if you have a crypto IRA invested in Bitcoin, Ethereum, and Litecoin, and the stock market crashes, your investments won’t necessarily go down; in fact, your crypto investments might go up in value.

This is because cryptocurrency prices are often driven by demand for coins, news, events, and investor sentiment rather than the stock market’s overall performance. So a crypto IRA is worth considering if you want to diversify your retirement savings and protect yourself from a potential stock market crash.

Are There Any Risks With A Crypto-Backed IRA?

Of course, there are always risks associated with investing in any asset, including traditional IRAs and cryptocurrency. The price of Bitcoin, Ethereum, Litecoin, and Ripple can go up or down at any time. And if the price of your chosen cryptocurrency goes down, you could lose money.

However, there are also ways to mitigate these risks. For example, you can spread your investment across several currencies instead of investing in just one. This way, if something occurs where one particular coin goes down in a major way, you’ll still have the rest of your investments to offset the loss.

Another way to offset potential losses is to utilize dollar-cost averaging when investing in crypto. This essentially means investing more money into your chosen cryptocurrency as the price goes down to bring down your overall average cost.

For example, let’s say the price of Bitcoin is $40,000 when you make your first investment and invest $40,000. This means your average cost per Bitcoin is $40,000.

Now, if Bitcoin drops to $30,000, you should see it as an opportunity to invest instead of considering this a loss. If you purchase another Bitcoin at $30,000, your average cost would be reduced from $40,000 to $35,000.

By utilizing dollar cost averaging on the way down, you will improve your overall returns as the currencies begin to come back up.

What are the Pros of a Crypto IRA?

While Cryptocurrencies like Bitcoin and Ethereum may experience fluctuations, they’ve established their place in the financial world as serious investment vehicles. When considering a crypto IRA vs. a traditional IRA, there are several pros to consider:

Hedging Against A Stock Market Crash

As mentioned earlier, crypto prices are not necessarily tied to the stock market’s performance or fiat currencies.  By investing in a crypto IRA, you’re giving yourself a hedge against the inevitable ups and downs of the stock market.

Potential For Larger Returns

Anyone who is even remotely familiar with cryptocurrency is familiar with the concept of a “crypto millionaire.”  While countless people have made millions in the stock market, there are countless stories of people turning small $100 investments into literal fortunes with cryptocurrency.

While a retirement fund is usually not intended for “riskier” stock investments, the massive growth in a specific coin does not necessarily represent a risk as much as demand or scarcity. By investing in various cryptocurrencies, you’re expanding the potential for exponential growth in your retirement fund.

What are the Cons of a Crypto IRA?

The most significant risk you face when investing in a crypto IRA is the same risk you’d face when investing in a traditional IRA – you might lose all of your money. While a traditional IRA is typically invested in safe vehicles like bonds, money markets, and mutual funds, no investment is 100% guaranteed.

Cryptocurrency prices will be a bit more volatile than your typical mutual fund. The price of Bitcoin has seen massive swings in the past several years, jumping from $30,000 to $50,000 and then back down again.  However, despite the periodic dips in crypto prices, when you’re invested for the long-term, the value tends to continue to grow over time.

How to Invest in a Crypto IRA

Starting a crypto-backed IRA with My Digital Money is easy. You’ll first want to open an account (you can click here to do that). Once you’ve opened your account, you’ll have a few options to fund your crypto retirement fund.

Transfer an Existing IRA

If you have an existing IRA, you can transfer those funds to your new My Digital Money Crypto IRA without creating a taxable event or penalty.  If you already have a Bitcoin/Crypto IRA, you can check if your existing provider will do an In-Kind Transfer to avoid having to liquidate your assets.

When you open your Self Directed IRA with MDM, you will complete an online form that includes the details of your existing IRA account and the funds you wish to transfer. We will add that to the wire instructions before forwarding it to your current custodian. The transfer process from start to finish can take three days to 3 weeks. It highly depends on your existing IRA account holder.

Rollover an Employer Plan

If you have a 401k, 403b, TSP, 457, or another employer-funded retirement plan, this may be rolled over into an IRA.

Once you’ve opened your self-directed IRA with My Digital Money, we will give you instructions on contacting your account’s plan administrator and instruct them to roll over your funds to your new IRA.  The rollover process can take up to 4 weeks, depending on your current plan, and they may send you a check or deposit your funds in your bank account.

Contribute New Funds

If you don’t have an existing retirement plan or want to start a new IRA with My Digital Money, you can also contribute new funds. Based on the IRS’ rules, the contribution limits are currently:

• 50 years old or below- $6,000 ($6,500 as of 2023)
• Over 50 years old – $7,000

Note that to make the max contribution, you’ll need to meet some income requirements depending on your marital status. If you are filing single, you must have a modified adjusted gross income (MAGI) under $124,000. If you are married and filing jointly, your MAGI must be less than $196,000.

Please see the IRS website for the most up to date contribution limits and rules.

Get Started With a Crypto IRA Platform

My Digital Money is the leading crypto IRA platform that allows you to securely trade cryptocurrency in a tax-advantaged IRA or in cash. If you’re ready to get started with a crypto IRA, My Digital Money is here to help. Our team is standing by to assist with anything you need, from opening your account, funding your IRA, or working with your current IRA custodian to roll over your plan.

Don’t hesitate to reach out by contacting us here, or if you’re ready to get started, you can click here to open your account now!