Historically, retirement savings accounts have offered traditional ways to invest for the future. But some financial institutions that offer these accounts are expanding their capabilities. While vehicles like IRAs are usually limited to assets like stocks, ETFs, and bonds, some are now including riskier assets like crypto, precious metals (e.g., gold bullion), and alternative investments.
Those who believe in crypto’s future may consider this good news. But should you hold crypto in your retirement savings accounts? Let’s examine which factors to consider.
What is a crypto IRA?
Crypto IRAs are simply individual retirement accounts that allow you to buy and hold bitcoin or other cryptocurrencies.
Note that there are different types of individual retirement accounts, each with potentially unique tax implications, withdrawal rules, and other important characteristics. Start by reviewing the key differences.
Potential advantages of crypto IRAs
May help you achieve your investing objectives
First, it’s important to understand that crypto is highly volatile, and may be more susceptible to market manipulation than registered securities. Crypto holders do not benefit from the same regulatory protections applicable to registered securities, and the future regulatory environment for crypto is currently uncertain.
Crypto is also not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation, meaning you should only buy crypto with an amount you're willing to lose.
That said, adding bitcoin to a portfolio has boosted a portfolio's returns during specific periods in the past, though it also came with substantial volatility. Since 2018, when the bitcoin futures market launched, bitcoin has generated average annual returns of roughly 29.6%.1 Note, of course, that past performance is no guarantee of future results, and future results are uncertain. Any year could yield returns significantly lower than its historical performance. 2022, for example, saw bitcoin plunge over 70% from its highs.
Holding cryptocurrencies in a retirement account may be appealing due to potential tax advantages. Some retirement accounts like Roth IRAs allow potential growth and qualified withdrawals to be taken tax-free.2 This means if crypto’s value appreciates, holders may be able to keep more of their gains.
May be able to increase portfolio diversification tax-free
A recent Fidelity study found that bitcoin has had the potential to help diversify a multi-asset portfolio during periods of its history.1 The study used the time frame from August 1, 2010, through March 31, 2024 (the date the study ended), and found that during the most recent 3-year period for this data set, bitcoin's correlation with stocks was 0.60, and 0.32 with bonds. Correlation is measured on a scale from −1 to 1, with −1 indicating a negative correlation, and 1 indicating a positive correlation.
In simple terms, this means that bitcoin didn’t move perfectly in line with stocks or bonds during this period, and therefore could’ve helped enhance portfolio diversification. Of course, this doesn’t mean that it’s guaranteed to do the same in the future.
Based on historical performance, diversification has been a tried-and-true strategy to reduce risks for both retirement and individual investment portfolios (though investors should remember that diversification and asset allocation do not ensure a profit or guarantee against loss). In the past, this has typically meant creating an investment strategy in traditional assets like stocks, bonds, and mutual funds. Now, assets like bitcoin and other cryptocurrencies are additional investment options at select financial institutions.
May simplify taxes involved with cryptocurrencies
Crypto is still a developing asset class and the subject of increased regulatory focus. As a result, there’s some uncertainty around potential government regulations. Like other assets, buying and selling crypto may also trigger capital gains taxes.
In after-tax retirement accounts, however, your investments have the potential to grow and be withdrawn tax-free. For most pre-tax accounts, tax obligations aren't incurred unless you make a withdrawal. This treatment is consistent with other non-crypto assets held in these accounts. Of course, investors should keep an eye out for any changes to cryptocurrency tax policy.
Potential disadvantages of crypto IRAs
Is risky for a retirement account
Crypto is a new asset class with a relatively short history. Some believe it will become the next internet boom, while others believe it may become worthless. Fidelity research has found that adding bitcoin to a portfolio would have enhanced returns during specific periods in the past, but also that even a small allocation of bitcoin meaningfully increased portfolio volatility. Note that its bear market periods have shown the potential for big drops in price. As mentioned earlier, bitcoin dropped over 75% during 2022’s bear market.
For most, the purpose of storing assets in IRAs and other retirement accounts is to save for retirement. Carefully consider whether the volatility fits the risk you're willing to endure. In the event crypto goes to zero, those who have crypto in a retirement account may be forced to delay their retirement and work for longer than originally planned.
May miss out on tax-loss harvesting opportunities
Taxable accounts may allow you to practice tax-loss harvesting with your assets. In a nutshell, this involves selling holdings at a loss, then offsetting those losses against crypto gains or other capital gains (i.e., gains from selling stocks). This can help reduce your tax bill.
Note that this strategy doesn’t apply to retirement accounts, which is consistent with the rules for non-crypto assets held in these accounts. Given crypto’s volatility, the ability to harvest tax losses could be an advantage in years where significant losses can be realized. Consult with an attorney or tax professional for more on whether this applies to your taxable accounts.
Must buy with cash and may incur fees
Be sure to compare providers before establishing an account, as different providers may offer different features. For example, some may charge to set up a crypto IRA, which can include initial setup fees, annual maintenance fees, and custody and trading fees, among others. After these fees are factored in, those who are interested in holding crypto may find it more cost-efficient to buy through a nonretirement account.
Some individual retirement accounts may also give you the option to choose between holding spot crypto and crypto ETPs in your account. Note that ETPs have a unique set of potential advantages and disadvantages compared to holding spot.
Another point to note is that due to IRS rules (and consistent with existing contribution rules for other property for regular IRAs), you cannot transfer your crypto from your exchange account or personal wallet into a crypto IRA. Typically, you must use cash to purchase crypto in your IRA.
Additional considerations for holding cryptocurrency in retirement accounts
If you’ve decided crypto is right for your retirement account, you may want to review the different retirement account types, as each type may have unique tax implications, withdrawal rules, and other important differences.
For those unsure about whether crypto is right for your retirement account, the most important factor to consider is whether crypto’s risks are in line with your retirement goals. While cryptocurrencies may offer the possibility of achieving your investing objectives, they may also expose portfolios to significant downside.
One additional factor to consider when it comes to buying crypto in general: Consider finding a crypto custodian with safe practices before making any purchases. Custodians that don’t follow safe practices are at greater risk of mishandling your assets, and the consequences may involve losing access to your investments forever.
It’s worth repeating that crypto is highly volatile, and may be more susceptible to market manipulation than securities. Crypto holders do not benefit from the same regulatory protections applicable to registered securities, and the future regulatory environment for crypto is currently uncertain. Crypto is also not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation.
In light of these risks, those who’ve decided crypto is right for their retirement accounts should limit their investments to an amount they can afford to lose. This may help limit the impact in the event of unforeseen circumstances. Make sure to consult a tax advisor who is familiar with your individual tax situation.