Crypto 401k – Fidelity, Bitcoin Laws & More
Saving for retirement is good, but investing in a 401k plan is better. If you’re looking into a crypto 401k, you likely know that 401ks in general offer a level of tax benefits and employer matching that is greater than simply putting money in the bank.
Cryptocurrency is a new retirement investment option most people haven’t considered. The regulations around Crypto and 401ks are still new and changing. However, congress has been discussing legislation and companies like Fidelity are beginning to offer bitcoin and other crypto in their 401k.
If you’re considering whether to invest in cryptocurrency with your 401k plan, this article will try to answer all your questions. Let’s dive in!
What Is 401k?
A 401k is a savings and investment plan that employers offer their employees to prepare for retirement. Employees make contributions to this plan directly from their paychecks, on a pre-tax basis, and the money is then invested in managed funds of the employer’s choice.
The United States Congress designed the 401(k) plan to encourage Americans to save for retirement. Congress named the 401k after a section of the US Internal Revenue Code (IRC).
Again, the basic idea of a 401k is that employees who sign up for a plan consent to a percentage of their paycheck going into an investment account of their employer’s choosing.
What is an IRA?
An IRA stands for Individual Retirement Account. Anyone individuals the United States can open an IRA and save in a tax advantageous way for retirement. IRAs are great for freelancers, small business owners, o people who work at company’s that don’t offer 401ks.
That said, even if your employer does offer a 401k you may still opt for an IRA either in it’s place or in addition to your 401k. An IRA offers much more flexibility in what you invest in and how you can manage your tax treatment. Let’s look at the different types of IRAs to better understand:
Traditional IRA
This is a retirement account where individuals can contribute pre-tax money towards investments. The money in the account grows tax-deferred, which means that the IRS will not assess any capital gains or dividend taxes until the beneficiary makes a withdrawal.
Roth IRA
This retirement account allows individuals to pay taxes on money before it goes into the account. This means the money can’t be double taxed so in the future, all withdrawals from the account are tax-free. This is huge if you are investing in crypto for the long run thinking it will make big gains.
Rollover IRA
A Rollover IRA is an account that allows you to move funds from your prior employer-sponsored retirement plan into an IRA, preserving the tax-deferred status of your retirement assets in the process. This is done without having to pay current taxes or early withdrawal penalties at the time of transfer, making it a convenient way to keep your retirement savings safe and protected.
401k vs. IRA Continued
When it comes to Americans saving for retirement, 401ks and Individual Retirement Accounts (IRAs) are two popular choices. The Investment Company Institute (ICI) reports that the total number of assets in 401k plans was $7.3 trillion in 2021, while IRA had $13.2 trillion in the same year.
It’s easy to get confused between an IRA and 401k, because both plans are similar. But here’s how they work:
An IRA is a retirement account that offers tax advantages. It’s referred to as an Individual Retirement Arrangement, which means that it’s an account you open for yourself.
On the flip side, a 401(k) is a type of retirement savings plan some employers set up for their workers. Like a Traditional IRA, you get tax advantages for saving in a 401(k) and at times employers will match your contributions up to a certain % of your paycheck or $$ amount contributed. However, not all employers offer 401ks, let alone matching contributions. Also, IRAs give you more control over how your money is invested and offer different tax structures like Roth IRAs.
401k vs IRA Comparison Chart
| 401k Plan | IRA Plan | |
| Investment options | With a 401k the employer, or sponsor, chooses the investment options. Employees usually have little to no choice in the funds where their money is invested. | The IRA plan has more investment options. |
| Contribution/ Tax Treatment | 401k contributions are tax-deductible. They are automatically deducted from your monthly payroll and thus, reducing your taxable income. However, retirement withdrawals are taxed based on the 401k account holder’s current income rate. So there is no break on capital gains tax. | IRA accounts are directly funded by their owners. Contributions into a Traditional IRA are tax-deductible, while contributions into a Roth IRA are taxed beforehand and therefore not taxed upon withdrawal. They do not accrue capital gains tax. |
Account Setup | Employers set up the 401k account. | IRA accounts are created by individuals. |
| Withdrawal Requirements | Excluding extreme life events, penalty-free withdrawals from an IRA begin at 59.5 years old. | Excluding extreme life events, penalty-free withdrawals from an IRA begin at 59.5 years old. |
| Employee Benefits | Employers sometimes match monthly contributions, depending on the amount the employee contributes to the 401k account. | No match for IRA account owners, but more freedom of investment. |
401k Employer Matching
Most employers tend to match their employees’ 401k contributions up to a certain %. So, if your employer offers this benefit, consider taking advantage of it.
The best way to save with a 401(k) plan is to choose one that falls under the Employee Retirement Income Security Act (ERISA) of 1974. This federal law sets minimum standards for employer-sponsored benefit plans within the private sector, which means that your chosen plan will have certain protections.
Can I Open a Crypto 401k to Buy Bitcoin?
As of now, bitcoin and crypto are not available in 401k plans. However, there is a proposed bill to allow crypto in 401ks, and fidelity is rolling out cryptocurrency options within their 401k plans.
That said, when these products come to fruition it is up to employers to decide if they want to give their employees access to Bitcoin in their retirement plan. It’s then up to employees if they would like to take advantage of that access and actually place some of their 401k money in bitcoin.
Crypto 401ks don’t quite exist yet, and once they do, your employer will have to choose to offer it. Employers and employees should study and understand Bitcoin before deciding to include it.
Can I Use My Fidelity 401k to Buy Bitcoin?
Buying Bitcoin with your fidelity 401k is currently unavailable, but fidelity has other crypto purchasing options, like the Fidelity Crypto and Digital Payment ETFs.
Can I Purchase Bitcoin Through Fidelity?
Reports suggest that Fidelity Investments may consider allowing individual investors to invest in bitcoin on its brokerage platform. This is a big step for the investment company and would likely increase interest in bitcoin among mainstream investors. But for now, you can’t purchase Bitcoin through Fidelity until the end of 2022.
Bitcoin First as an investor report was published by Fidelity, stating why investors should invest in Bitcoin before investing in another digital asset. Presently, Fidelity has over 34 million individual investors, and the company wants to make this investment option available to them.
However, some legislators do not support this because saving for retirement is a problem already, and Bitcoin is a highly volatile asset that shouldn’t be made available to Americans.
Can I Use an IRA to buy Bitcoin?
Yes, there are reputable companies that allow you to invest in cryptocurrency through an IRS compliant IRA account today.
We have made a comparison of the best crypto IRA’s in a separate blog post. The summary though is that our favorite choices are iTrustCapital and Alto Crytpo IRA.
Does Fidelity Have a Bitcoin IRA?
Fidelity doesn’t have a Bitcoin IRA, but they do have IRA options that don’t include Bitcoin and cryptocurrency.
Luckily, there are other reputable companies that offer Bitcoin and cryptocurrency IRAs.
Our two favorites are iTrustCapital and Alto Crypto IRA.
What is Bitcoin?
Bitcoin(BTC) is a digital currency that works independently of a central authority. Transactions are verified by network nodes through cryptography and can be recorded in a publicly distributed ledger called a blockchain.
As a cryptocurrency, Bitcoin serves as virtual currency for payments, meaning it can be used without a third party, like a bank, during financial transactions. Bitcoin can also be used to reward miners who verify transactions.
Bitcoin has seen a meteoric rise in price since it was first introduced in 2012.
Should I Use My Crypto 401K to Invest in Bitcoin?
Although investing in Bitcoin may be a wise decision, it’s important to understand that Bitcoin is very volatile, and there is high risk of losing money. It’s advisable to only use money that you can afford to lose when investing in Bitcoin.
If however, you want to invest some of your 401k in Bitcoin, that could work. However, we would recommend looking into a Bitcoin Roth IRA instead. The reason for this visit could save you thousands or even millions in capital gains taxes. With a Roth IRA, you can invest post-tax dollars into the IRA and not pay capital gains taxes on your bitcoin when you withdraw.
Final Thoughts on Crypto 401K
With new legislation coming allowing Bitcoin and other crypto into 401k, the crypto markets could see a large influx of institutional money. Companies like Fidelity entering the crypto space lend the new, and very volatile and scam-ridden industry, a bit of needed credibility.
Investing all your retirement savings in crypto is likely not a wise move as the market is too young and too volatile. Only invest what you can afford to lose.
That said, the market is young and volatile and could grow tremendously. If you are investing in Bitcoin for retirement, you are thinking long-term and hoping for a large increase in price. For that reason, we recommend using a Crypto Roth IRA to avoid paying capital gains tax instead of a crypto 401k.
It is better to pay taxes on the smaller amount now, and then not pay taxes if/when the investment comes up 10 times or even 100 times in value.
No matter what you decide, stay safe out there and good luck. Thanks for reading.
