Cryptocurrency Investment for Retirement

As Bitcoin and other cryptocurrencies move toward mass adoption, many people have started diversifying one retirement account or more with digital currency holdings. One option is to create a Digital IRA (also known as a Cryptocurrency IRA), which is a self-directed IRA holding cryptocurrency like Bitcoin.

You’ll need to open a Self-Directed IRA (SDIRA) instead of a conventional IRA in order to hold alternative assets like cryptocurrency. The SDIRA gives you more choices, including over the range of assets it can hold; a conventional IRA only holds the most traditional asset classes, such as cash, stocks, mutual funds, or bonds.

There are several classifications of an IRA, including a Traditional IRA, Roth IRA, and others, each of which is structured slightly differently to offer unique tax incentives. A self-directed IRA can assume any of these classifications.

Here we focus on the SEP IRA, often the mode chosen by those who are self-employed or own a small business. Specifically, we look at the SEP IRA classification of an SDIRA.

What is a SEP IRA?

A SEP IRA (or Simplified Employee Pension Individual Retirement Account) allows an employer to contribute funds into their employees’ (and their own) retirement accounts. These contributions are tax-deductible. Taxes are not paid on those investments until the employee makes a withdrawal, usually in retirement; at that point, distributions from the SEP IRA are taxed as income.

SEP IRAs in action: a real-life example
Let’s look at an example of how a SEP IRA works for a self-employed person. Keep in mind that this process works in a very similar way for businesses of any size, not just for self-employed individuals.

Mike is a sole proprietor who wants to take advantage of the higher annual maximums on IRA contributions that is offered by a SEP IRA. Mike decides to roll over his current Traditional IRA into a SEP IRA. After doing the rollover, Mike has flexibility in determining the size of his IRA contributions in any given year. His contributions are also tax-deductible. Mike makes $200,000 annually and decides to set his annual SEP IRA contribution to $50,000, the maximum for him for that year and income level (and much higher than limits for most other IRA types).

Mike can use his SEP IRA even if he works at a second job apart from his own small business. If Mike’s business grows, he will offer the same percentage of compensation for all eligible employees for their own SEP IRAs. Although an employee can determine what types of assets comprise their SEP IRA account, only the employer can decide the amount of annual employer contributions.

The employee can decide to invest in digital currency as part of their SEP IRA (more on this later). After contributions are made, the SEP IRA functions almost exactly like a Traditional IRA in terms of investment, distribution, and rollover rules.

Advantages of a SEP IRA

So what are the benefits of a SEP IRA compared to other IRA types?

• Higher annual contribution limits – The main advantage of a SEP IRA is its higher annual contribution limits. An employer (or self-employed person) can contribute whichever is smaller between either (a) $59,000 (2021) or $61,000 (2022) or (b) 25% of compensation.This is particularly useful in situations where an employer cannot match your contribution—such as when you are the employer.
• No filing or reporting – A SEP IRA is easy to set up and operate and also has no filing requirements or reporting requirements, another big plus for employers.
• Flexible annual contributions – If cash flow is an issue for a small business or revenue is cyclical, a SEP IRA is a good plan because annual contributions are flexible. This means that no employer is tied to making contributions every year—which might make it easier for some, particularly small businesses, to participate.
• 100% vested employees – An employee is always 100% vested in all of the money in their SEP IRA, which is not the case with some other retirement accounts. In other words, the employee always fully owns the money in their SEP IRA.

For those who have self-employed income, or who are considering setting up a sole proprietorship and becoming a small business owner/self-employed person, the SEP IRA version of a Self-Directed IRA is often the right choice for retirement saving.

Placing a cryptocurrency like Bitcoin—or any of the other cryptocurrencies that we support, including Ethereum and Litecoin—into this SEP SDIRA can be a powerful way to diversify your assets. Many people are tempted by what they see as the growth potential of cryptocurrency, as well as the decentralization and shift away from fiat currency.

Rules to Consider With a SEP IRA

As stipulated by the IRS, there are a few SEP IRA rules to consider as an employer when choosing between employer-sponsored retirement plans.

Employer contributions must be the same percentage of employee compensation for each employee, up to a maximum of 25% of total compensation.

Eligible employees (or a self-employed individual) for a SEP IRA must have:

• attained 21 years of age,
• worked for the business in at least 3 of the last 5 years,
• received at least $600 (2019, 2020) in compensation from the business for the year.

Those are the eligibility rules. As far as contribution limits go, the SEP IRA of an employee cannot exceed one of these two conditions (to determine which one applies, choose the one with the lower value, according to the IRS):

• 25% of employee’s compensation, or
• $58,000 (2021) or $61,000 (2022).

Catch-up contributions are not allowed with SEP IRA plans.

Cryptocurrency in a SEP IRA

As described above, a Digital IRA has to be a Self-Directed IRA, which itself can be one of various types. Many people choose to invest in Bitcoin, Ethereum, and other cryptocurrency in specifically the SEP IRA type because of the various advantages mentioned in this article.

Like other types of IRAs, a Self-Directed IRA requires a custodian to manage funds in the retirement account (though the account owner has full control as to how the funds are invested in the SEP IRA).

For someone with a business (or for a self-employed person) who wants to invest a greater portion of their retirement savings into Bitcoin, a SEP IRA offers generally higher contribution limits than other types of retirement accounts like Traditional IRAs.

SEP IRA Rollover Process

Rolling over your assets from your current eligible retirement account into a SEP IRA is a tax-free and penalty-free process. This is how a rollover to a Digital IRA of the SEP IRA type would work:

1. Download the free info guide about purchasing Bitcoin with a Digital IRA,
2. Assess your best options for a Digital IRA with the help of a BitIRA Digital Currency Specialist,
3. Open a Digital IRA account and decide on an initial digital currency investment amount.
4. Roll over funds from other eligible retirement accounts to a Digital IRA.
5. Purchase Bitcoin, Ethereum, Ripple, and other cryptocurrency assets.
6. Monitor the performance of your new Digital IRA in BitIRA’s Customer Web Portal, My BitIRA (https://my.bitira.com/).
7. Initiate buying, selling, or swapping cryptocurrency within your Digital IRA from the My BitIRA portal.

BitIRA helps you with each of these steps to set up and maintain a SEP IRA with digital currency holdings. Get your free guide about setting up a Digital IRA today.