by | Oct 23, 2020 | Bitcoin IRA

In the United States, 401(k) plans are the single most popular type of retirement vehicle, and are offered by essentially every employer. There are certainly advantages to having a 401(k) plan. However, the Internal Revenue Agency (IRS) has stringent regulations stipulating what types of assets can be purchased with 401(k) funds – cryptocurrency, including Bitcoin, is not one of the permitted investments. Therefore, the simplest method is to rollover funds from a 401(k) into a self-directed IRA (or SDIRA). The IRS has few restrictions on what assets can be held in SDIRAs, thus making Bitcoin (and cryptocurrency, in general) investment seamless. 

Yet, the question begs to be answered whether cryptocurrency investments are a good option to include in one’s retirement vehicle. In this article, financial experts discuss whether or not Bitcoin investments should be included in a 401(k) plan.

Bitcoin Investments As Part Of The 401(k) Retirement: Yes Or No?

“Bitcoin investment has remained as one of the most controversial investment subjects ever since its inception in 2009. The world’s largest cryptocurrency, which dominates over 60% of the overall crypto market as on date, has a standalone market cap of $238 billion.

Also called as ‘Digital Gold’, Bitcoin has time-and-again attracted big institutional players from the world of traditional finance. However, as a retail investor, it becomes an absolutely difficult choice to make whether one must have exposure to BTC investment either partially, fully, or in any other way.

Especially, when it comes to investing in 401(k) retirement funds, one must be extra careful about it. If one understands the inherent nature of Bitcoin, it is an extremely volatile investment asset that comes in the high-risk-high-rewards category.

However, one might have a question that since we are considering Bitcoin investment as part of our retirement plan, what’s wrong with being a holder and see our investments grow with time.

But let’s not see Bitcoin investments with just one lens but rather see it with a nuanced investment approach weighing both the risks and opportunities. Also, when you thinking of long term investments, the decisions vary depending on other factors of age, your family income, and your market position.

Firstly let’s understand how and where you can make Bitcoin (BTC) investment as part of your retirement plan. Later, we will move to see other Pros and Cons associated with it.

Parking Your 401 (k) Retirement Funds In Bitcoin

Over the last many decades, traditional investment instruments have dominated the market with a certain monopoly. Golds, bonds, and mutual funds have remained the standard investment vehicles for most of us individuals.

However, the rising inflation and turbulent economic times like now have pushed investors to move beyond the boundaries and search for alternatives in the market. Looking at the massive history of the market, Bitcoin is a relatively investment vehicle but that quickly climbed the ranks in terms of popularity and penetration in the mainstream global financial space.

Despite being a highly volatile asset, Bitcoin is seen as a potential hedge against the traditional stock market. Over the last decade, Bitcoin has gone through several moments of massive turbulence. However, it has managed to sustain all storms with the recent example being the COVID-19-led economic crisis.

In fact, the latest market data shows that BTC investments have soared drastically throughout 2020. Digital asset manager Grayscale reported a 147% jump year-to-date in its assets under management (AUM) for the Grayscale Bitcoin Trust. This further testifies that Bitcoin is the go-to choice of investors during a period of crisis.

The thing about Bitcoin is that it’s quicker and cheaper while making cross-border transactions. Besides, unlike gold, there’s no barrier in the movement of the asset.

Currently, most of the Individual Retirement Account (IRAs) are managed majorly by banks who serve as custodians or trustees. The most common investment vehicle for IRAs include stocks, mutual funds, bonds, and Certificate of Deposits (CDs). However, by choosing self-directed IRAs, investors can choose to diversify by investing in crypto assets like Bitcoin.

There are many retirement service providers who have collaborated with some of the top cryptocurrency exchanges to help users buy Bitcoins as part of the IRA investment. However, as said earlier, one needs to be smart enough while increasing exposure to these volatile asset classes via self-directed IRAs. Besides, one must also cognizance of the regulatory flips that can play out in the future.

Pros and Cons of Bitcoin IRAs

There are multiple considerations that can play out either in favour of you or against you. However, as an investor, one is always exposed to risks, but the ground idea is to mitigate the risks and maximize profits on your investment.

Pros of Bitcoin IRAs

The global economic uncertainty has spiked up certainly with bond yield and interest rate going at an all-time low. On the other hand, inflation will continue to rise and putting liquid cash in the bank is like losing money every year. One must think of moving part of their capital investment to an alternate asset class that can appreciate considerably over the period of time. Bitcoin presents this big opportunity at this stage.

  • The total Bitcoin supply is fixed at 21 million, unlike Gold that one can mine more. Thus, Bitcoin will always remain in scarcity driving higher demand and thus its price.
  • Bitcoin helps as a potential hedge in case of economic downturns like e say this year in 2020.
  • By making Bitcoin investment through IRA accounts, one can also get exemption on capital gains tax.
  • Unlike other asset classes like real estate and gold, Bitcoin is relatively easier to move and transact.

Cons of Bitcoin IRAs

  • Regulators can anytime pull the plug on the functioning of digital currencies and in such a case, investors will have nowhere to go.
  • Note that Bitcoin is highly volatile and can swing wither ways. It is very much possible that when you need some good funds after retirement, BTC can be much lower than your buying price.
  • While Bitcoin is good as an asset class, transacting this for daily purchases is very cumbersome. Very few merchants globally accept Bitcoin, and this situation may or may not improve in the future.
  • During the self-directed IRA investment process, setting up a Bitcoin trading facility can involve several different fees: setup fee, trading fee, custodial fee, and maintenance fee. Besides, the IRA custodians will get additional reporting duties for your account, with the IRS. They would pass on these fees directly to investors.

Coming back to the golden question, whether one should invest or not in Bitcoins via IRA? So, while investing in Bitcoin via IRS, one should have a clear retirement goal and how much they can write-off if things go awry. So, if you have over 15-20 years ahead for your retirement, investing in bitcoin could be a risk worth considering. But this needs to be a calculated risk and the exposure should be only enough money that you’re willing to lose entirely.

Bitcoin investments as part of the retirement plan could be good for young and early investors. Not only these investors can maximize their gains, but if things go wrong, they can even mitigate losses.

If you’re at a stage where there’re just 5-10 years of your service left, you might not consider going through the hassle just to expose your funds to a volatile asset class. Lastly, people who belong to the Buffett school of investment thinking should uprightly avoid Bitcoins.”

Edmund McCormack, Founder & CEO, Dchained LLC

Bitcoin Might Not Be An Ideal Investment For Retirement Due To Its Price Volatility

“Bitcoin might not be an ideal investment for retirement, due to its price volatility. In my opinion, bitcoin will not be a mainstream investment option in a 401(k) plan.

But let’s look at some of the pros and cons of having Bitcoin in 401(k):

Pros

  1. The addition of Bitcoin could potentially add diversification to retirement portfolios.
  2. It can also help to protect those retirement accounts in the event of a major market downturn.

Cons

  1. Bitcoin’s extremely volatile nature makes it a tough sell as a retirement investment for a lot of people.
  2. Cryptocurrency routinely experiences noticeable price fluctuations.
  3. Trading Cryptocurrency incurs its own set of fees from the service provider’s trading partner and custodian.”

Ahmed Ali, Content Marketing Executive,  Physicians Thrive

Two Main Reasons Why Bitcoin Is Not A Viable Option

“In my opinion, Bitcoin is not a viable option to be used as an investment option for two main reasons.

One of the reasons is that owing to the unregulated nature of cryptocurrencies, investing in form of the coins can be risky. Nobody knows what might come of the digital currencies in the future. What if someone had their retirement savings in form of Bitcoins and the coin suddenly vanished one morning? Who would compensate them?

The second reason is that Bitcoin fluctuates sharply. Due to this, it cannot be counted as a stable method of storing wealth. An employer might pay the employee’s 401(k) installments at the agreed rate but with time, the price of Bitcoin drops. When this happens, the employee might end up with an insufficient (reduced) retirement package due to the volatility of Bitcoin.”

James Jason, Financial Analyst and Currency Trader, Mitrade

As per its regulations, the IRS prohibits the use of 401(k) funds to invest in alternative assets such as cryptocurrency. However, for those investors interested in doing so, rolling 401(k) funds into a self-directed IRA (or more aptly, a Crypto IRA) is the easiest method. Investors interested in including Bitcoin investments in an IRA can see our reviews of the top 5 Crypto IRA companies, to better understand what is available in this space. As with any investment vehicle, always do your due diligence and consult a financial professional prior to investing in cryptocurrency.

Sarah Bauder

Sarah Bauder is a financial writer with over a decade of experience at numerous online publications, writing about alternative investments, retirement, US politics, world economy and more.