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Ethereum in Your IRA
Disclosure: Our content does not constitute financial advice. Speak to your financial advisor. We may earn money from companies reviewed. Learn more
Bitcoin’s birth in 2008 has spawned the creation of an entire new asset class known as cryptocurrencies. Today, there are over 2,500 of them on the market. Many projects promise to do the same thing that Bitcoin does, which is to allow for the transfer of financial value from peer to peer without the need for any government or central authority to oversee transactions. Still, there are also many other projects that aim to facilitate transfers of value for different reasons.
In fact the second most valuable cryptocurrency in the world is trying to build the world’s largest and most powerful decentralized computer. It’s called Ethereum. Unlike Bitcoin, which was invented by an anonymous figure going by the name Satoshi Nakamoto, Ethereum’s creator is a computer programmer in his early 20s, Vitalik Buterin. But that’s not the only way in which the two cryptocurrency projects differ.
The supply of Ethereum coins available is much higher than that of Bitcoin. The transaction fees and speeds are also much lower and much faster than Bitcoin, two big reasons Ethereum became popular.
Today, both projects are still the two most valuable in the industry, and both are becoming more popular selections in IRA investments.
A deeper explanation as to why that is, and how it all works will help investors decide if putting money into an Ethereum IRA is right for you. Keep in mind that while it is becoming a more popular investment, buying cryptocurrencies as part of a retirement portfolio should only be done in moderation and in coordination with a proper risk tolerance assessment. The potential to both gain and lose a lot of money in cryptocurrency IRA investing is very real.
Table of Contents
- What is Ethereum?
- What is Blockchain Technology?
- What is an Ethereum IRA and How Does it Work?
- Why Invest in Ethereum for Retirement?
- How Do You Add Ethereum to Your IRA or 401k?
- Ethereum in a Roth IRA versus a Traditional IRA
- Ethereum IRA Custodians
- Ethereum IRA Fees & Costs
- Should You Invest in Ethereum for Retirement?
What is Ethereum?
Ethereum is a decentralized peer-to-peer payment network just like Bitcoin, but there are a few fundamental and technical differences between them. The fundamental difference is that Bitcoin is strictly a peer-to-peer payment network. There’s no other purpose or use case for Bitcoin.
Ethereum on the other hand allows peers to transfer value to each other in a similar fashion, but its main mission is to allow application developers to publish and distribute their apps without having to sell or license intellectual property to big data companies like Google or Apple. This means that the application developer gets to keep more of the royalties they earn from selling their app. It also means users can contribute to app development by investing in an initial coin offering.
An ICO is when app developers allow users to acquire tokens in exchange for a contribution to their project. The developer then offers the project to all users. Both those that contributed to the initial coin offering and those that did not. This means there’s no need to go to fancy venture capital firms to raise the money needed to launch the app, and anyone can use the app without necessarily having to give up their personal information.
This is all made possible thanks to blockchain technology. A blockchain is a decentralized database that ensures transactions can’t be counterfeited or duplicated, and data can’t be manipulated without the consent of its owner. This means users get to keep their privacy while gaining access to valuable apps that cost them less money. App developers on the other hand get to build their ideas without being at the mercy of wealthy venture capitalists or the world’s five major data companies.
A Quick Note on Smart Contracts
Although we have already outlined several differences between Bitcoin and Ethereum, smart contracts are the most notable point of difference. A smart contract is basically a self-executing contract. It allows two people to go on to the Ethereum blockchain, set terms and conditions related to a particular transaction, lock value into a contract, and release that value only when the terms of the contract have been met. This was is considered a hallmark innovation of the Ethereum project.
Implementing a smart contract means being able to negotiate transactions and exchanges of value without the need for a third-party escrow service, lawyer, agent or intermediary. That means it’s no longer necessary to pay someone a commission or an hourly rate just to facilitate a transaction.
Today, there are many other cryptocurrency projects creating their own versions of smart contracts and trying to make a better version of Ethereum. The reality is although some have created interesting alternatives, all of Ethereum’s competitors owe the project a debt of gratitude for coming up with the concept of smart contracts in the first place.
While Ethereum puts a twist on the original concepts outlined by the Bitcoin whitepaper, it still maintains all of the same basic principles of money just like Bitcoin. It can be traded for goods and services and act as a medium of exchange, it acts as a unit of account, and it’s a store of value. Ethereum can be traded for other currencies and it’s also divisible and portable. While the supply of Ether tokens available on the open market today is much greater than that of Bitcoin’s, ETH tokens can’t be counterfeited or reproduced by anyone.
At a basic level this is what gives all digital currencies their value and allows people who are used to traditional fiat money a way to draw parallels between the old and the new. And again, the real value or secret that lies behind the success of both Bitcoin and the Ethereum project is blockchain technology.
What is Blockchain Technology?
As we’ve touched on a little bit in the sections above, a blockchain is a decentralized database that is controlled and secured by the computing power of users. In an explicitly public blockchain, nobody is empowered to edit transactions, manipulate or conceal data. This whole concept essentially eliminates the need for a trusted third-party and within the context of economics and the control of wealth, effectively disarms governments and major corporations who seek to exercise power over societies through leveraging advantages within the broader financial system.
That doesn’t mean however that a blockchain is strictly useful in the world of finance and transferring value. A blockchain can hold data related to anything. A private company can build its own blockchain to help manage the supply chain and record the whereabouts and availability of goods and supplies. A government can store public health records on the blockchain to reduce administrative costs and give the individual more control over their data. Blockchains can store proof of purchase or authenticity related data too. The application of blockchain technology is only limited by its creators and their imaginations. The fact that this technology is used in the digital currency space only represents a single use case for it.
That’s not to say all digital currencies use a public blockchain not owned by any central figure. Ripple is one of the most valuable cryptocurrencies in the world and while it can be used by the public to exchange value, the project is owned by a private corporation.
Cryptocurrency purists love to hate Ripple because it’s not truly a public entity, but some investors like the idea of owning a currency that intelligent business minds are guiding. To each their own. Some Bitcoin IRA providers allow investors to include Ripple in their portfolio, but we won’t be covering Ripple in this post.
What is an Ethereum IRA and How Does it Work?
An Ethereum IRA is kind of like a more traditional Gold IRA. Both are self-directed accounts that let people include alternative assets as part of their investment mix. Traditional IRAs and 401(k)s don’t let people go beyond stocks, bonds and certificates.
Doing this involves a lot of administrative work in negotiating on the part of digital currency IRA providers. They don’t do it alone. They use custodians that allow alternative investments. Regal Assets, Bitcoin IRA, BitIRA and Noble Bitcoin are all examples of cryptocurrency IRA providers that use custodians. In order to include investments outside of digital currencies, these providers also have to work with wholesalers and depositories that can give the investor the best possible price and the easiest possible access to different assets.
We’ll go deeper into each of the IRA providers above and explain how they allow investors to hold Ethereum tokens in their accounts while also having access to a variety of other alternative assets.
Why Invest in Ethereum for Retirement?
The reasons for investing in Ethereum as part of a retirement portfolio are the same as the reasons for investing in Bitcoin. Number one, there’s a popular belief that when economies slow down and begin to enter a recession, more and more people will move money into digital currencies built on public blockchains as a way of taking value out of the hands of governments and major banks.
Many people considering investing in digital assets as part of a retirement portfolio right now are old enough to remember the global economic crisis of 2008, where major banks and investment funds were bailed out by governments. Rich people profited and the average middle-class investor was left fighting to keep their job or their home. While cryptocurrency enthusiasts must look back on that time somewhat fondly given that it was these economic conditions that gave birth to Bitcoin and the other digital assets we have access to today, many believe the next recession might be even worse.
Just like investing in traditional gold, investing in digital currencies is seen as a way to protect against the ups and downs of the economy. Think about it logically. If there’s no central authority governing its use, there’s no need to trust anybody with one’s digital assets.
So the question remains…why choose Ethereum over Bitcoin?
Ethereum IRA vs. Bitcoin IRA
Choosing Ethereum over Bitcoin really comes down to personal preference. For those that understand the technical differences between different cryptocurrencies, they might choose to invest in Ethereum because of its sound fundamentals (aka the fact that it has a smart contract platform, and has proven itself as the world’s second most valuable cryptocurrency). The reality is that Bitcoin is likely still the most popular choice because it’s valued at over $150 billion and despite the fact there are over 2,500 cryptocurrencies on the market today, Bitcoin still reigns supreme above them all when it comes to market capitalization.
Generally speaking there’s no need to pick between the two. Investors can have their cake and eat it too. All of the major Bitcoin IRA providers doing business today offer at least a handful of other cryptocurrencies as options, including Ethereum.
As we certainly recommend starting small when adding cryptocurrencies to a retirement portfolio, perhaps allocating funds dedicated to digital assets should be divided evenly between the cryptocurrencies one might be interested in.
How Do You Add Ethereum to Your IRA or 401k?
Adding Ethereum to an IRA or 401k means working with a provider who has relationships with the right custodians, depositories, wholesalers and other third parties ensuring that their giving investors the best deal possible and the easiest access possible.
There are five top providers that provide digital assets inside of retirement investment accounts at the present moment. They include:
Regal Assets has the best reputation of all the providers listed above. The fees are the most reasonable, the track record is the most proven, and the options are the most flexible. Investors don’t just have to choose Bitcoin or Ethereum with Regal Assets. They can also choose to invest in altcoins like Bitcoin Cash, Bitcoin Gold, Bitcoin SV, Ethereum Classic, Ripple, Litecoin and Stellar Lumens. No other IRA provider offers access to more cryptocurrencies. Regal Assets also ranks best in class when it comes to customer review ratings and offers up to $100 million in insurance coverage. Most providers offer some insurance, but very few competitors go up to $100 million.
The best part about choosing Regal Assets is that it only requires a minimum investment of $10,000. Anybody just starting out might want to dip their toe in the water with cryptocurrency investing before transferring over the full value of their IRA. And yet, many other competitors require a higher minimum investment. This makes it difficult for newcomers to test results without making a big commitment. Regal Assets definitely puts the customer first in this regard. The company also makes it easy to invest in traditional precious metals like gold and silver if that’s something that an investor deems desirable.
The other IRA providers listed above are also solid options, but quite frankly, nobody compares to Regal Assets’ outstanding track record.
Ethereum in a Roth IRA versus a Traditional IRA
Roth IRAs and traditional IRAs are two pretty standard retirement investment accounts people commonly register an open. They accomplish the same goals but they do it in different ways. The chart at the bottom of this section highlights everything in bullet points.
It’s important to keep in mind that a traditional IRA allows investors to make investments today and pay taxes on the resulting gains later. In the short term, this is beneficial for anybody making a high income in the middle of their careers looking for a good way to lower their income tax bracket. From that standpoint using a traditional IRA account makes sense because people typically work less or not at all during retirement (isn’t that the whole point?). This means it’s more cost-effective to pay taxes later on in life.
A Roth IRA on the other hand offers investors the opposite benefit. They get to pay their taxes at the time that they invest, but they don’t have to pay taxes upon retirement. Using this account may be better for somebody that earns a below average income for most of their working years, but hopes to capitalize on investing gains later on in life and still hopefully live an above average retirement lifestyle.
Traditional IRAs function more like a pension plan offered through an employer. They help lower the potential tax burden immediately. However, a traditional IRA can also restrict investors and determine when a person can have access to their wealth.
The above examples of how the two different IRA types function is a simplified example. There are many considerations to think about when choosing between the two. Income, life stage, savings goals and livestock considerations must all be taken into account.
See the chart below for some of the finer details related to both account types. It should help lend some clarity to how and why people choose to manage their Bitcoin and Ethereum IRAs through either one of these account types.
|Roth IRA||Traditional IRA|
|2018: $5,500 ($6,500 for those age 50 and above).
2019: $6,000 ($7,000 for those 50 and above).
|· Qualified withdrawals in retirement are tax-free.
· Contributions can be withdrawn at any time.
|· If deductible, contributions lower taxable income in the year they are made.|
|· No immediate tax benefit for contributing.
· Ability to contribute is phased out at higher incomes.
|· Deductions may be phased out.
· Distributions in retirement are taxed as ordinary income.
|Early withdrawal rules|
|· Contributions can be withdrawn at any time, tax- and penalty-free.
· Unless you meet an exception, early withdrawals of earnings may be subject to a 10% penalty and income taxes.
|· Unless you meet an exception, early withdrawals of contributions and earnings are taxed and subject to a 10% penalty.|
*Chart courtesy of NerdWallet.com
Ethereum IRA Custodians
We’ve already gone over the four main Ethereum IRA providers in the sections above. Now let’s briefly cover the custodians associated with them. FYI. A custodian is a third-party company that ensures records are accurately reported to the IRS. An IRA provider can’t sell alternative assets without using one. So without custodians, customers would not be able to invest in cryptocurrencies as part of a retirement plan.
Regal Assets is our most highly recommended IRA provider. The company uses Kingdom Trust as its custodian. The company currently has over 100,000 clients and manages over $12 billion in assets. Naturally they specialize in helping customers with self-directed IRA’s gain access to alternative assets.
Bitcoin IRA uses Bitgo. They’ve been in business since 2013 and pride themselves on being secure, though the company has had issues in the pass, particularly with underwriting claims surrounding hacks at bitcoin exchange Bitfinex.
BitIRA uses Preferred Trust Company. They’ve been in the business since 2007, before Bitcoin was even a thing. They provide solid customer service, easy IRA transfers, and an investing and accounting team to make sure that all financial statements stay in good standing with the IRS.
The three IRA providers above work with the most well-known custodians but even other providers like CoinIRA and Noble Bitcoin still use trusted custodians. It’s pretty much an industry standard to use a properly registered custodian regardless of the retirement asset being traded in this day and age. The IRS demands it.
Ethereum IRA Fees & Costs
Ethereum’s network allows users to exchange value for mere pennies. Even with upgrades to Bitcoin’s network, Ethereum has always been a cheaper option.
When it comes to actual trading fees though, it’s only unfair to compare Ethereum to Bitcoin, it’s also hard to compare what different exchanges charge their customers. Most give bigger discounts to frequent traders which makes sense. But some exchanges charge more because they offer the ability to acquire cryptocurrency instantly using a credit card. Those that typically only accept money from bank accounts or wire transfers take longer but charge less. It all really depends on what the customer is looking for.
That’s why the best thing an investor can do when exploring options regarding Ethereum IRAs is to pick up the phone and call the different providers, read reviews and do their own due diligence. After all, the fees that trading platforms charge individuals still apply when those exchanges deal with IRA providers. It’s also then important to consider that IRA providers also need to make their money. Some charge regular maintenance fees, most require a minimum deposit (in fact they all do). An IRA provider that might be good for most people might not be the right one for you.
Some Ethereum IRA providers charge upfront setup fees that can cost thousands of dollars. Part of this goes towards covering fees from custodians. As an example Kingdom trust charges $150 per sale of assets. They work with Bitcoin IRA, who also charges a 5% repurchasing fee.
Kingdom Trust by contrast charges 3.5% per transaction and 1% per sale of assets. In contrast to other custodians, Kingdom trust ranks among the lowest fees, but in general to gain access to a highly volatile market like cryptocurrency within a retirement account, the best thing to do is commit to holding assets for a long time. The last thing an investor wants is to have their gains eaten away by trading fees from switching back and forth between different digital assets.
Seriously, taking the time to choose the right Ethereum IRA provider can save the average investor tens of thousands of dollars over the decades they will spend investing in their retirement.
Should You Invest in Ethereum for Retirement?
Anybody considering investing in Ethereum inside of an IRA likely doesn’t need to be sold on the fundamental benefits of cryptocurrency and blockchain technology.those choosing Ethereum as part of a portfolio likely already understand the benefits of smart contracts and the significance of allowing developers to create useful applications on a decentralized platform that isn’t controlled by a small number of companies.
That said, investing in cryptocurrency as part of one’s nest egg is best done in small amounts to start. Investing in cryptocurrency is still considered a very risky proposition. After all we’re talking about an asset class where investments can fluctuate in 40% swings within a matter of a day or two. Talk about volatility.
When it comes to making any big investment decision, conducting due diligence is always the first step. Phone the different IRA companies listed in this blog post. Read reviews that we’ve done on our sister site CryptoRadar. Ask friends who are already investing in the cryptocurrency space if they’ve thought about including some digital coins in their retirement fund.
Once all of your due diligence has been conducted, feel free to pull the trigger and pat yourself on the back for investing in your future in a way few people are doing right now.