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Does Your 401(k) Let You Invest in Bitcoin?

By Kailey Hagen - Jun 27, 2021 at 6:10AM

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Just because you're willing to risk your retirement savings on the cryptocurrency doesn't mean your employer is willing to take the risk of helping you do it.

If you'd invested $1,000 in Bitcoin (BTC 0.17%) in 2010, you'd probably already be retired -- and living a pretty extravagant lifestyle at that. And with some crypto-bulls asserting that the original cryptocurrency's price could one day exceed $100,000 per token, it's understandable that many people might be wondering if Bitcoin could help fund their retirements too. 

Anything's possible, but if you're hoping to use your 401(k) funds to invest in Bitcoin, you could run into a surprising problem.

Smiling worker typing on laptop

Image source: Getty Images.

Why it pays for your employer to be conservative with 401(k) options

In a typical 401(k), the company offers its employees a limited menu of choices in which they can invest, generally mutual funds and ETFs. Some may allow them to invest in company stock as well. But few businesses enable their employees to invest in anything they want. You can thank the Employee Retirement Income Security Act of 1974 (ERISA) for that.

This law does some great things to protect the rank-and-file worker's retirement savings, including requiring plan trustees (i.e., the employers) to act as fiduciaries. This means they have a legal obligation to take prudent care of their employees' money. If they don't do this, they could be held liable for the losses their employees incur.

One of the most common reasons 401(k) participants sue their employers is because of inappropriate investment choices. They argue that the employer, or the financial advisor who selected the investment options on behalf of the employer, didn't take adequate care when choosing those securities and, as a result, exposed plan participants to an undue level of risk and caused them to lose money. 

Obviously, no business owner wants to be put in that situation. As such, they tend to be wary about offering up risky investment options. That's why you probably can't invest in Bitcoin through your 401(k).

All cryptocurrency prices are largely based on speculation right now. It's possible Bitcoin could exceed $100,000 a token someday, but it's also possible that the cryptocurrency frenzy will die down, that other headwinds will sap tokens' values, or that Bitcoin's leadership spot will be usurped by another coin. No investment is risk-free, but there's clearly more risk involved in putting money into these new and still fairly unproven assets than there is in investing in diversified mutual funds.

Is there any way to invest your retirement savings in Bitcoin?

If you're really serious about making Bitcoin a part of your retirement portfolio, there are ways you can do it. If your employer offers a self-directed 401(k), you may be able to buy cryptocurrencies directly through that account. Check with the HR department to see if this is an option at your company, or to discuss the possibility of making it available to interested employees.

You could also open a self-directed IRA. This is similar to a regular IRA, but it enables you to invest in some types of assets a regular IRA doesn't, including cryptocurrency. This type of account isn't as common as Traditional or Roth IRAs, so you'll have to do some research to find out which brokers offer them. Look into the investment options, too, to make sure Bitcoin is a possibility. Not all self-directed IRAs offer the same set of investment choices, and you wouldn't want to go through the trouble of opening one only to find out it's not what you needed.

Perhaps the best option for most people is to not invest their retirement savings in Bitcoin at all. Instead, invest some of your extra cash in Bitcoin through a cryptocurrency exchange. You won't enjoy the same tax breaks that you'd get if you were holding those assets in a retirement account, but it will give you an opportunity to get some skin in the game without jeopardizing your retirement savings.

If Bitcoin prices end up soaring, you could always sell your tokens and use that money to retire anyway. That could actually be the better choice if you're still young, because you usually pay a penalty for withdrawals made from retirement accounts while you're under 59 1/2.

Or if you see Bitcoin as too risky for your investment portfolio, you could invest in some safer securities. Cryptocurrency stocks are one option to consider. There are a number of established companies that are positioned to profit if crypto becomes a more mainstream asset, but that could also make you a lot of money even if Bitcoin never goes anywhere. Or there's always the option of investing in a good old-fashioned S&P 500 index fund.

Your retirement savings will be your financial lifeline in your senior years, so gambling with it isn't wise. Think carefully before deciding whether you'd like to invest your retirement savings in Bitcoin. If you do, make sure you're diversified into plenty of other investments as well so that the cryptocurrency's ups and downs don't weigh too heavily on your portfolio.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Kailey Hagen owns shares of Bitcoin. The Motley Fool owns shares of and recommends Amazon, Apple, and Bitcoin. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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