Interest in crypto continues to dominate the financial conversation right now. For those who want to hold cryptocurrencies and other crypto assets for the long term, though, it’s been difficult find tax-advantaged investment accounts that allow you to use crypto to save for retirement.
There are roundabout ways to hold crypto in your IRA or 401(k), and its even possible to find custodial companies that help you set up a crypto HSA. But many of these approaches require extra steps.
Recently, though, a new player has arrived in the world of tax-advantage crypto. Fidelity recently announced that it will allow accountholders to add bitcoin to their 401(k)s. This makes Fidelity the first provider to offer crypto as a retirement holding.
So, now that you can hold bitcoin in your 401(k), does it make sense for you? Let’s take a look at what it might mean to invest in crypto in your retirement account.
Who Can Add Bitcoin To Their 401k?
So far, Fidelity is the only company allowing for bitcoin in their 401(k) accounts. Accountholders will be able to purchase bitcoin in their 401(k) accounts, as long as their employer uses Fidelity to manage the accounts. Additionally, the employer must allow for the bitcoin purchase option in their plan.
Other companies might also allow the purchase of bitcoin in 401(k) accounts later. Additionally, there is speculation that some other crypto assets might also be available at some point.
Fidelity will limit bitcoin purchases to 20% of the retirement portfolio, although employers can set lower thresholds.
Advantages Of Holding Crypto In Your 401k
One of the biggest reasons to put crypto in your 401(k) is that it offers a way for you to take advantage of tax benefits when you invest in crypto.
So far, crypto assets have mostly been held in taxable investment accounts, which means you’re subject to either short-term or long-term capital gains. You can’t defer the capital gains taxes until later if you decide to sell your digital assets. Now, though, if you can add crypto to your 401(k), you have the chance to defer some of your tax gains.
Another advantage of holding crypto in your 401(k) is that you can take advantage of some of the potential gains. If cryptocurrencies and other digital assets catch on in the mainstream, there’s an opportunity for huge growth. Capturing this growth in your retirement portfolio can go a long way toward helping you reach your long-term financial goals.
Finally, holding crypto in your 401(k) offers the opportunity for diversity. So far, cryptocurrencies, especially bitcoin, have been moving in correlation to the stock market, but some enthusiasts believe that crypto will decouple from the stock market. If you’re looking for other assets to add diversity to your retirement portfolio, crypto might be able to help.
Disadvantages Of Holding Crypto In Your 401k
Even though there are some advantages to keeping crypto in your retirement account, there are also some downsides to be aware of.
First of all, crypto is a volatile asset. Prices swing wildly. As a result, it can be difficult to estimate the value of your retirement portfolio, especially if you hold a lot of bitcoin or some other cryptocurrency in your 401(k). Trying to pinpoint the value of bitcoin and other cryptocurrencies can be difficult because, technically, there’s nothing to back most crypto.
Another downside is the potential that cryptocurrencies and other digital assets won’t catch on with the mainstream. If cryptocurrencies don’t become the norm, then having them in your portfolio could be a drawback as they lose value and drag down your retirement portfolio. You could end up not having enough in your portfolio to reach your retirement goals if you rely too heavily on crypto assets.
Finally, regulation remains uncertain. While the IRS has issued some guidance on cryptocurrency, it’s unclear what the final regulatory position will be. If the United States issues its own digital dollar, or if the IRS changes its stance toward cryptocurrencies, it could change how bitcoin and other crypto can be used in your retirement portfolio.
How To Decide If You Should Invest In Crypto In Your Retirement Plan?
Before you decide whether to add crypto to your tax-advantaged retirement account, it’s important to understand the implications and be prepared for the possibilities.
Here are some of the considerations of investing crypto in your retirement account, including your 401(k).
Which Coins Do You Want To Invest In?
Right now, Fidelity will only allow accountholders to invest bitcoin in their 401(k)s. Bitcoin is considered a “blue chip” cryptocurrency. It’s the first crypto and considered the most valuable. If you want to invest in a “regular” 401(k) with a major company, your only option is bitcoin, through Fidelity. However, other 401(k) providers are likely to follow suit, especially if Fidelity’s approach proves popular.
It remains to be seen whether other cryptocurrencies will be added to the offerings for retirement accounts. If you want to use other coins to invest for retirement, you might need to open an account with a crypto IRA provider.
What Is Your Risk Tolerance?
Because crypto assets are still new and speculative, it’s important to understand your risk tolerance. Do you have the risk tolerance to add crypto to your retirement portfolio? Understanding your risk tolerance requires that you think about what happens if your crypto assets go to zero. Can you absorb the loss financially and emotionally? Would the rest of your retirement portfolio still be intact?
Make sure adding crypto to your 401(k) fits with your risk profile before you decide to move forward.
Do You Understand Cryptocurrency Investing?
One of the general pieces of investing advice out there is to avoid investing in something you don’t understand. Do you know how cryptocurrencies are valued? What makes them interesting and valuable? If you don’t understand crypto, and you just want to invest because it seems new and exciting, it might make sense to take a step back and reconsider adding it to your 401(k).
Does It Fit Your Investing Goals?
As yourself if adding crypto to your 401(k) will help you reach your retirement investing goals. Does bitcoin or another crypto actually fit in with your portfolio strategy? Don’t change your entire investment strategy around just to accommodate crypto in your 401(k). If you’re more interested in crypto as an experiment, it can make more sense to stick with a more traditional retirement portfolio and then invest in crypto to work toward short-term goals.
Tips For Investing In Crypto In Your 401k
If you decide that you want to add crypto to your 401(k) or other retirement account, there are ways to ensure that it fits with your plan and to limit some of your potential risks. Here are some tips for adding crypto to your retirement account.
Choose Coins You Think Have Long-Term Potential
Because retirement investing is about long-term thinking, you also need to make sure the crypto you add to your 401(k) has long-term potential. Look at the use case for the cryptocurrency. Does it solve a problem? Can it be useful in the future?
“Blue chip” cryptocurrencies like bitcoin and ethereum are generally thought to provide more long-term potential. Bitcoin is increasingly being seen as a store of digital value while ethereum offers a practical ecosystem for decentralized finance. If the upgrade coming at the end of 2022 goes smoothly and ethereum is able to increase its throughput, there’s a good chance that it could have long-term potential.
While ethereum isn’t currently offered by Fidelity, some other 401(k) administrators could potentially include ethereum and other cryptocurrencies to their offerings.
Limit Your Crypto Asset Allocation
While Fidelity will allow accountholders to allocate up to 20% of their 401(k) to bitcoin, it might not be the best choice to put that much of your retirement into crypto. Carefully consider what asset allocation makes sense to you. Some experts suggest that you limit your total alternative assets to 20% of your portfolio, while others suggest you keep it to 10%.
If you already have other alternative assets, you might want to limit how much cryptocurrency you include so that you don’t push your total over that 10% to 20%.
Limiting your crypto asset allocation can also help you avoid relying too much on a volatile asset for your long-term retirement needs.
While it’s possible to find ways to invest crypto in a tax-advantaged retirement account, it might not be your best bet. Carefully consider your retirement goals and whether crypto fits into them. If you decide that crypto should be included, you can add it in a way that helps you capture potential growth in a more tax-efficient manner.
Miranda Marquit, MBA, has been covering personal finance, investing and business topics for more than 15 years, and covering crypto topics for more than 10 years. She has contributed to numerous outlets, including NPR, Marketwatch, U.S. News & World Report and HuffPost. She is an avid podcaster, co-hosting the podcast at Money Talks News. Miranda lives in Idaho, where she enjoys spending time with her son playing board games, travel and the outdoors.