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Why Open a Tax Advantaged Self-Directed IRA
Investors use Individual Retirement Accounts (IRAs) for several reasons:
One of the key reasons investors use IRAs is the associated tax benefits. There are two main types of IRAs: Traditional and Roth. Traditional IRAs allow for tax-deductible contributions (subject to income limits), but distributions in retirement are taxed as regular income. Roth IRAs are funded with post-tax dollars, but both contributions and earnings can be withdrawn tax-free in retirement (assuming certain conditions are met).
IRAs are designed to facilitate long-term savings for retirement. They encourage regular savings and investing, which can grow over time due to compounding.
IRAs typically offer a wider range of investment options than employer-sponsored plans like 401(k)s. At iTrustCapital, you are able to invest in alternative investments such as cryptocurrencies and physical precious metals.
If you leave a job, you can roll over your 401(k) or other employer-sponsored retirement plan into a self-directed IRA. This can help you keep all of your retirement savings in one place and maintain the tax-advantaged status of these funds. An advantage of a rollover is that there are no taxable events that get triggered.
Similar to a 401(k) rollover, if you have an existing IRA (Traditional, Roth, or SEP) it can be transferred into a new self-directed IRA while maintaining the tax advantages of these funds. There are no taxable events that get triggered.
Unlike a 401(k), anyone with earned income has the opportunity to contribute cash to a self-directed IRA and partake in tax advantages similar to an employer-sponsored plan. Depending on an individual's age, there are contribution limits.
How Buying and Selling Cryptocurrency inside an IRA Differs from an Exchange
When you purchase cryptocurrency outside of an IRA, you're buying it in a crypto exchange account using post-tax dollars. If the value of the cryptocurrency goes up and you sell it, you'll be liable to pay capital gains tax on the profit.
Let's illustrate this with an example:
Say you buy $10,000 worth of Bitcoin outside an IRA. Over the next few years, the value of your Bitcoin holdings increases to $60,000. If you decide to sell your Bitcoin at this point, you'll have capital gains of $50,000 ($60,000 - $10,000). The exact amount owed in taxes will depend on how long you've held the Bitcoin and your overall tax situation.
Now, let's consider the same transaction within an IRA, specifically a Roth IRA.
Again, you buy $10,000 worth of Bitcoin, this time within the Roth IRA using after-tax dollars, just like the non-IRA scenario. The value grows to $60,000 over the next few years. If you sell the Bitcoin within the Roth IRA, the $50,000 gain is not subject to capital gains tax. If you wait until you're at least 59.5 years old and the account has been open for at least five years, you can withdraw the money tax-free.
This highlights the main advantage of buying and selling within an IRA - the tax benefits!
Traditional and Roth IRAs have different tax benefits. Traditional IRAs offer tax deductions on contributions but tax withdrawals as income, whereas Roth IRAs don't offer tax deductions on contributions but allow tax-free withdrawals.
Another key point to consider is the fact that IRAs are designed for long-term retirement savings, meaning there are penalties for withdrawing funds before a certain age. As always, you should seek advice from a qualified financial advisor or tax professional when considering such transactions.
This article is for information purposes only. It does not constitute investment advice in any way. It does not constitute an offer to sell or a solicitation of an offer to buy or sell any cryptocurrency or security or to participate in any investment strategy.
iTrustCapital is a cryptocurrency IRA software platform. It is not an exchange, funding portal, custodian, trust company, licensed broker, dealer, broker-dealer, investment advisor, investment manager, or adviser in the United States or elsewhere. iTrustCapital is not affiliated with and does not endorse any particular cryptocurrency, precious metal, or investment strategy.
Cryptocurrencies are a speculative investment with risk of loss. Precious metals are a speculative investment with risk of loss. Cryptocurrency is not legal tender backed by the United States government, nor is it subject to Federal Deposit Insurance Corporation (“FDIC”) insurance or protections. Clients do not receive a choice of custody partner. The self-directed purchase and sale of cryptocurrency through a cryptocurrency IRA have not been endorsed by the IRS or any regulatory agency. Historical performance is no guarantee of future results.
Some taxes and conditions may apply depending on the type of IRA account. Investors assume the risk of all purchase and sale decisions. iTrustCapital makes no guarantee or representation regarding investors’ ability to profit from any transaction or the tax implications of any transaction. iTrustCapital does not provide legal, investment or tax advice. Consult a qualified legal, investment, or tax professional.
iTrustCapital makes no representation or warranty as to the accuracy or completeness of this information and shall not have any liability for any representations (expressed or implied) or omissions from the information contained herein. iTrustCapital disclaims any and all liability to any party for any direct, indirect, implied, punitive, special, incidental or other consequential damages arising directly or indirectly from any use of this information, which is provided as is, without warranties.
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