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Retirement Planning

How To Invest In Crypto In Your IRA Or 401k

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As cryptocurrencies become more popular, some savers wonder how they can include them in their tax-advantaged retirement accounts like a 401k or IRA.

Investing in crypto in these accounts is possible — depending on who your custodian is — but it can also be tricky and often requires extra steps. 

If you’re interested, though, here’s what you need to know about how to invest in crypto in your IRA or 401k.

Table of Contents
Finding A Custodian For Your Cryptocurrency Retirement Account
How To Invest In Crypto In Your 401k
How To Invest In Crypto In Your IRA
Pros And Cons Of Investing In Crypto In Your Retirement Account
Should You Invest In Crypto In Your IRA Or 401k?

Finding A Custodian For Your Cryptocurrency Retirement Account

The biggest challenge to investing crypto in your IRA or 401k is finding a custodian for the account. Even though it’s legal to hold cryptocurrency in a tax-advantaged retirement account, it’s not always easy.

Some custodians don’t like the idea of dealing with cryptos, especially since it can require extra paperwork and additional hoops to jump through. If you want to invest crypto in your IRA or 401k, you need to find a custodian that will help you manage the account.

Typically, the best way to find custodians that will allow you to invest in crypto is to search for "self-directed" retirement accounts. Note that it's generally more difficult (but not necessarily impossible) to find self-directed options for 401k plans since these are sponsored by employers. Here's a closer look at how to invest in crypto in a 401k or IRA.

How To Invest In Crypto In Your 401k

It’s more challenging to find a custodian if you want to invest in cryptocurrency for an employer-sponsored 401k. You'll be limited — to some degree — by the options available from your employer’s retirement plan custodian.

However, you can check to find out if your employer offers a self-directed brokerage options with your 401k. If it does, you could potentially invest part of your portfolio in cryptocurrencies.

There are some custodians that offer self-directed services to employers. For example, Bitwage began offering its Bitcoin 401k in 2020. Bitwage offers payroll services to employers who want to pay salaries in Bitcoin.

However, it’s also possible to access a cryptocurrency 401k through the provider ForUsAll. This administrator works with companies to provide a range for 401k choices. And it recently announced that participants can allocate a portion of their portfolios to cryptocurrencies. ForUsAll isn’t limited to Bitcoin either. It’s possible to invest in Ethereum and Litecoin as well through this offering.

For now, cryptocurrency 401k offerings are fairly limited (unless you're self-employed and have a Solo 401k). It can be difficult to find a custodian that will allow crypto investing, even if your employer has a self-directed option on their 401k plan. If you can’t invest in a cryptocurrency retirement plan through your employer, you might need to turn to an IRA.

How To Invest In Crypto In Your IRA

It’s a little easier to invest crypto in an IRA, since you don’t have to go through your employer’s administrator to find a custodian. There are a number of self-directed IRAs that will help you invest in alternative assets.

Just like a 401k, many IRAs focus on stocks, bonds and funds. In fact, if you use a more traditional brokerage or a robo-advisor, you’re likely to be limited to these assets. However, there are custodians that offer access to self-directed IRAs and there are also custodians that specialize in IRAs designed to hold cryptocurrency.

Self-Directed IRA

Before you choose your IRA custodian, make sure they allow cryptocurrency transactions and get a list of exchanges that the custodian works with. For example, Alto IRA is one of the only self-directed IRA providers that integrates directly with Coinbase.

To set up and use a self-directed IRA, you'll need to jump through a few extra hoops:

  1. You must set up an LLC that is completely owned through the self-directed IRA. 
  2. Once you have the LLC set up, you need to open a business checking account specifically for this LLC. You can use the tax ID for your LLC, and make sure you open the account under the name of the business.
  3. Now you can open an account for your LLC on a cryptocurrency exchange. The exchange should be compatible with your self-directed IRA, and you should only use this account for trades related to your self-directed IRA account.

Depending on the IRA provider, you might be able to get help with these steps. Additionally, some self-directed IRA providers offer the option to invest in private placement funds that include cryptocurrency investments. 

Check out this list of the Best Self-Directed IRA Providers.

Crypto IRAs

If you’re not interested in going through the process of setting up an LLC and jumping through the hoops that come with a self-directed IRA, you can turn to a crypto IRA provider. 

These IRA providers act as custodians and will manage all aspects of the IRA for you — including the associated wallet. You set up an account similar to how you would other tax-advantaged accounts through brokers.

One of the most well-known providers is BitcoinIRA, which offers access to Ethereum and other cryptocurrencies in addition to Bitcoin. BitcoinIRA also allows you to use an IRA to invest in gold.

However, there are other service providers that can help you invest in crypto. For example, Madison Trust Company and iTrust Capital also offer cryptocurrency IRAs. BitGo offers access to crypto IRA choices too.

With these accounts, you can set things up fairly easily and make your choice of cryptocurrencies, as well as contribute on a regular basis. And, unlike a 401k administrator from your company, you usually aren’t limited in regards to allocation.

Pros And Cons Of Investing In Crypto In Your Retirement Account

Before you decide to add crypto to an IRA or 401k, it’s important to carefully consider your long-term financial goals and your overall strategy. Here are some of the pros and cons of adding crypto to your retirement portfolio.

  • Diversification: If you want to add diversity to your retirement portfolio, cryptocurrencies can help. Many retirement investors like the idea of going beyond stocks and bonds and crypto is a different asset class that provides something extra to a portfolio.
  • Potential growth: Cryptocurrencies have seen explosive growth recently. As a result, many retirement investors like the idea of adding crypto to their portfolios as a way to grow their wealth exponentially.
  • Reduce tax liability: By keeping cryptocurrencies in retirement accounts, they get to take advantage of favorable tax laws. With a traditional 401k or IRA, you can get a tax deduction now, and the earnings grow tax-deferred. If you trade inside your IRA, you can avoid short-term crypto gains taxes. With a Roth account, you contribute with after-tax money, but you won’t have to pay taxes when you withdraw.
  • Price volatility: Cryptocurrency prices are much more volatile than the prices of stocks and bonds. It can feel like a rollercoaster when you invest in cryptocurrencies as part of your retirement portfolio.
  • Risk of loss: There’s always a risk of loss anytime you invest. However, stocks have yet to log overall losses in any 20-year period. Cryptocurrencies, though, represent a new asset class. It’s untried, and there’s the possibility that they won’t be widely adopted. On top of that, if you pick the “wrong” cryptocurrencies and they don’t end up becoming the standard, you could also lose.
  • Fees: Self-directed IRAs usually come with higher fees than you see with other IRAs. Additionally, crypto-focused IRAs or 401ks usually charge higher fees than what you’d pay with a retirement account through a robo-advisor. On top of regular management fees, you might also pay additional fees for each trade — including purchases. If you frequently buy crypto, the fees can really start to add up.

Should You Invest In Crypto In Your IRA Or 401k?

Before you move forward with buying crypto for your tax-advantaged retirement account, it’s important to consider your risk tolerance, as well as your other retirement and portfolio goals.

Do you think cryptocurrencies will reach a point where they’re more widely accepted and used in mainstream transactions? If so, capturing the explosive growth of cryptocurrencies now can make sense for your portfolio.

However, there's still the risk of loss. As a result, it might make sense to limit how much of your portfolio you devote to cryptocurrencies. Some experts recommend that no more than 10% of your portfolio be devoted to alternative investments.

In the end, cryptocurrencies provide an interesting way to potentially boost your retirement portfolio. Carefully consider your needs and do your own research to determine if this is the right path for you.

Disclosure: the author owns Bitcoin, Ethereum and Litecoin, which are mentioned in this piece.

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