Advantages and disadvantages of holding crypto in a 401 (k)
In early 2022, Fidelity became the first major financial services firm to allow investors to add cryptocurrency assets to their 401 (k) pension accounts. Although this move was certainly a milestone for crypto, many analysts have been quick to point out that cryptocurrencies can be a poor choice for investors looking to build value in the long run.
The key promise for cryptocurrencies is that they provide a higher return than the assets that are traditionally held in 401 (k) accounts – primarily equity funds. However, even the most well-established cryptocurrencies, such as Bitcoin, have proven to be very volatile. In this article, we will look at these disadvantages and advantages in more detail.
Important takeaways
- Fidelity now allows investors to add cryptocurrencies to their 401 (k) accounts, allowing retired investors to allocate up to a maximum of 20% of their nesting eggs to Bitcoin.
- Proponents of her case have been working to make the actual transcript of this statement available online.
- Analysts generally agree that cryptocurrencies are simply too risky to form a large part of a responsible retirement plan.
The disadvantages of keeping crypto in a 401 (k)
The primary disadvantage of keeping cryptocurrency in a 401 (k) can be summed up in one word: instability.
Cryptocurrencies are considered unstable in two main ways. One is their price. Even the most well-established cryptocurrencies, such as Bitcoin and Ethereum, are exposed to wild price fluctuations. Of course, some other assets are also volatile, and some of these are held in 401 (k) accounts. However, crypto is still such a new asset that there is no long-term data or research on its long-term price path (or even viability as an asset class).
The other way crypto is unstable is when it comes to regulation. Historically, there has been fairly tight regulation around what kind of assets employees can have (and employers can offer) in their 401 (k) accounts, and it is expected that crypto will face increased regulation over the next few years. In fact, Bitcoin’s suitability as a 401 (k) investment has given warnings from the Ministry of Labor, which enforces federal rules for the plans. In March, the Ministry of Labor (DOL) warned employers against crypto, warning that they “should expect to be questioned about how they can put their actions in relation to their duties of prudence and loyalty.”
This instability is particularly relevant when it comes to assessing the suitability of cryptocurrencies for 401 (k) accounts, because these accounts are usually focused on safer investment options. If you are investing for your retirement, it is a good idea to choose assets that have the best chance of meeting your individual risk tolerance and long-term investment goals as possible, and that will not be subject to increasing government regulation.
This is why there are currently very few options to add crypto to 401 (k). As of June 2022, only one company (Fidelity) is offering Bitcoin for its 401 (k) accounts, and it seems unlikely that this will work. The reason is that employers (who oversee employees’ 401 (k) accounts) act as custodians of 401 (k) plans – in part to protect employees from risky investments.
and partly to protect themselves from liability. As a result, options for 401 (k) accounts have always been limited to low-risk assets: some plans will not even make closed-end funds or preferred stocks available in a 401 (k), let alone something as risky as Bitcoin.
Cryptocurrencies have proven to be a volatile investment with high risk over the past decade. For this reason, they may not be suitable for a 401 (k) pension account.
The Benefits of Keeping Crypto in a 401 (k)
However, there are potential benefits to keeping crypto in a 401 (k). Crypto enthusiasts point to the fact that Bitcoin in particular has increased enormously in value over the last decade, and far better than the return given by “traditional” 401 (k) investments as equity funds.
This is true, but does not tell the whole story. Although the price of Bitcoin has risen exponentially since its launch in 2009, it happened at a time when crypto was growing from a fringe movement to an accepted and widespread asset class, representing a growth rate that is unlikely to be recreated in the future. Furthermore, given the relative novelty of cryptocurrencies, there is an almost complete lack of long-term data to support the claim that any cryptocurrency is a good stock of value in the long run.
However, keeping a crypto in your 401 (k) account can be a definite benefit: tax. If you are already trading in cryptocurrencies, and have a well-established and low-risk retirement plan that is not dependent on crypto, doing your crypto trading in a 401 (k) may reduce your tax liability. Roth 401 (k) accounts in particular can offer a benefit to bitcoin investors, because they allow you to avoid capital gains tax that your crypto investments can generate.
Although given this benefit, however, most experts agree that crypto should only make up a small portion of your retirement savings plan, if any.
Can I keep crypto in my 401 (k) account?
It is possible, but there are limited options. At the moment, Fidelity is the only company that offers crypto for its 401 (k) accounts, so investors can add Bitcoin. Crypto is unlikely to become a common choice for 401 (k) accounts anytime soon.
What are the potential benefits of Crypto for 401 (k) accounts?
Supporters of holding crypto in 401 (k) accounts claim that currencies such as Bitcoin yield higher profits than assets traditionally held in 401 (k) accounts. However, even the most well-established cryptocurrencies are highly volatile and claims of higher performance over time are not supported by evidence.
What are the disadvantages of Crypto for 401 (k) accounts?
Cryptocurrencies are highly volatile, risky investments. This is the reason why they are generally seen as a poor choice for pension schemes. In addition, it is unclear what regulatory landscape cryptocurrencies will face in the short to medium term, which further casts doubt on those who stockpile long-term value.
The bottom line
In 2022, Fidelity became the first major asset manager to allow investors to add cryptocurrencies to their 401 (k) accounts. Pension investors can now allocate up to a maximum of 20% of their nest eggs to Bitcoin.
Proponents of cryptocurrencies say they offer much higher returns than assets typically held in 401 (k) accounts. However, most analysts agree that cryptocurrencies are simply too risky to form a large part of a responsible retirement plan.
