Since one in five Americans has invested in, traded, or used cryptocurrency, it’s no wonder that many investors are exploring the question, “Can you put crypto in a Roth IRA?” While there are obvious tax benefits to investing with a Roth IRA, we’ll explore some of the advantages of putting crypto in a Roth IRA, such as avoiding complicated tax reporting and creating a truly diversified portfolio.
- You can put crypto in a Roth IRA through a self-directed IRA.
- Investing in crypto through a Roth IRA allows you to avoid taxes and complicated tax reporting on crypto sales and trades.
- Holding crypto in a Roth IRA can help diversify your retirement portfolio.
- Crypto is a volatile asset class, so, like with any investment, it’s important to do your research.
Self-Directed Roth IRAs for Crypto Investments
Most custodians do not allow for the purchase of crypto in an IRA due to strenuous security and reporting requirements. A self-directed IRA, however, gives users greater control over IRA funds and investment selections. Specifically, self-directed IRAs enable users to invest in alternative assets like startups, real estate, farmland, art, investor-grade wine, and yes, even cryptocurrencies with all the tax advantages associated with an IRA.
Roth IRAs are a great choice for people who:
- Do not want to pay taxes on their investments
- Expect the market or particular asset classes to appreciate
- Believe income taxes will be higher when they take distributions
- Predict being in a higher tax bracket when they take distributions
- Do not want to have to take distributions at age 72
Roth IRA Rules, Income Limits, and Contribution Limits
Congress originally created the Roth IRA as part of the Taxpayer Relief Act of 1997 to encourage more people to use IRAs to invest for the future. Roth IRAs offered a potentially greater perk than traditional IRAs: Completely tax-free gains and distributions.
Congress imposed income limits on who could contribute to a Roth IRA as a way to prevent the ultra-wealthy from using a Roth IRA to shield income from taxes. Still, a new study revealed the astounding amount of money kept in tax-free mega Roth IRA accounts: More than $15 billion held by just 156 Americans, which is a testament to just how profitable Roth IRAs can be.
Self-directed Roth IRAs fall under the same IRS guidelines as more conventional Roth IRAs. According to the 2022 IRS guidelines, you can’t make a Roth IRA contribution if your modified adjusted gross income (MAGI) is $144,000 or more (single, head of household, or married filing separately) OR if your MAGI is $214,000 or more (married filing jointly, qualifying widow, or qualifying widower).
For investors who have exceeded the IRS income limit, a backdoor Roth IRA, or Roth conversion, is an option. A backdoor Roth IRA involves transferring funds from a tax-deferred retirement account like a 401(k) or traditional IRA to a tax-free Roth IRA by paying a one-time tax on the amount to be converted.
Finally, the annual contribution limit for traditional and Roth IRAs is $6,000 ($7,000 for investors age 50 or older).
There are three of the main benefits of putting crypto in a Roth IRA:
1. A Roth IRA Allows Investors to Avoid Paying Taxes on Crypto Sales and Trades
The benefits of purchasing crypto using a Roth IRA are similar to purchasing any other asset using a Roth IRA. Namely, distributions are entirely tax-free upon reaching 59 ½ years of age (so long as your Roth account has been open for at least five years).
As an example, the table below demonstrates just how much an investor can save on taxes by purchasing crypto in a Roth crypto IRA as opposed to a taxable account.
Tax Savings Between a Roth Crypto IRA vs. Taxable Account
|Centralized Exchange||Roth Alto CryptoIRA®|
|Initial Crypto Purchase Amount||$1,000||$1,000|
|Initial Purchase (Market Buy) After Trade Fee (The Cost Basis)||$985||$990|
(Assuming a Hypothetical 10X Gain Over 10 Years)
|Sale Amount After Trade Fee||$9,702.25||$9,801|
(Sale Price – Initial Purchase Amount)
(Assuming 15% Long-Term Capital Gains)
|Total Amount You Keep2
(Sale Amount After Trade Fee – Tax Responsibility)
|1Based on a leading crypto exchange’s base-level account.
2Gains in a Roth IRA account may be withdrawn at retirement tax-free. Note that gains in a traditional IRA are typically taxed at ordinary income tax rates at withdrawal.
2. Reporting IRAs on Your Taxes Is Quick and Easy Compared to Reporting Crypto Gains
Since 2014, cryptocurrency has been classified as a property like any other asset. Because of its classification, investors do not have to pay taxes on crypto until they sell or trade it. However, when not kept in an IRA, investors must report crypto earnings on taxes each year, including:
- Every sale/trade
- The original price paid (cost basis)
- The sale price
- The date of sale
The process can be tedious and overwhelming. Investors can bypass this by holding crypto in an IRA since IRAs are much easier to report on than crypto gains.
Of course, there are downsides to holding crypto in a Roth IRA, one of which being that investors can’t withdraw earnings before age 59 ½ without having to pay a significant tax penalty. Determining your long-term goals and the liquidity of your investments before deciding to hold cryptocurrency in a Roth IRA is vital.
3. Holding Crypto in a Roth IRA Can Help Diversify Your Portfolio
Cryptocurrency is an undoubtedly volatile asset class; however, it is just one of the ways you can diversify your portfolio. Pardon our broken record, but when it comes to investing, portfolio diversification is key.
Portfolio diversification is important because the number of publicly traded companies in the U.S. has declined by 50% since its peak in the mid-1990s. This means there are fewer and fewer public market opportunities to invest in up-and-comers with the potential for outsized returns.
With so much volatility in the markets and mounting recession fears, diversification helps protect investor assets to ensure that one asset class’ decline will not tank your overall portfolio. Cultivating a portfolio that includes a variety of asset classes, like crypto, can help reduce the potential for significant loss.
How You Can Put Crypto in a Roth IRA
If you’re interested in investing in cryptocurrency using tax-advantaged retirement funds, an Alto CryptoIRA® may be right for you. With real-time 24/7 trading, some of the lowest fees in the industry, and 175+ coins and tokens available through integration with Coinbase, you can make the most of your crypto investments using a tax-free Roth crypto IRA.
Get started by creating an account today.