Updated on March 23, 2023
It’s almost impossible to not be curious about cryptocurrency – even if you’re the most ardent index fund investor. As the crypto ecosystem has evolved over the past decade, we’re now seeing an increase in investor interest in crypto as a retirement investing option and also, retirement accounts that offer crypto as an investment option.
Since it’s unlikely that your 401(k) provider offers digital assets, your best bet for crypto investing is through an IRA, or Individual Retirement Arrangement. Recall that IRAs are opened outside of your employment relationship, and you’ll need to do the work when it comes to identifying your optimal IRA provider and opening the account.
Here, we’ll first walk through the basics of how a crypto IRA works, and then outline the process of rolling over your old employer 401(k) to a crypto IRA.
A crypto IRA is not that different from a standard IRA when it comes to tax laws and rules, but it is substantially different in terms of the investment types it allows.
Inside a crypto IRA, you’re able to buy and sell a variety of cryptocurrencies, like Bitcoin, Ethereum, and Litecoin – and some providers will also allow access to more exotic alternative coins (“alt-coins”). Here it is important to note that crypto investments are significantly more volatile and high-risk, and you should be thoughtful about the amount of retirement money you invest in crypto.
One of the major issues with holding crypto in a regular, taxable account (or wallet) – either by directly holding the underlying currency or by holding it indirectly through an ETF – is that you’ll pay tax on any realized gains. In other words, if you buy Bitcoin at a certain price and it rises in value, you’ll be liable for capital gains taxes on the rise in value when you sell it. This is the same experience you’ll have when buying and selling stocks.
In a crypto IRA, however, you won’t be taxed on any gains you incur while trading inside the account. Regardless of the type of crypto IRA you have, you won’t have to worry about the burden of paying capital gains taxes immediately on your gains. However depending on whether you have a Traditional crypto IRA or a Roth crypto IRA, there will be different tax implications when you withdraw the money.
Another important feature of crypto IRAs is that you may have the option to “stake” your crypto for either interest or rewards, and avoid paying taxes at the time you earn them. In many ways, staking crypto is like earning interest at a bank, or collecting interest on any loan you’ve granted
In the context of a crypto IRA, you can earn different staking rewards without incurring any tax at the time you earn them. But, much like a traditional or Roth IRA, you’ll either need to pay ordinary income tax on money you withdraw (like a traditional IRA), or you’ll need to have paid tax already on the money going in (like a Roth IRA).
Before you start, there’s some key pre-work that will make your life quite a bit easier once you actually begin moving money. This includes:
If all this seems too much, Capitalize is a free service that allows you to seamlessly roll over your 401(k) into any IRA of your choice – including a crypto IRA. From filling out forms to staying on hold with your old 401k provider, we do all the work on your behalf.