Buying Crypto in an IRA vs. 401k

Regardless of the market direction, cryptocurrency remains a hot topic of conversation because it's one of the most transformative digital assets of the 21st century. 

Cryptocurrency market capitalization ranged from under $200 billion to over $3 trillion since 2020. Despite its volatility, Bitcoin, the leading cryptocurrency, was the best-performing asset of the last decade, returning 10 times more than the Nasdaq 100. 

Historically, crypto market crashes are often followed by rapid recovery and an all-time high, so there's every reason to be optimistic despite the current market situation. If you're a core believer in a decentralized future and hope to build long-term wealth before retirement, a crypto IRA or 401(k) offers you an opportunity to realize your goal. 

Individual retirement accounts (IRAs) and 401(k) plans are tax-advantaged retirement savings and investment vehicles available for investors. At year-end 2021, both accounted for about 63% (over $24 trillion) of U.S. retirement market assets. Both represent an emerging market for everyday crypto investors. Benzinga takes a deep dive into crypto IRAs and 401(k), providing insights into how you can leverage both to build wealth before your golden years.

Can You Buy Crypto in an IRA?

Yes, you can buy crypto in an IRA. However, to leverage this opportunity for your crypto investments, you need to understand how it works. IRAs can be controlled by a private fund manager that oversees the investment. In contrast, despite being administered by custodian-like managed accounts, a self-directed (SDIRA) offers investors total control over their assets. Additionally, a SDIRA grants investors access to diverse investment alternatives, including real estate, private equity, precious metals and cryptocurrencies. So, if you're looking to buy crypto in an IRA, a SDIRA is one choice. In fact, the Bitcoin or cryptocurrency IRA is a SDIRA, with several types of cryptocurrencies as its investment choices.

IRAs designed explicitly for cryptocurrencies are appealing to many modern investors, and the first of this type is Bitcoin IRA. Crypto IRAs may be a good fit for investors who like to keep up with the market. The cryptocurrency market is highly volatile and speculative. You need to do your due diligence to mitigate risks.

Can I Use a Traditional or Roth IRA to Invest in Crypto?

Yes, you can use a self-directed traditional or Roth IRA to invest in crypto. The primary difference between traditional and Roth IRAs lies in the timing of their tax advantages. In traditional IRAs, you contribute your gross or pretax income and then pay tax on distributions taken at retirement age. However, in Roth IRAs, you contribute your net or after-tax income and typically do not pay tax on distributions taken at retirement age.

Will I Pay Capital Gains Tax on a Crypto IRA?

No, you will not owe capital gains tax on a crypto IRA. For tax purposes, virtual currencies saved in retirement accounts are not subject to capital gains taxes, which can be a great advantage for crypto enthusiasts.

Can I Invest my 401(k) in Cryptocurrency?

Yes, you can buy cryptocurrency in a 401(k) if your employer’s plan allows for it. For clarity, the 401(k) plan is an employer-sponsored retirement saving and investment account that offers employees a tax break on their monetary contributions. When you sign up for a 401(k), you agree to have some portion of your wages paid into that account. As with an IRA, contributions to a traditional 401(k) are tax-deferred — you pay the tax on distributions taken at retirement age. Meanwhile, contributions to Roth 401(k) are made with after-tax dollars — you likely will pay zero taxes on distributions taken at retirement age.

What to Know About Buying Crypto in an IRA vs. a 401(k) 

IRAs and 401(k)s are two popular retirement account types that provide tax benefits when you invest. The fundamental difference between the two is that a 401(k) is provided by your employer. In contrast, an IRA is one that you open, fund and invest all by yourself. 401(k)s also offer higher annual contribution limits than IRAs, which can be beneficial if you're trying to increase your crypto exposure in a short time.

Some 401(k)s only allow employees to invest in certain assets such as exchange-traded funds (ETFs) and mutual funds. But some employers allow you to self-direct a portion of your 401(k). If that is the case, you may be able to leverage it to allocate funds to cryptocurrencies or alternative investment choices. Some fintech startups also have started offering institutional investors crypto-specific 401(k)s.

How to Buy Crypto in an IRA or a 401(k) 

Here's a breakdown of the procedures to buy crypto in an IRA or a 401(k):

1. Open an IRA or 401(k) account through a platform that allows cryptocurrency investments. If you run a sole proprietorship, you can open a solo 401(k) plan.
2. Fund your account. You can transfer your 401(k) or IRA into Bitcoin IRA.
3. Start trading your favorite cryptocurrencies.

Advantages of Buying Crypto in an IRA or 401(k)

From maximizing tax advantages to diversification, buying crypto in an IRA or 401(k) offers you extensive benefits. Take a look at some of the advantages. 

Maximize Tax Advantages

Because cryptocurrencies are considered property and are subject to capital gains tax as other securities, IRAs and 401(k)s can help you minimize taxation on your profit. For instance, a Roth self-directed IRA or 401(k) lets you realize untaxed capital gains because the funds in the account have already been taxed upfront.

Diversification

Cryptocurrency can provide diversification in your IRA or 401(k) portfolio because it may not correlate with the equity market. The assets could potentially act as your investment funds' safety net during a significant market downturn.

Growth Potential 

The value of Bitcoin and other cryptocurrencies can increase significantly to provide investors with extraordinary returns. The cryptocurrency market ebbs and flows, and price declines may be followed by rapid recovery and then all-time highs. So despite the current crypto winter, there's every reason to still believe in the long-term growth potential of this asset class. 

Disadvantages of Buying Crypto in an IRA or 401(k)

Despite its underlying benefits, buying cryptocurrencies in IRAs or 401(k)s comes with significant risk. Take a look at some of them. 

Volatility 

Even more than traditional investment vehicles, Bitcoin and cryptocurrencies can be volatile. Prices can rise and fall dramatically. In a little under a year after its all-time high, Bitcoin’s price had crumbled below $20,000 according to CoinMarketCap. While investing, do your due diligence and ensure diversification.

Hype and Scams

Meme coins are part of the crypto universe. Some of these coins are traded based on hype. Additionally, you must be careful not to fall prey to crypto scammers. According to the Federal Trade Commission, over $1 billion has been lost to scammers since 2021. Again, do your due diligence and choose trusted crypto providers.

Contribution Limits

There’s an allowable annual contribution limit for IRAs and 401(k)s. For IRAs, the 2022 limit is $6,000 ($7,000 if you’re 50 years or older). For 401(k)s, the 2022 limit is $20,500. These limits can make it hard to increase your cryptocurrency exposure in a short time.

Things to Consider Before Buying Crypto in an IRA or 401(k)

You’ll want to consider some factors before buying cryptocurrency in an IRA or 401(k). Take a look. 

Risk Tolerance

Cryptocurrency is highly speculative and volatile, so you must constructively assess your risk tolerance before buying. An individual's risk tolerance is influenced by investment expertise, amount of capital and other factors. 

Consider Investing in Your 20s

If you're in your late 20s and still building your career, consider buying crypto in an IRA or 401(k). The reason is that the earlier you start, the more time you have to accumulate wealth before retiring. Also, in case of a long-term market crash, you have time to restrategize your approach and modify your portfolio. 

Account and Trading Fees

SDIRA and 401(k) providers charge various fees. These may include set-up, maintenance, transaction and custodial fees. With some platforms, these fees cover personalized customer service and support.

Take Control of your Financial Future with Bitcoin IRA 

The cryptocurrency asset class is an exciting retirement investment vehicle that can potentially multiply your return on investment (ROI) while providing diversification. The first step is finding a retirement account provider that offers crypto-enabled SDIRA or 401(k) plans. That's where the Bitcoin IRA comes into play. 

As the world's first and most-trusted crypto IRA, the platform helps you turn your 401(k), traditional IRA and Roth IRA into a SDIRA and grants you access to over 60 cryptocurrencies. This opportunity enhances diversification and helps turbocharge your retirement portfolio. Additionally, with the Bitcoin IRA mobile app, you can buy, sell and swap cryptocurrencies within your SDIRA at your comfort. That way, you can take charge of your financial future by seamlessly building your retirement wealth.

Frequently Asked Questions