Crypto Roth IRAs May Be Risky Due To Cryptocurrencies’ Price Volatility

A Roth Individual Retirement Account (IRA) has long been known as a tax-efficient way to save for your retirement. Some Roth IRA providers have started to offer cryptocurrency as an eligible asset under these accounts. This opens up opportunities for crypto investors to leverage the tax advantages associated with Roth IRAs. Crypto Roth IRAs are still a relatively new development, with many of their specifics shrouded in mystery. In this article, we take an in-depth look at this new breed of Roth IRAs.

What Is a Roth IRA?

A Roth IRA is a specific variety of retirement account approved by the U.S. Internal Revenue Service (IRS) that comes with significant tax benefits. You may open a Roth IRA account at an eligible provider and contribute your after-tax dollars to it to save for retirement. Your Roth IRA contributions and earnings grow tax-free under the account. All contributions to a Roth IRA must be made in the form of cash.

While your contributions are not tax-deductible, you can withdraw funds from your Roth IRA completely tax-free after the age of 59½ as long as you’ve held the account for at least five years. You may also withdraw your contributions tax-free at any time without meeting the age and account tenure requirements, but in this case, your earnings will be taxed.

Key points for Roth IRAs and taxation

A Roth IRA is a great tax-efficient way to save for your retirement and enjoy tax-free income past the age of 59½. The IRS has put a limit on yearly contributions to a Roth IRA. From 2023, the yearly contribution limit will be $6,500 for those under 50, and $7,500 for those 50 or older. There are also income limits applicable to a Roth IRA. From 2023, you can contribute to your Roth IRA if:

• you are a single taxpayer with a modified adjusted gross income (MAGI) under $153,000, or
• you are married, file your taxes jointly with your spouse, and your joint MAGI is under $228,000.

A Roth IRA is a relatively flexible retirement account — there are no required minimum distributions (RMDs), and the account may be held indefinitely. A wide variety of financial assets and instruments can be held in a Roth IRA, including stocks, bonds, exchange-traded funds (ETFs), mutual funds and more.

Can You Hold Crypto in a Roth IRA?

The IRS considers cryptocurrency a form of property for tax purposes. As a legitimate asset, crypto may be held in a Roth IRA. However, you may not contribute cryptocurrency directly to your Roth IRA. Contributions must always be in the form of cash. At the same time, theoretically, nothing prevents you from purchasing cryptocurrencies within your Roth IRA.

In reality, most of the traditional Roth IRA providers do not offer crypto as an eligible form of investment under the accounts they provide. This is how Roth IRAs usually work — you’re limited to the asset classes that the account provider offers.

However, over the past few years, a new breed of Roth IRA providers specializing in crypto has emerged. These crypto IRA companies offer Bitcoin IRAs and other crypto IRAs. Some of the notable providers in this niche include iTrustCapital, Bitcoin IRA, BitIRA and Equity Trust.

Can You Hold Both Traditional and Crypto Investments in a Roth IRA?

In general, mixing different assets is very common in Roth IRAs. However, the practical difficulty of mixing alternative assets, such as crypto and traditional investments, under one Roth IRA may limit your choices. Although the niche of crypto IRAs is growing, it’s still very small. Only a handful of Bitcoin IRA companies and other crypto IRA providers have established a firm market presence. Furthermore, some of these providers offer Roth IRAs that are limited to cryptocurrency only.

The good news is that you may still find some crypto IRA providers who offer a mix of traditional and crypto assets. For example, iTrustCapital offers cryptocurrencies and two precious metals — gold and silver — as eligible assets for its Roth IRA product. By using the Roth IRA from iTrustCapital, you may gain exposure to crypto as a volatile but high-growth-potential asset, and to precious metals, which have long been regarded as low-risk investments. Additionally, iTrustCapital offers investment in nearly 30 different cryptocurrencies, including all the leading ones, within its Roth IRA product.

The 5 most popular cryptocurrencies on the iTrustCapital platform

However, if you really like the idea of combining crypto and traditional investments under your Roth IRA, the optimal strategy could be opening two — or even more, if you prefer — Roth IRA accounts. One account, held at a crypto IRA provider, will let you invest in cryptocurrencies, while the other account, held at a traditional IRA provider, may be used for exposure to traditional assets like stocks, bonds and mutual funds.

The IRS rules allow you to open multiple Roth IRA accounts, an option that some retirement-focused investors overlook. By opening multiple Roth IRAs, and investing in crypto and other asset classes using separate accounts, you may get around the problem of the limited choice of “mixed-mode” IRAs. Do note, however, that the yearly contribution limit of $6,500 ($7,500 if you’re 50 or older) applies across all your Roth IRAs. Unfortunately, you cannot get around this limit by setting up multiple Roth IRAs.

Pros and Cons of a Roth IRA

Holding a Roth IRA has several pros and cons as compared to standard retirement accounts. Let’s have a closer look at the advantages and disadvantages of this type of retirement account.

Pros of Roth IRAs

Tax-free income past 59½. The most obvious advantage of Roth IRAs is the ability to draw tax-free income after reaching the age of 59 and a half.

Tax-free withdrawals of contributions before 59½. A Roth IRA is a flexible retirement account. You may withdraw your contributions, but not the earnings, tax-free before 59½.

No need for required minimum distributions (RMDs). The majority of standard retirement accounts — including the most commonly used one, the 401(k) — require you to start taking required minimum distributions (RMDs) from the account after reaching a certain age. Roth IRAs have no such requirement.

Portfolio diversification in the case of crypto Roth IRAs. You can diversify your overall retirement portfolio by investing a part of your funds in a crypto Roth IRA. This helps you gain exposure to a high-risk/high-reward asset, namely cryptocurrency. This benefit of crypto Roth IRAs is relevant for many, if not most, retirees and pre-retirement age individuals.

Retirement portfolios made up of only traditional assets (like stocks and bonds) create an overreliance on these asset classes. While it’s prudent to dedicate the bulk of your funds to low-risk assets, the lack of high-growth alternative assets, such as crypto, limits the income potential of these accounts.

Cons of Roth IRAs

Contributions are not tax-deductible. While a Roth IRA is great for deriving tax-free income in retirement, your contributions to this account type are not tax-deductible.

Earnings withdrawn before age 59½, or before the account is 5 years old, are taxable. You’ll be taxed if you withdraw earnings from your Roth IRA before reaching the minimum age and account tenure requirements.

Income limits. Individuals with yearly incomes over $153,000, or $228,000 if filing taxes jointly with a spouse, aren’t eligible for a Roth IRA.

Low yearly contribution ceilings. The yearly contribution limit of $6,500 ($7,500 if over 50 years old) across all your Roth IRAs is relatively low, which decreases the utility of these accounts as a tax-efficient vehicle.

Alternative Ways of Investing in Crypto

Although the crypto Roth IRA market is still young and has a modest number of options, alternative ways of investing in cryptocurrency are available to anyone considering an investment for retirement purposes. These alternatives include crypto funds, staking, and other types of IRAs based on crypto.

Crypto IRAs

The leading crypto Roth IRA providers, such as iTrustCapital, BitIRA and Bitcoin IRA, also offer crypto IRA accounts. These are essentially traditional IRAs that hold crypto in their portfolios. The key difference between these IRAs and Roth IRAs is how your contributions and withdrawals are treated from a taxation perspective.

With Roth IRAs, your contributions aren't tax-deductible, but your future withdrawals in retirement are. In contrast, you receive a tax break from your contributions to traditional IRAs, but you get taxed for your withdrawals after retirement. Experienced investors may be interested in self-directed IRAs, which can hold diverse alternative assets and are available as either traditional or Roth IRA.

Traditional investment providers are also likely to expand soon into the niche of crypto retirement accounts — and become formidable competitors to the IRA providers specializing in crypto. For instance, Fidelity Investments, the largest retirement investment provider in the U.S., announced in April 2022 that it plans to start providing a crypto option for its 401(k) accounts. It’s likely just a matter of time before Fidelity and its key competitors expand the crypto option to IRAs and Roth IRAs.

Crypto ETFs

Planning for your gray years doesn’t have to be limited to retirement accounts only. Other investment account types are also a great option for a good income stream later in life. One of these account types is an exchange-traded fund (ETF), specifically a crypto ETF.

Crypto ETFs allow you to mix your investments in crypto and traditional asset classes in a product that may be traded on the stock exchange. These ETFs are a great option for a hands-off approach to investment management.

Crypto Funds

Other fund types — e.g., mutual funds, index funds and trusts — are suitable for a passive, hands-off approach to investment. Many of these funds offer a mix of crypto and traditional assets, while some are based solely on cryptocurrency products. For instance, the world’s largest crypto fund vehicle, Grayscale Bitcoin Trust (GBTC), allows you to own Bitcoin as an index-based product, without having to purchase it directly.

Crypto Staking

Another option for low-risk investment in crypto is staking, which was initially associated with locking your funds on a blockchain network to help process transactions. Over time, staking has also come to refer to a variety of crypto investment products on centralized exchanges (CEXs) and other crypto trading platforms.

For example, Bybit Savings lets you invest in crypto to derive low-risk, principal-guaranteed, high-yield income.

Final Thoughts

Granted, crypto Roth IRAs may be risky, due to cryptocurrencies’ price volatility. However, they do come with significant tax benefits, and they allow exposure to crypto, an asset class with high growth potential. For now, the landscape of crypto Roth IRAs is relatively limited, with several specialized providers on the market. However, traditional retirement investment providers are likely to join the race in the not-so-distant future. When they do, your product options will expand significantly.

In the meantime, don’t forget that retirement planning isn’t limited to Roth IRAs or other types of retirement accounts. Alternative products, like Bybit Savings and other crypto fund types, are also a solid option for low-risk investment for your best years ahead.