Traditional IRAs: Pre-Tax Contributions, Tax-Deferred Growth
A Traditional IRA—or individual retirement account—is a way of placing pre-tax retirement savings into investments that grow tax-deferred until they are withdrawn from the account. Contributions to a Traditional IRA are tax deductible, and withdrawals are taxed as income. The ability to purchase assets within an IRA and save for retirement, while enjoying the benefits of tax deferment, leads many people to open a Traditional IRA.
Anyone receiving taxable income can open a Traditional IRA without the need for an employer to get involved, as they would need to with some other types of IRAs (as in a SEP IRA or SIMPLE IRA). And for individuals 50 years of age or older, catch-up IRA contributions are available to maximize retirement savings.
Advantages of Traditional IRAs
If your employer offers a 401(k), 403(b), or even another type of IRA and you’re happy with it, you’re all set. But if you don’t receive retirement benefits from an employer, or if you do have an employer-sponsored retirement plan but you still have unmet retirement savings goals, a Traditional IRA might be a good choice for you.
While the name implies it might be old-fashioned or limited in some ways, that’s not the case. A Traditional IRA is just the simplest form of an individual retirement account, without the flipped tax timeline of a Roth IRA or the employer involvement of a SEP or SIMPLE IRA.
As one of the most popular retirement account types in the country, many people rely on its several advantages as they map out their retirement goals:
- Eligibility – Unlike other IRAs, there are no income thresholds on who can open a Traditional IRA; you simply need to receive taxable income in order to contribute. Starting in 2020, there is no longer an age limit to opening an account.
- Catch-Up Provision – While Traditional IRAs don’t offer the highest contribution limits you can find, they do give a higher ceiling on those limits for anyone older than 50. You get to “catch up” on contributions you might not have been able to make when you were younger, particularly when you were still incurring costs relating to your children, your mortgage, and so forth.
- Tax-Deductible – A certain amount of your contributions to your Traditional IRA each year can be deducted from your annual taxes. We will dig deeper into contribution limits in the next section.
- Loose Rollover Options – Circumstances change throughout one’s life, and so do retirement savings goals—and financial strategies. The types of retirement accounts you may choose to hold closer to retirement may differ from what you originally set out with. The IRS publishes a rollover chart that illustrates how it is relatively easy to roll funds from another account into a Traditional IRA—and that includes 401(k)s and other options.
Traditional IRA Rules
IRAs were first established in 1974 by the Employee Retirement Income Security Act (ERISA), with Traditional IRAs first becoming available to the public in 1975. A number of rules have since gone into place and evolved over the years since its inception.
For instance, during their first seven years of existence, Traditional IRAs were only intended for employees without a 401(k) or pension plan. The Economic Recovery Tax Act of 1981 changed that, opening Traditional IRAs to everyone receiving taxable income. The Tax Reform Act of 1986 then changed how tax deductions work for employees with other employer-sponsored plans by setting some limits.
But what matters most is to understand where the rules surrounding a Traditional IRA are today, so that you can plan your retirement strategy accordingly.
- $6,000 Annual Contribution Limit – For anyone under the age of 50, the limit on tax-deductible contributions to a Traditional IRA is $6,000. For those older than 50, that contribution limit goes up to $7,000.
- Limited Tax Deductions – The tax deduction for contributions is limited for those with both a 401(k) and a Traditional IRA. For anyone with both plans making less than $65,000 per year or $104,000 if married, there are no limits to deductions under the contribution limits noted above. Income limits are also a factor here. Those making more than those limits can only deduct a certain portion of contributions—or none at all, if their income is high enough—come tax season. The IRS has issued an updated Publication covering the rules around this deduction.
- Tax Day Deadlines – The deadline for both opening and contributing to a Traditional IRA is Tax Day; usually, this is April 15. Due to the coronavirus pandemic, the IRS and Treasury extended the 2020 tax deadline to May 17. You have through Tax day to contribute to a Traditional IRA for the 2020 tax year.
- 10% Early Withdrawal Penalty – Unless you meet certain hardship requirements, any withdrawal you make out of a Traditional IRA before the age of 59 ½ comes with a 10% penalty issued by the IRS on top of taxes. It is worth noting that this penalty is fairly universal across all retirement accounts with few exceptions.
- Required Minimum Distributions (RMDs) – At the age of 72, you are required to begin taking distributions from your Traditional IRA; this used to begin at the age of 70½, but was recently The size of the required distribution amount also changes, but the IRS has also issued guidance around this. And, in 2020, as part of the CARES Act passed in response to the coronavirus pandemic, the IRS is suspending RMDs.
Digital Currencies In a Traditional IRA
What form of Traditional IRA will I need?
A Traditional IRA is a type of IRA that can be opened either as a conventional IRA or as a self-directed IRA (SDIRA).
- A conventional IRA is offered by many financial services providers; the trade-off for its accessibility is that its limited in the type of assets it can hold, usually to a list that includes mutual funds, stocks, and bonds.
- An SDIRA gives the research and allocation of assets over entirely to the holder of the account. But the trade-off is that the accountholder is free to pick from the whole range of possible assets, as long as the IRS has not specifically excluded it. This increases the opportunity for individuals to diversify the assets they’re holding in their retirement accounts, which may provide protection in case of an economic downturn.
If you’ve considered purchasing cryptocurrency, doing so within a Traditional SDIRA can allow you to take advantage of tax deductions on your contributions as well as tax deferrals on your investments.
Why put cryptocurrency in my Traditional IRA?
There are several reasons why people are drawn to buy cryptocurrency within an IRA.
- Potential for growth – No one can guarantee what will happen, but many financial experts note the long-term potential cryptocurrency has to grow in value and returns. This makes it a tempting investment within a retirement portfolio.
- Diversification – Because banks and treasuries cannot directly influence cryptocurrency, it can help diversify retirement holdings. Just because fiat currency may suffer does not necessarily mean that crypto will, and so it might help shield retirement savings in case of economic downturn.
- Decentralization – Purchasing a decentralized currency offers retirement savers many of the same benefits as diversification. It is also a way to participate in a system—cryptocurrency—designed to increase transparency using technology like blockchain, and to avoid the high transaction costs and other limitations often associated with major financial institutions.
- Resistant to adaptive scaling – Again, because they are not controlled by the government, cryptocurrency is not issued or adjusted by them. Many cryptocurrencies have a hard limit on how much can be created; for example, Bitcoin is capped at 21 million.
- Secure transactions – The use of wallets and secure protocols to handle cryptocurrency transactions makes them secure, with a significant ongoing interest within the community to keep developing that security further.
How do I buy cryptocurrency in my Traditional IRA?
We’ve streamlined the process of buying cryptocurrency within a Traditional IRA, distilling it down into four steps. Each of these steps is made easier with a BitIRA Digital Currency Specialist. When you call in, you will be paired with a Specialist who will get to know you and your retirement goals, and who can help you navigate your options and the paperwork required to open your SDIRA.
- Discuss your options. Your Digital Currency Specialist can help you find the answers to any questions you may have, as well as review any steps or paperwork you might need to take in order to open your Cryptocurrency IRA.
- Choose your SDIRA type + funding source(s). We covered Traditional IRAs on this page, but you can also choose from Roth, SEP, or SIMPLE types of Self-Directed IRAs. You will also need to decide how you will fund this account. Your Specialist can help you review your existing retirement account(s) to see which ones are eligible for rollover or transfer, and clarify what steps would be involved.
- Pick your cryptocurrency assets + sign your paperwork. You’ll get to pick from available cryptocurrencies and decide how you want to allocate your funds to buy them. Your Specialist will review your purchase details and confirm the transaction with you one final time. Pending your approval, the purchase will then go through via our partner exchange, and you will be the proud owner of cryptocurrency in your IRA. The private keys associated with your crypto holdings are securely stored. Again, your Specialist can answer any specific questions you may have.
- Log in to My BitIRA to manage your account. Monitor the performance of your crypto assets within your Digital IRA through the My BitIRA portal. From here, you can even initiate transactions to buy or sell crypto within your IRA.
If you find yourself looking for a way to add cryptocurrencies or other alternative assets into your retirement, a self-directed Traditional IRA might just be your best solution. Reach out to us today at (800) 299-1567 to talk through your options in more detail, or to proceed directly to opening your Cryptocurrency IRA.