Securing Your Retirement When Buying Bitcoin In The 401k

One area that has not experienced the cryptocurrency trend is the 401k. That could soon change, with the announcement by Fidelity this week that it would let 401k operators opt-in to allow their employees to invest in bitcoin through a retirement plan.

It marks the first time that a major brokerage house has signaled that it will provide access to a cryptocurrency within the 401k. While this may become an option for your retirement, it doesn’t mean that you should rush to incorporate bitcoin into your portfolio. First, it requires an understanding of what your capabilities to safely invest in the coin are.

Fidelity’s move doesn’t mean that your 401k will suddenly have bitcoin within the purchasing options. The first company to provide it as an option, MicroStrategy MSTR , will begin offering it this summer. Your own employer will have to opt-into the digital asset account feature within your company’s 401k, if it’s hosted by Fidelity. But the Labor Department has yet to clarify whether they would accept bitcoin and other cryptos within the 401k, signaling that it still views the investment as speculative. While it hasn’t banned the practice, it does require admins to only provide “prudent” options, which it doesn’t label cryptocurrency as, according the New York Times NYT .

And, if you’re self-employed, Fidelity doesn’t yet give you access to directly own the coins via your retirement account, such as a solo 401k or SIMPLE IRA.

Still, Fidelity is in talks with other companies to begin allowing the coins. While it will become possible that a crypto option shows up in your 401k soon, before you begin investing make sure you and your retirement can stomach the coins.

Your goals for the 401k

There’s value in investing crypto within a 401k. First, you can use pre-tax dollars to purchase the coins, making it cheaper to buy. Second, if the coins appreciate, then you do not owe taxes on the appreciation until you withdraw funds from the 401k. Even then, it won’t be treated like divesting crypto, but instead like divesting the entire 401k. This could reduce what you’ll owe if you sold significantly appreciating cryptos outright even though they won’t be taxed as capital gains.


Yet, while everyone wants to see as much return as possible for their investment dollars. When it comes to investing for the long-term, speculation can lead to dramatic damage to a retirement account. If you experience that damage as you near retirement, then you may not have the capability to recover.

That’s why it’s important to first make sure your basic needs of retirement are met within your portfolio selection. Once that goal has been achieved, then it’s understandable to play with some speculation. While you may want that hot appreciating asset, it’s important to remember that the primary goal in retirement is to cover your lifestyle expenses while accounting for inflation. The S&P 500 has provided a 7% return, after accounting for inflation, annually on average. Certainly, some years are much more than 7% and others much less. Yet, when averaging out for many years, like while saving for retirement, it allows you to meet your goals if you’re setting aside enough each month or year.

Few assets have shown a long-term result as strong. Whether crypto is one of those, isn’t worth betting your entire retirement on.

Expect significantly more volatility

Many investors will be ill-suited to hold cryptocurrency because of their feelings towards risk.

To accept cryptocurrency into your portfolio, you must first accept that your investment balance may not stay very static. Instead, you could see serious swings depending on how the coins trade. Since reaching all-time highs in November 2021, the price of bitcoin has fallen 42%, for example, while the S&P 500 index fell 10% during the same time span. Of course, bitcoin may also rise much faster than the overall market of large US companies.

How close you’re to retirement and your belief in cryptocurrency long-term will play a large role in whether you build exposure to it in your 401k. For those nearing retirement though, can you take such a hit to your portfolio and still safely retire? Many would begin having to pull funds out at a time when assets have fallen, resulting in requiring divesting a larger share of the portfolio to fund basic needs. This could destroy your safety in retirement.

But for those with an understanding that balances will shift, a high-risk tolerance, and time can at least wait out the periods when crypto assets fall. If, instead, you’re quick to sell when assets drop, then it’s probably not the right investment for your risk tolerance.

Don’t overweight the coin

Even if you decide you want to test out cryptocurrency in your 401k, you should take aim to ensure it doesn’t become too large of a percentage of your overall investment portfolio. While financial planners may not always encourage taking speculative investments, many say if you do, keep it to under 10% of your portfolio.

But with crypto, it could require rebalancing more often, since the weight of the coin may rise or fall significantly, depending on the volatility experienced. If you’re comfortable with, say, 3% of your portfolio in bitcoin, then make sure it doesn’t move too far beyond that. The good news? If you do rebalance within the 401k, it won’t require paying taxes on the bitcoin sale. But you may face a trading charge within the account, depending on the rules within the 401k.

It’s one way to keep your 401k safe, even if you do decide to dip your toes into crypto.

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