The Benefits of an IRA

Why Open a Tax Advantaged Self-Directed IRA

Investors use Individual Retirement Accounts (IRAs) for several reasons:

1. Tax Advantages

• 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 Roth IRAs are funded with post-tax dollars, but both contributions and earnings can be withdrawn tax-free in retirement (assuming certain conditions are met).

2. Retirement Savings

• IRAs are designed to facilitate long-term savings for retirement. They encourage regular savings and investing, which can grow over time due to compounding.

3. Investment Choices

• 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.

4. Rollovers

• 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.

5. IRA Transfers

• 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.

6. Cash Contribution

• 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.