If you had invested $ 1,000 in Bitcoin (CRYPTO: BTC) by 2010, you would probably already be retired – and live a pretty extravagant lifestyle. And with some crypto bulls claiming that the price of the original cryptocurrency could one day exceed $ 100,000 per token, it’s understandable that many people are wondering if Bitcoin could help fund their pensions as well.
Anything is possible, but if you are hoping to use your 401 (k) funds to invest in Bitcoin, you might run into a surprising problem.
Why it pays to be careful with 401 (k) options for your employer
In a typical 401 (k), the company offers its employees a limited menu of choices in which they can invest, typically mutual funds and ETFs. Some may also allow them to invest in shares of the company. But few companies allow their employees to invest in whatever they want. You can thank the Employee Retirement Income Security Act of 1974 (ERISA) for this.
This law does great things to protect the retirement savings of core workers, including requiring plan trustees (i.e. employers) to act as trustees. This means that they have a legal obligation to take care of their employees’ money. If they don’t, they could be held responsible for the losses suffered by their employees.
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 chose the investment options on behalf of the employer, did not exercise caution in choosing these securities and, therefore, exposed the participants to the scheme at an excessive level of risk and caused them to lose money.
Obviously, no business owner wants to be put in this situation. As such, they tend to be wary of offering 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 at this time. It is possible that Bitcoin will one day exceed $ 100,000 per token, but it is also possible that the cryptocurrency frenzy will abate, other headwinds undermine the value of tokens, or Bitcoin’s leadership position. be usurped by another part. No investment is risk-free, but it is clearly riskier to invest money in these new and relatively untested assets than by investing in diversified mutual funds.
Is there a way to invest your retirement savings in Bitcoin?
If you are serious about integrating Bitcoin into your retirement wallet, there are ways to do it. If your employer offers self-directed 401 (k), you may be able to purchase cryptocurrencies directly through this account. Check with the HR department to see if this is an option in your company, or to discuss the possibility of making it available to interested employees.
You can also open a self-directed IRA. This is similar to a regular IRA, but it allows you to invest in certain types of assets that a regular IRA doesn’t, including cryptocurrency. This type of account is not as common as traditional or Roth IRAs, so you will need to do some research to find out which brokers offer them. Also review investment options 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 bother opening one only to find that it’s not what you need.
Perhaps the best option for most people is not to invest their retirement savings in Bitcoin at all. Instead, invest some of your extra money in Bitcoin through a cryptocurrency exchange. You won’t get the same tax breaks as if you had these assets in a retirement account, but it will give you the opportunity to play a role without putting your retirement savings at risk.
If Bitcoin prices end up skyrocketing, you can still sell your tokens and use that money to retire anyway. This might actually be the best bet if you are still young, as you usually pay a penalty for withdrawals made to retirement accounts when you are under 59 1/2.
Or if you find Bitcoin too risky for your investment portfolio, you can invest in safer securities. Cryptocurrency stocks are an option to consider. There are a number of established companies that are able to profit if crypto becomes a more mainstream asset, but it could also net you a lot of money even if Bitcoin is never going anywhere. Or there is always the option of investing in a good old school S&P 500 index fund.
Your retirement savings will be your financial lifeline in your old age, so playing with them is not wise. Think carefully before deciding if you want to invest your retirement savings in Bitcoin. If you do, make sure that you are diversified into plenty of other investments as well so that the ups and downs in cryptocurrency don’t weigh too heavily on your wallet.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.