Should You Invest Your 401(K) In Crypto?

Investing in crypto assets using 401(k) funds is a complex and nuanced topic. While it may be possible to use 401(k) funds to invest in cryptocurrencies like Bitcoin, there are important considerations to keep in mind. Firstly, the availability of such investment options depends on the plan provider and the employer. For instance, Fidelity Investments, one of the largest 401(k) plan providers, has started allowing Bitcoin investments within 401(k) plans, but other providers like Vanguard Group have avoided crypto investments. Secondly, the volatility and regulatory uncertainty of cryptocurrencies introduce significant risks to retirement savings. The U.S. Department of Labor (DOL) has expressed grave concerns and urged plan fiduciaries to exercise extreme care before adding crypto options to 401(k) investment menus. These risks, along with the potential benefits of crypto investments, should be carefully evaluated before making any decisions.

Crypto IRA companies

Investing in crypto IRAs can be a great way to diversify your retirement portfolio and eliminate capital gains taxes. Here is a list of some of the top Crypto IRA companies:

ITrustCapital

ITrustCapital is a leading digital asset IRA trading platform that offers 24/7 trading and allows investors to buy and trade cryptocurrencies, silver, and gold in real-time through their retirement accounts. They have low fees, with a 1% trade fee for crypto and $50 over spot for gold. iTrustCapital also has no monthly, initial purchase, broker, or scaling fees. The minimum investment amount is $1,000, and there is a $30 trade minimum. iTrustCapital offers 34 cryptocurrencies to trade, including Bitcoin, Ethereum, Litecoin, and Ripple.

Bitcoin IRA

Bitcoin IRA is a full-service Bitcoin IRA provider that offers an easy account setup, 24/7 real-time trading, and military-grade security. They support over 60 types of cryptocurrencies and have a standard account minimum of $3,000, but also offer a Saver IRA with a $100 initial deposit and $100 monthly recurring investment. Bitcoin IRA charges a custodian fee, a security fee, and a one-time service fee, but the specific amounts are not listed on their website.

BitIRA

BitIRA offers Bitcoin IRAs with top-notch security measures and end-to-end insurance coverage for digital assets. They utilize multi-encryption encoding for transactions and store digital assets in offline physical keys kept in grade-5 nuclear bunkers protected by armed guards and computer specialists. BitIRA requires a minimum investment of $5,000 and does not list its fees on its website. They support investing and trading in multiple cryptocurrencies, including Bitcoin, Ethereum, Ripple, and Litecoin.

Equity Trust

Equity Trust has been in the business of managing self-directed IRAs for over 40 years and offers support for both traditional and alternative investments. They have no transaction fees and provide access to SDIRA specialists who can help manage accounts. Equity Trust supports trading in eight cryptocurrencies, including Bitcoin, Ethereum, and Litecoin, with one-day settlement. They employ multiple security features, including multi-factor authentication, multi-encryption, and secure cold storage, and offer end-to-end insurance on digital assets. Annual administration fees range from $225 to $2,250, depending on the account size, and there is a $50 account setup fee.

Coin IRA

Coin IRA is a low-cost cryptocurrency IRA company that provides educational resources and consultants to assist customers with crypto-related questions. They offer a free crypto IRA guide covering various topics, such as tax benefits, crypto retirement savings, and inflation hedging. Coin IRA requires a minimum investment of $5,000 with no setup, annual, or monthly maintenance fees. They support investing and trading in Bitcoin, Ethereum, Litecoin, and more, and store cryptocurrencies in cold-wallet storage.

Self-directed IRAs

A self-directed IRA (SDIRA) is an individual retirement account that allows you to invest in alternative assets beyond the stock market. This includes private equity, precious metals, real estate, and cryptocurrency.

With an SDIRA, you are in charge of making investment decisions and directing transactions. This means you have greater flexibility and control over your retirement funds. However, it also comes with increased responsibility and potential risks.

• Eligibility and Setup: To open an SDIRA, you need to find a specialised provider, such as The Entrust Group, Equity Trust, or IRA Financial. You will need to confirm that they can hold your preferred investment type and choose between a traditional or Roth SDIRA. There is typically an account establishment fee, and you will need to fund your account through a transfer, rollover, or contribution.
• Investment Options: With an SDIRA, you can invest in a diverse range of alternative assets. This includes real estate, private equity, precious metals, cryptocurrency, and more. You have the freedom to choose investments that align with your interests, expertise, and risk tolerance.
• Tax Advantages: SDIRAs offer tax-efficient ways to build your portfolio. A traditional SDIRA allows for tax-deductible contributions, and withdrawals are taxed as ordinary income. A Roth SDIRA, on the other hand, is funded with post-tax dollars, and withdrawals can be made tax-free.
• Due Diligence and Risk: As the account holder, you are responsible for carrying out due diligence and understanding IRS rules before making any investments. SDIRAs often carry higher risks due to the nature of alternative assets. These investments may be more difficult to sell, come with strict contracts, or have a higher potential for fraud.
• Fees: SDIRAs typically have higher fees compared to regular IRAs due to the increased complexity of administering the account. You may encounter account setup fees, annual fees, and fees per asset held.
• Record-Keeping and Compliance: SDIRAs require meticulous record-keeping and compliance with IRS regulations. Failure to follow guidelines can result in penalties or taxes. You must also abide by restrictions on disqualified persons and prohibited transactions.
• Suitability: SDIRAs are not suitable for everyone. They require a certain level of dedication, knowledge, and comfort with risk. They are often utilised by hands-on investors who are willing to take on the responsibilities of selecting and vetting their investments.

In summary, self-directed IRAs offer a unique opportunity to invest in alternative assets and build a diversified portfolio. However, they come with increased responsibilities, potential risks, and fees. It is crucial to thoroughly understand the rules, carry out due diligence, and carefully consider your risk tolerance before opening an SDIRA.

Crypto volatility

As of 2024, it is possible to invest your 401(k) in crypto, specifically Bitcoin. However, this is dependent on your situation and the company you work for. Crypto is a relatively new asset class and is widely considered to be volatile. Volatility refers to the rate at which the price of an asset increases or decreases over time. Generally, the more volatile an asset is, the riskier it is considered to be as an investment. Crypto is considered to be more volatile than stocks, with the potential for significant upward and downward movements over shorter time periods.

Cryptocurrencies with lower trading volumes or emerging crypto assets like DeFi tokens tend to have higher volatility. Factors that can increase volatility include news coverage, earnings reports, and unusually high or low spikes in the volume of trading.

The crypto market is still in its infancy and is rapidly growing and maturing. As a result, many of the factors that drive volatility are expected to subside over time. For instance, as the market grows, there will be increased institutional participation and regulatory oversight, which will reduce volatility in the future as the asset class matures.

While crypto volatility may be a concern for potential investors, it also presents opportunities for high returns. Additionally, strategies such as dollar-cost averaging can be used to limit the downside impact of volatility.

Regulatory risk

Firstly, cryptocurrencies are subject to limited regulation, which can expose investors to significant risks. The U.S. Department of Labor (DOL) has cautioned employers and plan fiduciaries about the risks of offering cryptocurrencies within 401(k) plans. The DOL has warned that cryptocurrencies may not be suitable for retirement plans due to their volatile nature and lack of long-term data. In addition, the DOL has stated that plan fiduciaries have a legal obligation to act in the best interests of plan participants and select prudent investments. As such, offering cryptocurrencies within a 401(k) plan could potentially breach fiduciary duties if it is deemed that cryptocurrencies do not meet minimum risk requirements.

Secondly, the regulatory landscape for cryptocurrencies is expected to evolve, and increased regulation could impact the viability of cryptocurrencies as an investment option. Historically, there has been tight regulation around the types of assets that can be held in 401(k) accounts. With cryptocurrencies gaining mainstream attention, it is likely that government intervention and regulation will increase. This could potentially impact the value and liquidity of cryptocurrencies, affecting their performance as an investment.

Additionally, the lack of regulatory clarity makes it challenging for fiduciaries to properly analyze and assess the risks associated with cryptocurrencies. As a result, many plan managers and employers are hesitant to include cryptocurrencies within their 401(k) offerings. They prefer to take a wait-and-see approach until the regulatory environment becomes more defined.

The regulatory risks associated with investing 401(k) funds in cryptocurrencies are significant. These risks include the potential for increased government intervention, the impact of regulation on the value and liquidity of cryptocurrencies, and the difficulty for fiduciaries to assess the risks due to the evolving regulatory landscape. Therefore, it is essential to carefully consider these regulatory risks before investing your 401(k) in cryptocurrencies.

Eligibility requirements

The eligibility requirements for investing in crypto with your 401(k) depend on your specific situation and the type of retirement plan you have. Here are some general guidelines and considerations to keep in mind:

• The Employee Retirement Income Security Act of 1974 (ERISA) sets the rules for 401(k) plans and requires the plan to have a sponsor, an administrator, and a fiduciary. The fiduciary is responsible for ensuring that the plan is managed in the best interests of the participants and can decide whether to include crypto as an investment option.
• Your employer plays a crucial role in determining the investment options available in your 401(k) plan. They tend to be conservative and wary of offering risky investments like cryptocurrencies.
• If your employer offers a self-directed 401(k) or a self-directed IRA, you may have the option to invest in cryptocurrencies directly. A self-directed account gives you more control over your investment choices.
• The general guideline for eligibility is that you established your 401(k) as a full-time employee from a previous employer or you are over the age of 59.5 years. However, the rules can vary depending on the type of retirement plan you have, such as a Traditional or Roth IRA, 403(b), 457, or Thrift Savings Plan (TSP).
• It's important to understand the specifics of your plan's eligibility requirements, as they can vary. Factors such as age, service hours, and employment status may influence your eligibility.
• When considering investing in crypto with your 401(k), it's essential to carefully weigh the risks and potential benefits. Cryptocurrencies are volatile and speculative investments, and you should ensure you have a well-diversified portfolio.

Frequently asked questions