Investors have used 401(k) retirement accounts for decades to save money on taxes and expand their wealth. Some investors defer taxes for the future, while others pay taxes on their contributions concurrently and avoid having to worry about taxed withdrawals when they retire. While many 401(k) accounts from financial institutions focus on stocks and mutual funds, the growing wave of crypto 401(k)s presents a compelling opportunity for investors. Let’s review the details of how crypto 401(k) retirement plans work and how to get started.
Can You Hold Crypto in a 401K?
Crypto’s widespread adoption in recent years has many wondering if this asset can be integrated with their retirement planning. Luckily for crypto enthusiasts, this option exists. You can hold crypto in a 401(k) account, but not every retirement account provider gives you this option. Instead, you will have to create an account with a self-directed retirement account platform like Bitcoin IRA. Their crypto retirement account platform lets users buy and sell over 60 cryptocurrencies in tax-advantaged accounts.
Things You Should Know About a Crypto 401K
A crypto 401(k) account combines crypto and tax savings, but does a crypto 401(k) account make sense for you? We will discuss some of the facts surrounding crypto 401(k)s to inform your decision.
What is a Crypto 401K?
A Crypto 401(k) is like a regular 401(k), but it contains cryptocurrency investments instead. These tax-advantaged accounts let you invest money that would otherwise have gone to the government. While some employers may offer this option, most investors will need to roll over their 401(k) into a self-directed IRA. Typically, crypto 401(k) plans are one-participant plans.
How Crypto 401K Works
Crypto retirement accounts have annual contribution limits that the IRS can change each year. Currently, individual retirement account holders can contribute up to $6,500 per year to their accounts. Investors who are 50 years or older can make an additional catch-up contribution of $1,000. 401(k)s from current employers have higher limits. The maximum total contribution for a 401(k) in 2023 is $22,500. Contributions made to your self-directed retirement account can be used to invest in any crypto offered on your crypto IRA platform. Crypto purchases in your IRA will count toward your contribution total, so keep the limits in mind.
How to Access Crypto in Your 401K
Crypto retirement account platforms typically have dashboards that make it easy to access your crypto and make trades. The crypto IRA platform stores crypto on your behalf, so you don’t have to worry about private keys and custody details. You will need to fund your crypto IRA and use that cash to buy crypto. When distributing, first sell crypto, then distribute cash. You cannot contribute crypto directly from your personal wallet to your retirement account.
What If You Have an Existing 401K?
If you want to invest in crypto with an existing 401(k), you should reach out to your 401(k) provider. Your provider should be able to tell you if the 401(k) plan documents allow for investing in cryptocurrency. Investors with 401(k)s from previous employers can also roll over those funds to a crypto IRA on a platform like Bitcoin IRA.
What are the Fees?
Fees vary for each crypto retirement account provider; typically, you can expect higher fees than with retirement accounts that focus on stocks and mutual funds. Crypto retirement account providers usually have monthly fees that encompass storage, security protocols, and maintenance. You will also have to pay a transaction fee for each trade. The transaction fee won’t amount to much if you buy and hold crypto; however, day traders using their crypto retirement account to time the market may experience higher costs.
Where is the Cryptocurrency Stored?
Crypto storage is a big deal. The way your crypto gets stored impacts its accessibility, and can protect it from cyberattacks. Crypto retirement account providers store crypto for you, so you don’t have to memorize and secure private keys. It is important to choose a crypto retirement account provider that takes security seriously by doing things like storing your crypto in a cold storage solution and employing various security measures to keep your crypto safe.
Are There Government Regulations About Crypto 401Ks?
Crypto 401(k)s have some regulations, just like Traditional and Roth IRAs. The government limits how much you can contribute to a 401(k) each year and raises this limit based on changes to the cost of living. The IRS has raised the 401(k) limit each year for the past several years. Contribution limits for Traditional and Roth IRAs are also raised occasionally but at a less frequent scale.
What are the Benefits of a Crypto 401K?
Wondering if crypto retirement investing is right for you? Then discover the advantages of getting started with a crypto 401(k).
- Save money on taxes: You can trim your current tax bill with a Traditional IRA by making pre-tax contributions and withdrawing the funds at retirement age. Most retirees fall into a lower income tax bracket, which lowers their tax rate. The government makes changes to its tax brackets, typically expanding them over time. For instance, the 22% tax rate included every dollar between $41,776 to $89,075 for single filers in 2022. The 2023 tax season adjusted the 22% tax rate to every dollar between $44,726 to $95,375 for single filers. A 401(k) won’t let you evade taxes, but tax-deferral and good timing can reduce how much you pay in taxes. Post-tax contributions don’t help with your current tax bill, but you typically won’t owe taxes on distributions taken at retirement age, including capital gains and other income.
- Inflation resistance: Many cryptos have a limited supply, and their decentralized structure prevents a central authority from creating more coins. The Federal Reserve’s substantial increases to the money supply significantly contributed to record-high inflation, and crypto may be able to hedge against that risk.
- Strong historical returns: Crypto returns have comfortably outperformed the S&P 500 stock prices over the past 10 years. The asset class has been a rollercoaster throughout its history but tends to compensate with strong performance and decentralized properties to attract investors. Crypto is still in an early stage and has a history of recovering from 70%+ drops.
How About the Risks?
Every investment has risks. Understanding crypto’s risks will help you determine if the asset makes sense for your retirement savings. The best investors look at the pros and cons of every investment idea. Here are the risks to keep in mind.
- Crypto is extremely volatile: Although crypto investments have recovered multiple times from 70%+ declines, emotions at the moment impact investment decisions. Some investors panic sell at the bottom, only to watch crypto soar to new heights. The volatility is not for everyone, especially if you plan to retire in a few years. Thus, this retirement option may better suit young investors or those with significant risk tolerance. Investors with more time before retirement can invest funds into crypto, knowing there is time to weather the volatility.
- Opportunity cost: Every dollar you put into crypto cannot go into stocks, bonds, or other assets. This opportunity cost is present for any investment, and you can mitigate this concern with a diversified portfolio; In other words, you shouldn’t put all of your eggs in one basket. Investors should review their portfolios and financial goals when deciding how much of their funds to allocate to crypto and other assets.
- High fees: Some crypto retirement account providers have significant fees; be sure to review fee structures before committing to an account. You can open a crypto retirement account and allocate some of your retirement funds to crypto through a less expensive buy-and-hold strategy. Day traders who use their 401(k)s to transact will incur more fees due to more frequent transactions. You must also consider monthly maintenance fees, which pay for storage, security, and other costs.
Invest in Your Retirement
Crypto can make for a great addition to many retirement portfolios, and regardless of which investments you choose, a retirement account can move you in the right direction. If you want to combine retirement account perks with promising cryptocurrencies, you can open an account with Bitcoin IRA (*) . Bitcoin IRA (*) is a crypto IRA platform that lets users trade over 60 cryptocurrencies and takes positions in precious metals for further diversification. You can create an account with Bitcoin IRA (*) through their website to get started today.