On March 11, the United States Department of Labor warned employers that sponsor 401(k) retirement plans to “exercise extreme care” when dealing with
On March 11, the United States Department of Labor warned employers that sponsor 401(k) retirement plans to “exercise extreme care” when dealing with cryptocurrencies and other digital assets, even threatening to pay extra legal attention to retirement plans with significant crypto investments.
Its rationale is familiar to any crypto investor: The risk of fraud aside, digital assets are prone to volatility and, thus, may pose risks to the retirement savings of America’s workers. On the other hand, we are seeing established players in the retirement market taking steps toward crypto. For one, retirement investment platform ForUsAll decided last year to implement crypto as an investment option for 401(k) fixed retirement accounts in partnership with Coinbase. Is this the beginning of a larger trend?
Why even bother?
Apart from the simplistic explanation that digital assets have the magical ability to make people extremely rich in a short period, there are two serious points to consider regarding crypto and retirement investments.
The first is investment diversification. At least for now, cryptocurrencies, nonfungible tokens (NFTs) and other digital assets possess relative autonomy from the larger traditional financial market. In some cases, this could make them relatively stable when equity and other traditional markets are in turmoil.
A second, perhaps more pragmatic, point is that one doesn’t have to pay the same amount of taxes when buying and trading crypto via a retirement plan. This is a matter of both profit and time — each time an American investor makes money from selling cryptocurrency, they are required to record it to report to the Internal Revenue Service. Retirement accounts are, as a rule, exempt from that burden. As Dale Werts, partner at law firm Lathrop GPM, explained to Cointelegraph:
“Trading crypto inside a qualified plan would be treated like any other asset transaction in a plan, so the same tax benefits would apply. Normally, asset transfers within a plan are not taxed — that is the whole point of a qualified plan. Gains you accrue can be retained tax-free until you take a distribution.”
What the law says: 401(k)s, the ERISA and IRAs
Because 401(k) investments are subject to the Employee Retirement Income Security Act (ERISA) of 1974, it’s hardly surprising that digital currencies fall into a legal gray zone when they are part of a retirement investment portfolio. The ERISA doesn’t specify which asset classes can or cannot be included in a 401(k). In a somewhat outdated manner, it obliges fiduciaries to “show the care, skill, prudence, and diligence that a prudent person would exercise” when dealing with retirees’ hard-earned money.
Nevertheless, the vast majority of employers prefer not to go against the spirit of the law; hence, there are few opportunities to directly invest in crypto via 401(k) plans at the moment. As Christy Bieber, a contributing analyst at investment advice firm The Motley Fool, noted to Cointelegraph:
“Those who use a 401(k) to invest for retirement will not generally have the ability to buy cryptocurrencies when investing for their later years. That’s because 401(k) accounts usually limit you to a small selection of mutual funds or exchange-traded funds.”
A common solution for those who are nevertheless eager to make crypto a part of their retirement funds is self-directed individual retirement accounts (IRAs), where the choice of which assets to allocate is usually open.
The Retirement Industry Trust Association has estimated that between 3% to 5% of all IRAs are invested in alternative assets such as cryptocurrencies. According to various surveys, between 49% and 54% of millennials are invested in cryptocurrencies or NFTs and/or consider them to be a part of their retirement strategy.
Werts, who includes crypto in his own personal retirement investment strategy, said that while the Labor Department highlighted crypto’s general risks and challenges, ERISA in no way prohibits digital assets as an investment option in a 401(k) plan. He sees three primary options for those who are interested in crypto as a retirement asset:
- “You can (if available from your employer) use a self-directed 401(k) to invest in alternative investments like cryptocurrencies. A simple Google search turns up at least one alternative to ForUsAll: BitWage. Many firms are working on ETFs, too (like Vanguard and SkyBridge Capital), although the Securities and Exchange Commission is not yet approving any. There are Bitcoin futures investment options approved by the Commodity Futures Trading Commission.”
- “You can invest in a long list of publicly traded companies that own crypto, like MicroStrategy, Tesla, Coinbase, Block, PayPal, Marathon Digital Holdings and Nvidia. I have done this. Of course, these companies have other business objectives, so you have to be ‘on board’ with whatever those objectives are.”
- “You can invest through your 401(k) plan in trusts,…
cointelegraph.com