Crypto and 401K: 3 Secrets to a Crypto Retirement Plan

News, Opinion | November 8, 2021 By:

Combining crypto with traditional savings vehicles — like a 401K — can be a great way to diversify your assets and better prepare for retirement. 

A number of new crypto-based retirement vehicles, like bitcoin IRAs and bitcoin 401Ks, have also emerged over the past few years, enabling investors to benefit from the growing bitcoin market without directly holding coins. 

However, risks like volatility may require caution and some unique investment strategies. 

Below, we’ll break down how to get the most out of both crypto and traditional retirement vehicles with three essential tips.

1. Managing Volatility

For investors looking to use bitcoin to fund their retirement, volatility will likely be a challenge. The value of bitcoin has trended mostly up over time, but it’s not unusual for the price of the coin to fluctuate wildly, bouncing between extreme lows and highs.

Ideally, the fixed supply of bitcoin and cryptocurrencies will mean that long-term volatility won’t be a problem. Only so many bitcoin can be mined. After a certain number of coins are generated, it won’t be possible to create any additional currency.

Bitcoin has already become somewhat less volatile over the past few years as the creation of new coins has slowed down. This doesn’t mean that the currency is stable now, however — take a look at its price over time and you can see some major price swings within the past few months alone. 

This volatility is likely the biggest risk of investing heavily in crypto for your retirement. In the words of the University of Missouri’s personal financial planning department’s chair emeritus, “I don’t know if there’s going to be a market for Bitcoin six months from now, let alone 60 years from now.” 

Proponents of crypto investments will point to bitcoin’s long life so far and tell investors that volatility should wind down in the long run. It’s worth keeping in mind that current investors have reason to encourage you to buy into the market, however — when you invest in bitcoin, they’re also likely to profit. 

This volatility and risk is a good reason to diversify your assets if you invest in crypto as part of your retirement plan. A 401K, Roth IRA or other more traditional retirement investment vehicle may be a good accompaniment to crypto investments.

2. Diversifying Your Assets

One advantage of bitcoin or other cryptocurrencies over an IRA or 401K is that funds invested will be more easily accessible. 

Early withdrawals from a Roth IRA come with a 10% penalty. The same goes for an early withdrawal from your 401K. There’s no penalty for converting your bitcoin back to cash if there are buyers available — though you will still need to pay tax on the money you made from your investment. 

Crypto, as a result, can be a good way to diversify your retirement assets. Funds invested in crypto will almost always be easy to access, unlike funds invested in a more traditional retirement vehicle. 

3. Bitcoin IRAs and 401Ks

Most bitcoin investors hold the coins directly, purchasing them via an exchange and storing them in a wallet they own. This isn’t the only way to own bitcoin, however. New investments vehicles, like bitcoin IRAs, 401Ks and others, provide an option for investors who want their bitcoin held in a more structured fashion.

These vehicles provide some advantages over holding crypto directly. For example, a self-directed Bitcoin IRA may allow you to make crypto trades without incurring the typical capital gains tax that you face after buying or selling bitcoin.

Some IRAs may also provide you with direct access to a fund manager or investment broker who can manage your crypto investments and possibly offer advice on your crypto retirement fund.

There are a growing number of Bitcoin IRAs and 401Ks available, meaning that you have a range of options to choose from if you decide to invest with one of these vehicles. 

There are risks to these vehicles, however. A bitcoin IRA requires a fund manager with a deep understanding of crypto trading and cybersecurity, in addition to the skills necessary to successfully manage a standard IRA. 

Carefully selecting a manager will be necessary if you want to keep your funds safe — and even with an investment vehicle like an IRA, you’ll still have to think about other risks, like volatility. 

Should Investors Consider Retirement With Crypto?

Investors thinking about their retirement may want to investigate crypto savings vehicles, like Bitcoin IRAs and 401Ks. 

While these vehicles aren’t immune to some of the investing challenges associated with cryptocurrency, like its volatility, they do provide investors with a different way to hold crypto.