Investing in crypto through a Roth IRA is possible, but usually not through a regular Roth IRA that you find at major banks and institutions. You’ll have to find a special type of Roth IRA known as a self-directed crypto Roth IRA.

Why use a Roth IRA to invest in crypto?

A Roth IRA gives you tax-free withdrawals in retirement, no matter how large the profits in your account may be. Because of this, some people prefer to invest in asset classes that may be higher risk, but also can provide higher returns. While bitcoin is one of the most volatile assets you can hold in your portfolio, it also can provide higher returns than traditional assets.

What’s the difference between a regular Roth IRA and a crypto Roth IRA?

A Roth IRA is an individual retirement account that lets anyone with earned income make contributions with post-tax income, invest your funds with tax-free growth, and make tax-free withdrawals in retirement.

The main difference between a regular Roth IRA and a crypto Roth IRA is your investment options. A regular Roth IRA is offered by most major financial institutions. Your investment options are limited to traditional assets like stocks, bonds, mutual funds, and ETFs. A crypto Roth IRA is a special type of Roth IRA that’s specifically designed to let users invest their money into crypto.

Also read: What is a Roth IRA?

Are you allowed to buy crypto through a Roth IRA?

Yes, the IRS has viewed cryptocurrencies as property for tax purposes, and allows the holding of crypto assets in retirement accounts like the Roth IRA. While you cannot make contributions directly into your retirement account with crypto, you’re allowed to make purchases of crypto using your dollar contributions.

Can I have both a crypto Roth IRA and a regular Roth IRA?

Yes, you’re allowed to have multiple Roth IRAs. You can have a regular Roth IRA that you use to invest in traditional assets and another crypto Roth IRA that you use to invest in bitcoin and other crypto assets. In fact, unless you only want to use your Roth IRA to invest in crypto, it’s probably a good idea to have both accounts, especially considering that most regular Roth IRAs are free to open.

However, the contribution limits are consolidated between all your IRA accounts. For 2023, your total contributions made across all of your IRAs must not exceed the IRA contribution limit of $6,500 ($7,500 if age 50+).

Can I have both a crypto Roth IRA and a crypto traditional IRA?

Yes, you can have both a crypto Roth IRA and a crypto traditional IRA. However, like mentioned above, your annual contributions across all of your IRAs must not exceed the IRA contribution limit.

Are crypto Roth IRAs free?

Buying crypto through a crypto Roth IRA and exchanges have higher transaction fees than buying traditional assets through a brokerage. The typical fee is 1% to 2% per transaction when buying crypto through an exchange. On top of that, your custodian will also have additional fees on top that aren’t typically charged by regular Roth IRA providers. In the end, you may be looking at over 3% fees for each transaction that you make.

The downsides of buying crypto through a Roth IRA

The two biggest downsides of investing in crypto through a Roth IRA are volatility and slow transaction processing times.

High volatility

Crypto is one of the most volatile asset classes in the world, which may not be suitable for someone approaching retirement. Even bitcoin can have 10% price swings in a single day. While investing in crypto can provide diversification to your retirement portfolio, f you’re not able to handle the downswings of crypto, it may not be the best idea to invest in such volatile assets.

Slow transaction processing

With a self-directed Roth IRA, you have to make a request to your custodian for every transaction. This process can often take days, which means that it doesn’t make any sense to use a crypto Roth IRA to buy and sell crypto using short-term time frames. For example, if you notice a price decline and want to send in an order to purchase a crypto asset, it may be too late by the time your custodian processes the transaction. Therefore, it’s a better idea to use your crypto Roth IRA for long-term holdings of your crypto assets.

If you don’t want to go through a custodian for each transaction, there’s also something called a Checkbook IRA. These are even less common than a self-directed IRA, but it allows you to have complete control over your checkbook and use your Roth IRA funds directly without going through a custodian.

When can I withdraw my crypto from a Roth IRA?

First, you cannot withdraw crypto directly from your Roth IRA, the same way you cannot make contributions to your Roth IRA with crypto. To get crypto into your Roth IRA, you have to use your contribution dollars to purchase it within your account. To get crypto out of your Roth IRA, you must sell your crypto in order to withdraw dollars out of your account.

With a Roth IRA, you can withdraw your contributions made to your account at any age, without any penalties or taxes. However, to withdraw any earnings from your account, you’ll have to wait until you reach the age of 59½, and your Roth IRA must be at least 5 years old (referred to as the 5 year rule). Any earlier withdrawals of earnings will results in a 10% early distribution penalty plus income taxes on the amount you withdraw.

For example, if you contributed $10,000 into your Roth IRA, invested it all into crypto, and it grew to a value of $100,000, you would be able to withdraw your $10,000 contribution amount at any time without any penalties or taxes. However, you cannot withdraw the $90,000 in earnings in your account until your Roth IRA is at least 5 years old, and you reach the age of 59½.

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