Bitcoin may provide you with 401 (okay) plans. It may take that lengthy

Participants in the Bitcoin 2021 Convention, a cryptocurrency conference that took place in Miami on June 4, 2021.

Joe Raedle | Getty Images

A recent Bitcoin conference in Miami attracted a mix of professionals who have wholeheartedly embraced cryptocurrency.

However, David Ramirez, chief investment officer at ForUsAll, said he was still able to surprise attendees with a new way of thinking about their holdings.

“I have met with a lot of people who have been investing in this area for quite a while and who are staring at massive capital gains,” said Ramirez. “With the 401 (k) that can be largely eliminated.”

ForUsAll announced this month that it has partnered with Coinbase, a cryptocurrency exchange, to allow employees to put up to 5% of their 401 (k) investments in Bitcoin and other cryptocurrencies. The function is offered by employers who register for a so-called self-controlled cryptocurrency window.

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ForUsAll isn’t the first company to offer Bitcoin and other cryptocurrencies in 401 (k) plans. Companies like BitWage and Digital Asset Investment Management are also working to incorporate these investments into traditional employer retirement plans.

Investors can already access cryptocurrency through their individual retirement accounts. And some professionals say they see a growing appetite to expand that to 401 (k) plans as well.

However, many traditional players in the industry are skeptical that employers who offer retirement plans known as plan sponsors will offer these investments.

“Plan sponsors in general are still very unlikely to want to add any type of cryptocurrency to their portfolio,” said Aaron Pottichen, senior vice president at Alliant Retirement Consulting.

At the heart of the debate is whether these types of investments in a 401 (k) will ultimately help or hurt investors.

Tax benefits

Art at the Bitcoin 2021 Convention cryptocurrency conference at the Mana Convention Center in Miami on June 4, 2021.

Marco Bello | AFP | Getty Images

With 401 (k) plans being the primary savings option for many Americans, the lack of access to cryptocurrencies in these accounts means a “structural disadvantage,” Ramirez said.

Taxes are an important reason.

Roth 401 (k) accounts that invest after-tax dollars can give Bitcoin investors an edge, Ramirez said.

“When you invest in cryptocurrency in your 401 (k) with Roth dollars, you can keep 100% of the profits, which essentially makes them tax-free for you forever,” said Ramirez.

Investing over a 401 (k) can also help people avoid a tax trap that many cryptocurrency investors face: tax trading risk, Ramirez said.

Take someone who buys Bitcoin earlier in the year, then sells it after a price spike and buys the cryptocurrency Ether. If the overall market then declines, you could ultimately owe more taxes on the first trade than you invested in ether.

It’s just an easy way for the 401 (k) sponsors – that’s going to explode the market.

Jonathan Chester

Bitwage CEO

“Unfortunately, I’ve met a lot of people who learned the hard way and had to leave positions to cover taxes or worse,” said Ramirez.

If the investment was instead made through a tax-privileged account, with either pre-tax or post-tax dollars, levies won’t be collected on every trade, he said.

There’s another reason 401 (k) plans are preferable to IRAs: higher contribution limits.

This year, savers can invest up to $ 19,500 in their 401 (k), or $ 26,000 for those over 50. In contrast, you can only deposit up to $ 6,000 into an IRA, or $ 7,000 for those 50 and over.

For investors who invest up to 10% of their retirement savings in cryptocurrencies, a 401 (k) offers the opportunity to have invested more, said Adam Pokornicky, chief operating officer at Digital Asset Investment Management, which is building model portfolios that plan participants can choose to do decide.

While some may argue that Bitcoin is too volatile for a 401 (k), Pokornicky argues that it actually works for investors. “Volatility is a good upside thing,” he said.

Another company called Bitwage launched its 401 (k) offering alongside its existing Bitcoin payroll services over a year ago.

There is a demand to cost average Bitcoin dollar investments and retirement accounts are the “best version of that,” said Jonathan Chester, CEO of Bitwage.

The company sees great demand from participants looking to access Bitcoin and other cryptocurrencies in their 401 (k) s. “It’s very hot,” said Chester.

The biggest hurdle is getting companies to switch to systems that enable Bitcoin investments.

“It’s just an easy way for 401 (k) sponsors – that’s going to explode the market,” Chester said.

All three companies say they are already seeing demand from employers looking to add their offerings.

Adoption Risks

Still, right now, traditional gamblers are still seeing more barriers than opportunities to get people to invest in Bitcoin in their 401 (k).

With 401 (k) lawsuits generally increasing, these types of investments could be vulnerable because they are so new, Pottichen said. Ultimately, the Department of Labor can provide further guidance on how cryptocurrency investments in retirement plans should be handled.

“Right now, none of our clients are looking at cryptocurrencies and think that this is an asset class that we need to have as part of our investment universe that we give our employees access to,” said Pottichen of Alliant’s clients, from start to finish with thousands of employees.

Neal Nolan, director of company retirement plans at Parsec Financial in Asheville, North Carolina, said he recently had a client who wanted to add bitcoin to their 401 (k) through a self-managed brokerage account.

Although it was the first time Nolan had received such a request, he was not surprised. “I thought it was going to happen at some point,” he said.

After the company’s investment committee met, the plan’s trustees decided against it.

One reason for keeping it off the plan is that if a subscriber has a self-managed account, it needs to be offered to everyone. This could put a strain on plan sponsors who would be responsible for overseeing these investments.

In addition, an investment like Bitcoin would have to be deemed sensible for everyone on the plan, which is a high bar.

Ultimately, it’s better to risk being late for the party than for retirement plans to sacrifice their role as good stewards of the funds, Nolan said.

“If you don’t understand something, caution would suggest that you find out more information or wait,” said Nolan. “Never invest in something that you cannot understand or explain.”

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