More than just a fad, the advent of cryptocurrency has become a watershed moment for 21st-century financial markets. Since digital currencies are here to stay, why not make them work to your advantage in the long run?
A self-directed individual retirement account (SDIRA) is your ticket to capitalizing on the potential of investment options like cryptocurrency tokens. The growing popularity of web3 products has led to digital assets being held as major holdings
in investment funds like retirement accounts.
While the idea isn’t exactly novel, it has only recently started catching the fancy of small, individual investors who prefer managing their own investment opportunities.
So, can cryptocurrencies be a part of your self-directed IRA? Absolutely!
But before we delve deeper into what assets your self-directed IRA account can hold, let’s first understand what exactly a self-directed IRA is and how it functions.
What Is a Self-Directed IRA?
An Individual Retirement Account or IRA is a special type of savings account wherein users can save or make tax-free (or advantaged) investments in the long term. As the name suggests, it’s a type of retirement savings. You can open an IRA through
your bank, an investment company, an online brokerage, or a personal broker.
The problem with traditional IRAs is that they don’t allow users to hold certain alternative investments such as digital assets. This is where self-directed IRAs come in handy. Like a regular IRA, self-directed IRAs offer tax-free gains to the
account holder, either via a traditional IRA or a Roth IRA. However, they also provide the added benefit of holding alternative assets, which can mean greater diversification.
Regular IRA users choose their offerings from a pool of assets, usually restricted to stocks, bonds, mutual funds, ETFs, and certificates of deposit. On the other hand, the Internal Revenue Service (IRS) offers a larger number of options to SDIRA
From real estate and cryptocurrency to private equity and precious metals, investors are free to choose from a vast array of assets. This variety allows you to diversify your portfolio and retirement plan, which in turn can help you stay afloat
in the face of market uncertainty or financial adversity.
As the name also suggests, a self-directed IRA hands over the reins of the account to the original account holder. What does this mean for you? Your account or fund manager won’t be able to intervene in your SDIRA investment decisions.
Instead, there’s a self directed IRA custodian (usually a trust company), whose duties are limited to ensuring the safety of your holdings and performing nominal tasks, albeit under your authorization. One of the biggest advantages of these restrictions
is that the lack of external involvement will likely reflect a lower account fee.
As the sole account holder, you manage your transactions and make all the decisions concerning your portfolio as you see fit. Your agency is reflected in the strategies you put into place to achieve specific financial goals. However, this amount
of freedom and control over your holdings comes with certain responsibilities. As you near retirement and your account nears maturity, you might have to put in a few extra hours to manage your SDIRA. You can, of course, choose to seek advice
from professional accountants and financial advisors before making any big decisions.
How To Set Up a Self Directed IRA
Most brokerage firms or IRA providers only allow you to open regular IRAs. To set up a self-directed IRA, you can work with Dorado to get all the resources you need, including a specialized IRA custodian.
Custodians differ in the types of investments they handle, so make sure to pick someone who understands your financial goals and offers the choices you are looking for. For example, some custodians let you invest in gold bullions and private
equity, while others provide real estate and web3-based holdings. Once you find a custodian you trust, you can open an account and put money into it, just like you would with any other type of IRA.
If you want to add tax-advantaged digital assets to your retirement portfolio, Dorado provides access to hundreds of cryptocurrencies and yield products. We can also connect you with all of your favorite crypto trading platforms to make sure
adding these digital assets to your IRA is never a hassle.
$6,000 for individuals under the age of 50
$7,000 for individuals over 50 years of age
A point worth reiterating here is that self-directed IRAs do not allow anyone other than the account owner (you) to manage holdings. This means that financial institutions like banks, investment agencies, or brokerages won’t be able to help you
set up an SDIRA or control it. So it might be best to work closely with a financial advisor in order to manage your SDIRA savings and investments well.
Also, keep in mind that self-directed IRA holders are prohibited from IRA investments in life insurance instruments or collectibles like NFTs, which is one of many IRS rules to be aware of.
Roth vs. Traditional SDIRAs
Traditional SDIRAs and Roth SDIRAs function based on different eligibility and investment criteria. One key difference between the two is how users avail their tax benefits. Traditional SDIRAs allow you to get a tax break up-front, but you must
pay income tax on all your earnings and IRA contributions when you withdraw IRA funds during retirement. On the other hand, with Roth SDIRA holders, you pay taxes on the money put into your account, but all your earnings, contributions, and
qualified distributions remain tax-free. As a result, investors generally opt for Roth IRAs when they believe marginal taxes will be higher when withdrawing retirement funds than they are currently.
Before moving forward, it is crucial to understand what qualified IRA distributions are. Simply put, qualified distributions are a chunk of your assets that is handed back to you once your IRA matures. They work based on certain rules and requirements
set forth by the IRS.
Some other differences between traditional IRAs and Roth IRAs include:
Annual income limit: There are no annual income limits on a traditional SDIRA. However, you are required to make less than a certain amount of money annually to qualify for a Roth SDIRA.
The specific limit varies based on:
Your marital status
Whether you are filing for the SDIRA alone or jointly with your spouse
Whether or not you qualify as the ‘head of your household.
You can view the IRS page for more details regarding investment limits linked
Required Minimum Distributions (RMD): For traditional and most other IRA holders, it is mandatory to start withdrawing minimum distributions (a prescribed amount of assets out of your IRA) each year once they turn 72. Roth SDIRAs
do not have any such RMD restrictions.
Withdrawal policy: With Roth SDIRAs, you can withdraw your contributions (but not earnings) at any time without paying taxes or penalties. Furthermore, all withdrawals go penalty-free once you’re 59 ½ or older, given that your
account is at least five years old. With traditional SDIRAs, withdrawals (including your own contributions) are only tax-free once you turn 59 ½, but you still have to pay taxes on withdrawals.
Taxes: Each withdrawal is taxed for traditional SDIRA holders, regardless of whether it is just your contribution or your contribution plus earnings. In contrast, Roth SDIRA holders do not have to pay any taxes on withdrawals.
Which SDIRA Is Best For You?
The type of SDIRA you should select for yourself depends on your choice of investment, financial goals, and general eligibility criteria. Investors looking to invest in relatively less stable types of assets, such as crypto tokens, are usually
advised to stick to Roth SDIRAs because of their flexible withdrawal policies. On the other hand, investors who can take on some long-term risks and are seeking better returns can invest in traditional SDIRAs. We encourage you to seek investment
advice from a professional to go over your eligibility criteria and determine which SDIRA would work best for you.
Dorado helps you make the most of your SDIRA account, whether it’s traditional or Roth, by giving you more freedom, control, and access to investing in cryptocurrency through a tax-efficient retirement account.
Our wide range of cryptocurrency token choices allows you to efficiently search and evaluate the market to find the crypto investment that best suits you. Our tax benefits further ensure that you save up to 37% in taxes on all your crypto gains.
With checkbook control, you can also contribute flexibly without depending on custodian approval for each investment.
Dorado and its trusted partners have helped thousands invest in a better, safer future for themselves and their loved ones.