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Can I Invest in Bitcoin With My IRA or 401(k)?

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.

Investing in Cryptocurrency Through Your 401(k)

A cryptocurrency is a digital or virtual currency unconnected to a centralized authority such as a country. Instead, cryptocurrency is verified by cryptography—the practice of coding and encoding data using computations and mathematical problems.

A cryptocurrency is a digital or virtual currency unconnected to a centralized authority such as a country. Instead, cryptocurrency is verified by cryptography—the practice of coding and encoding data using computations and mathematical problems. The best-known cryptocurrency is Bitcoin, followed by Ethereum, and a few others such as Cardano, Solana, Polygon, Tether, and USD Coin. As of May 2023, there are over 23,000 cryptocurrencies trading in exchange platforms, according to CoinMarketCap.

While cryptocurrency isn’t technically a security like a stock or bond, it can be purchased using regular money and varies in value, lending itself to speculation. Since it first began trading in mid-2010, Bitcoin’s price has risen from 8 cents per coin in 2010 to a high of over $65,000 in 2021. It was trading for around $29,000 in mid-April 2023.

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 rigorous government oversight due to the low understanding of this new digital money or assets have made many employers and the companies that administer retirement plans wary of including crypto in their 401(k) offerings.

In addition, under the Employee Retirement Income Security Act of 1974 (ERISA), defined benefit plans, such as 401(k)s, must be managed by fiduciary standards—meaning that the managers must act in the best interests of plan participants. If they don’t, they can be held personally liable. That has also made plan managers wary.

The situation could be starting to change, however. 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 most managers will sign on anytime soon, or perhaps ever.

The Employee Benefits Security Administration in 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 that, “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 cryptocurrency exchange FTX, 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 are a different matter. Since it’s your account to manage, you are, in effect, your own fiduciary. With normal IRA accounts, however, the law limits your investment options primarily to mainstream investments like mutual funds, exchange-traded funds, stocks, bonds, and so forth.

But there’s another type of IRA, known as a self-directed IRA (SDIRA), that allows for alternative investments. Those, according to the U.S. Securities and Exchange Commission, include “real estate, precious metals and other commodities, crypto assets, private placement securities, promissory notes, and tax lien certificates.”

You can’t, however, simply buy cryptocurrency and stick it in your IRA. You must have an account with an IRA custodian that is willing to hold crypto assets. Originally these tended to be new and specialized companies, but a growing number of established mutual fund companies and brokerage firms are adding this service.

Self-directed IRAs can be either traditional or Roth IRAs. Bear in mind that many of the same rules that apply to conventional IRAs also apply to self-directed ones. For example, your maximum annual contribution is limited under IRS rules. For 2023, it’s $6,500 if you’re under 50, $7,500 if you’re 50 or older.

What Is Crypto 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 brokerage houses now offer the option to invest in cryptocurrency through ETFs that track bitcoin prices. Cryptocurrencies use their own exchanges, such as Coinbase, to trade and to track values.

Does the U.S. Government Regulate Cryptocurrency?

Cryptocurrency is regulated to a limited extent by the Securities and Exchange Administration (SEC), which has authority over the securities markets, and the Commodity Futures Trading Commission (CFTC), which has authority over derivative investments, including those using derivatives. But is subject to far less oversight than traditional investments, such as mutual funds. The SEC has been pushing for greater regulatory authority and may eventually get it.

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 don’t actually own crypto but simply track its prices. Many experts are skeptical of crypto’s value and wary of its volatility. If investing in crypto for retirement appeals to you, you may want to constitute only a small portion of your portfolio.