One of the major perks at many jobs is a 401(k), an employer-sponsored retirement savings plan. Traditionally, 401(k) administrators have offered an assortment of mutual funds as the primary investment options for plan participants. And you may be able to invest in Bitcoin or other cryptocurrencies.
If your 401(k) doesn’t offer cryptocurrency as an investment option, and that’s something you want to invest in, you may be able to do so through an individual retirement account (IRA).
Here’s what you need to know.
Key Takeaways
- Bitcoin and other cryptocurrency investments may be available through 401(k) plans and individual retirement accounts (IRAs), though access may depend on the plan provider.
- Many plan managers are skeptical about the value of crypto and concerned about the risks it entails.
- If you have the option to invest in crypto, it should probably make up only a small percentage of your retirement portfolio at most.
Investing in Cryptocurrency Through Your 401(k)
While cryptocurrency has gained popularity among investors, it's still a risky and highly volatile investment. The hype among speculators, the pump-and-dump scheme crafters, and the lack of stability and longevity have made many employers and the companies that administer retirement plans wary of including crypto in their 401(k) offerings. One of the issues faced by cryptocurrency fans wanting to invest in crypto through their 401(k)s is that employees rely on sponsored and usually externally managed plans.
This means that under the Employee Retirement Income Security Act (ERISA) of 1974, defined benefit plans, such as 401(k)s, must be managed by fiduciary standards—meaning that the plan managers must act in the best interests of plan participants. If they don't, they can be held personally liable. That said, cryptocurrencies may not be the plan manager's idea of assets that meet these standards.
The first Bitcoin Spot ETFs (exchange-traded funds) began trading on stock exchanges in January 2024. They are available to investors through traditional brokerage platforms and might have a place in a retirement account as an alternative investment for those who can afford the risk. As of January 2024, whether these ETFs will be selected for use in retirement savings accounts remains to be seen.
Crypto 401(k) Innovation
However, the situation is changing—Fidelity, which administers 401(k) plans for many companies, has created a Digital Assets Account for 401(k)s, which it describes to employers as “an innovative investment account that gives your employees the option to gain exposure to digital asset investments and provides you more choice in your investment options to help meet the demands of your evolving workforce.” Fidelity states that the account “primarily holds bitcoin plus a short-term money market investment.”
But while Fidelity and its competitors may make crypto assets available to retirement plan managers, that doesn’t mean managers will sign on anytime soon—or perhaps ever.
The Employee Benefits Security Administration of the U.S. Department of Labor sent out a compliance assistance release in early 2022, reminding plan administrators of their fiduciary responsibilities and urging them to “exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants.”
The release stated, “At this early stage in the history of cryptocurrencies, the Department has serious concerns about the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies. These investments present significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft, and loss...”
Warnings like that, combined with the recent failures of several cryptocurrencies and the much-publicized collapse of the FTX cryptocurrency exchange, could keep many 401(k) plan managers in wait-and-see mode for years to come.
Investing in Cryptocurrency Through Your IRA
Individual retirement accounts (IRAs) are a different matter. Since it’s your account to manage, you are, in effect, your own fiduciary. With regular IRAs, however, the law limits your investment options primarily to mainstream investments like mutual funds, exchange-traded funds (ETFs), stocks, bonds, and so forth.
But there’s another type of IRA, known as a self-directed IRA (SDIRA), that allows for alternative investments. According to the U.S. Securities and Exchange Commission (SEC), those include “real estate, precious metals and other commodities, crypto assets, private placement securities, promissory notes, and tax lien certificates.”
Self-directed IRAs can be either traditional or Roth IRAs. Remember that many of the same rules that apply to conventional IRAs also apply to self-directed IRAs. For example, your maximum annual contribution is limited under Internal Revenue Service (IRS) rules. For 2024, it’s $7,000 (up from $6,500 in 2023) if you’re younger than 50, or $8,000 (up from $7,500 in 2023) if you’re 50 or older.
However, you can’t simply buy a cryptocurrency and stick it in your IRA. You must have an account with an IRA custodian willing to hold crypto assets. These originally tended to be new and specialized companies, but a growing number of established mutual fund companies and brokerage firms are adding this service.
What is Cryptocurrency Backed by?
Unlike so-called fiat money, which is backed by government guarantees, most cryptocurrencies are backed by nothing except the value that investors assign to them. In other words, one investor’s cryptocurrency is worth what another investor is willing to pay for it.
Is Cryptocurrency Traded on the Stock Market?
Cryptocurrency is not traded on the New York Stock Exchange or any other traditional stock exchange. However, many brokerages now offer the option to invest in cryptocurrency through exchange-traded funds (ETFs) that track bitcoin prices. Cryptocurrencies are traded on crypto exchanges.
Does the U.S. Government Regulate Cryptocurrency?
Contrary to popular belief, cryptocurrency is highly regulated by several government entities when used in ways that fall under their jurisdiction. For example, the Securities and Exchange Commission (SEC) regulates cryptocurrency when there is the perception of an investment offering; the Commodity Futures Trading Commission (CFTC) has authority over crypto derivatives trading; the IRS considers it property and enforces its taxation. The Department of the Treasury's Office of Foreign Asset Control (OFAC) and the Financial Crimes Enforcement Network (FinCEN) enforce illegal cryptocurrency uses.
The Bottom Line
Bitcoin and other cryptocurrencies are available to 401(k)s, IRAs, and other retirement plans, although usually indirectly, such as through ETFs that own crypto. Many retirement plan managers maintain a distance from cryptocurrency because of skepticism about the value and wariness of its volatility. If investing in crypto for retirement appeals to you, you may want it to constitute only a small portion of your portfolio.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read ourwarranty and liability disclaimerfor more info. As of the date this article was written, the author owns/does not own cryptocurrency.
