In April 2022, Fidelity, an asset management giant, announced that its investors can now invest Bitcoin in their 401(k) retirement savings account. While this makes an emerging asset class accessible to investors and offers them tax advantages, there are some important aspects to take into consideration.
Before we dive in, it is important to understand that Bitcoin is subject to market risk and hence it is recommended to consult a crypto tax professional before you invest in this asset class. Now let’s move on to the things that you should be mindful of in this retirement plan.
This service will be rolled out later this year to people who partake in employer-sponsored retirement plans that Fidelity offers, provided an employer chooses to offer it. 401(k)’s put taxes on the back burner, eliminating the hassles related to cryptocurrency investments and annual tax reports. When the funds are withdrawn from a 401(k), they are taxed either as ordinary income if contributed to a conventional pre-tax account or tax-free if contributed after-tax dollars into a Roth account.
The Wall Street Journal says that the fees related to these investments will be between 0.75 percent to 0.90 percent. Also, there will be a trading fee, which is equivalent to the standard spot market trading fees charged by major exchanges in the US such as Gemini, Coinbase, Binance.US, Kraken, and FTX.US. Also, at the moment, employees can only make 20 percent of their current account balances to Bitcoin.
There’s a Waiting Period
This service is supposed to launch over the course of this year. Right now, only MicroStrategy, a business analytics firm has openly signed on to this service. MicroStrategy is led by the Bitcoin bull Michael Saylor. The company holds the world’s largest Bitcoin treasury worth more than $5 billion.
Bitcoin Has Had Its Ups and Downs
In 2013, buying a single Bitcoin needed only $300, but today, you would need to shell out almost $40,000. It is considered a tremendous growth, but it was full of ups and downs. There have been times when Bitcoin’s value dwindled and lost 50 percent of its value. Like in 2017, it was priced at around $20,000, and in 2021, it fell from $69,000 to $30,000. Bitcoin investors firmly believe that whenever Bitcoin’s value tanks it recovers very effectively.
The Government Might Not Be a Fan of of Crypto
While this move by Fidelity has been cheered-on on social media, the government might not be happy about this. For starters, the regulators are very cautious about people getting easy exposure to cryptocurrency spot markets.
One of the reasons behind this is the volatility aspect of Bitcoin and cryptocurrency in general. As discussed above, Bitcoin has seen its fair share of ups and downs. And people who are soon to retire cannot ride a boom and bust cycle.
A couple of months ago, the Department of Labor expressed several concerns concerning crypto as retirement fund investments. A top few concerns were the market’s extreme volatility, investors not being able to make informed decisions, murky regulatory status, and HODLing crypto assets, which are a prime target for hackers. The Department’s concerns hold value because it contributes to the regulation of employer-sponsored plans. And that’s why consulting a crypto tax professional is essential before making crypto retirement accounts or crypto investments in general.
Coinbase, one of the largest crypto exchanges in the US has collaborated with a retirement firm to offer similar services. On this partnership—a senior policy advisor at AARP Policy Institute—David John expressed himself by saying, as intriguing as cryptocurrency is, it is still in its developmental phase and definitely not the best option for retirement investing.
For a retirement plan, one should aim for growth with minimum volatility. The closer you get to retirement, the less you want your portfolio to seesaw up and down.
There Are Other Options
While Fidelity is a world-class asset management company, there are other ways you can access crypto retirement accounts. There are firms such as iTrust Capital, Kingdom Trust, Bitcoin IRA, and Coinbase. But, we cannot stress enough to talk to a certified crypto tax professional before making any big decisions. The reason being retirement savings are personal and your decision of what to invest in and how much to invest depends on different circumstances.
Bitcoin in a 401(k) retirement savings account sounds really exciting, but the volatility of this digital asset as seen in the past really is creating headwinds for itself. On top of that, a safer and probably less volatile retirement plan should be ideal. To find out which plan is ideal for you, a crypto tax professional should be consulted.
1. Can you own bitcoin in a 401k?
In April 2022, Fidelity, an asset management giant, announced that now its investors can invest Bitcoin in their 401(k) retirement savings account. This service will be rolled out later this year to people who partake in employer-sponsored retirement plans that Fidelity offers, provided an employer chooses to offer it.
2. How do I hold my bitcoin in my 401k?
You can take advantage of tax-deferred personal property status by investing 401(k) savings in Trust Capital, Kingdom Trust, or Bitcoin IRA. Thanks to the IRS Notice 2014-21, digital currency such as bitcoin is treated as property. Gains you accrue can be retained tax-free until you withdraw.
3. Will fidelity offer Bitcoin?
Yes, as of April 2022, Fidelity announced that now its investors can invest Bitcoin in their 401(k) retirement savings account.