If you are considering using your retirement funds to open a Crypto IRA then you have a number of options. Factors include whether or not you are self-employed, when you want to pay taxes, and your age. Below are the different types of Crypto IRA accounts you can start and the advantages of each of them.
Types of Crypto IRA Accounts
Crypto Traditional IRA
A Traditional IRA is a pretax individual retirement account that can be established by any individual with earned income. However, if one has access to an employer plan at work, he or she may be limited on the amount of deductions that can be taken in association with the IRA contribution.
For 2022, the maximum IRA contribution limit is $6,000, or $7,000 if at least age 50. Distributions are subject to tax and a 10% early distribution penalty would be assessed if taken prior to age 59½. Furthermore, a minimum distribution is required once you reach the age of 72.
Crypto Roth IRA
A Roth IRA is an after-tax individual retirement account. In general, only individuals under a certain income threshold (for example, $214,000 married filing jointly in 2022) can make Roth IRA contributions. However, there is a backdoor mechanism for circumventing this rule. The Backdoor Roth IRA allows any individual, irrespective of income, to make after-tax contributions to a traditional IRA and convert those contributions to Roth tax-free. The same contribution limits apply.
Distributions are tax-free so long as the Roth IRA holder is over the age of 59½ and any Roth IRA has been opened at least five years. Unlike a traditional plan, a Roth IRA has no mandatory distributions. If you don’t need the money in the plan, you can pass the account, in full, to your beneficiaries. A Roth IRA is generally more popular with younger retirement account holders since there is a longer tax-free growth opportunity.
On the other hand, business owners wishing to generate a current tax deduction will generally consider the Traditional IRA. Nevertheless, a small business owner may be better off with a Solo 401(k) plan or SEP IRA which has higher contribution limits than a standard IRA.
Crypto SEP IRA
A SEP IRA is an employer-sponsored retirement plan. In order to establish a SEP IRA, one must have a business. Therefore, if one works for an employer and does not have any source of income from self-employment or business sources, then establishing a SEP IRA is not an option. However, if one has any other sources of earned income, the SEP IRA would allow one to contribute up to $61,000 in 2022. A SEP IRA is essentially a profit-sharing plan that allows the individual to contribute 20% (25% in the case of a W-2 employee) of their net Schedule C business income or W-2, respectively.
Crypto Solo 401(k) Plan
Like a SEP IRA, a Solo 401(k) plan is a retirement plan that was created especially for the sole proprietorship or small business owner with no full-time employees. Again, one needs self-employment income to open a Solo 401(k). Individuals who have a “regular” job, but also have a side gig, can establish an account. This is especially important if your main job doesn’t offer retirement benefits.
Under the 2022 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $20,500. That amount can be made in pretax funds or Roth. On the profit-sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) contribution up to a combined maximum, including the employee deferral, of $61,000. If you are at least age 50, you may contribute an additional $6,500 increasing the limits to $27,000 and $67,500.
Now that you have a clear understanding of the types of retirement accounts that can be used in a tax-efficient manner to start a Crypto IRA, let’s examine the different Crypto IRA investment structures.
Crypto IRA Investment Structures
Invest Directly on an Exchange
We are very proud to have the industry’s best solution for buying Bitcoin and other major cryptocurrencies on an exchange in the name of an IRA or 401(k). IRA Financial is the first self-directed retirement company to allow their clients to invest in cryptocurrencies, such as Bitcoin, directly via a cryptocurrency exchange without the need for a third-party broker or the use of an LLC.
Investors can use their retirement funds to buy all the major cryptocurrencies directly through Gemini, one of the leading US cryptocurrencies exchange. IRA Financial’s solution is the first to allow retirement holders to hold cryptocurrencies in an IRA directly on an exchange.
The account is opened in the name of the IRA, but controlled by you as the authorized representative on the account. The IRA holder has 100% control over the account and can trade anytime.
How Does the IRAFI-Gemini Crypto Solution Work?
- Step 1: Open an IRA or Solo 401(k) account at IRA Financial Trust.
- Step 2: Move IRA or 401(k) funds to new IRA Financial account tax free.
- Step 3: IRA Financial Trust creates your exchange account on Gemini, who emails you onboard instructions. An IRA or 401(k) account is opened at Gemini
- Step 4: Funds are moved From IRA Financial to Gemini
- Step 5: Begin buying and selling cryptos 24/7 on your own without the need for a broker or the use of an LLC. Hold the cryptos on the Gemini Exchange.
- Best and cheapest way to buy cryptos in a retirement plan
- Ability to control fees – Low Gemini trading fees
- Own Cryptos in the name of your IRA – no IRS headaches
- Flat fee
- No annual asset value or transaction fees
- No wire or check fees
- Trade 24/7 on your own directly through Gemini
- No broker fees
- No need for an LLC
- Quick set-up
- More personal involvement
Use of an LLC
Over the last several years, the Direct Exchange option have overtaken the LLC as the most popular ways to start a cryptos IRA. Although, for investors looking to use a smaller U.S. based exchange or a foreign cryptocurrency exchange, using an LLC wholly owned by an IRA has become a popular way to purchase cryptos in an IRA. Below is a breakdown of how it works:
- Individual opens account at Self-Directed IRA custodian
- IRA would own 100% of the LLC
- LLC would open an account with a crypto exchange
- LLC’s bank account would be linked to the crypto exchange account
- IRA owner would have total control over the account
- Ability to control fees – can select exchange of your choice
- Trade 24/7
- Low annual fees
- Can hold cryptos on the exchange or in cold wallet (offline)
- More personal involvement
- Long on-boarding time delays
- Upfront and annual costs for LLC
A Third-Party Broker Company
An unregulated third-party broker company will work with a Self-Directed IRA custodian to help clients buy and sell cryptocurrencies. In this model, the individual opens an IRA and then directs the custodian to send the funds to a third-party broker/company who will purchase the cryptos on an exchange for the client.
By analogy, this model looks a lot like how individuals bought stocks with a stockbroker in the 1980s. Third-party broker companies generally charge high commission fees to purchase cryptocurrencies, much higher than you would pay by using a cryptocurrency exchange directly. I personally think this is the weakest model to start a crypto IRA.
- Very limited personal involvement
- Costs – transactions fees on purchase and sale
- Annual crypto asset valuation fees are common
- Lose complete control of private key
- Broker is not regulated or licenses
- Cannot hold cryptos in cold wallet (offline)
A retirement investor now has many options to start a Crypto IRA. Whether one is starting one with pretax funds, Roth, or via a SEP or Solo 401(k) plan, using your retirement funds is simple and easy.
Funding the Crypto IRA can come from a variety of sources, such as contributions, an IRA transfer, or retirement plan rollover. However, selecting the right Crypto IRA investment may end up being the most important decision, as the fees and delays involved in choosing the wrong solution could end up being very costly.