Back in June, retirement plan provider ForUsAll announced that its 401(k)s would allow holders the option to invest some of their holdings in cryptocurrency. Although the company is relatively small as servicers go, managing just $1.7 billion of the $22 trillion retirement account market, it’s been getting a lot of attention for embracing crypto. That may mean bigger providers will follow.
For most retirement funds, the idea of including crypto in the mix is a terrifying one, both due to its volatility and, of course, because there’s literally nothing holding the asset class up besides the interest of investors and future investors. Unlike stocks, which are supported by businesses with physical assets, crypto has nothing to sell should it take a violent downturn. Since there’s no central holder and no real regulation, it’s been seen as an exceptional risk.
Crypto and retirement funds
Crypto is tricky as an asset class, since it’s trying to be a lot of things to a lot of people. For some, it’s essentially a currency; for others, an investment that feels like it can go nowhere but up. To the IRS, it’s a property and is taxed as one. This is where having crypto in a retirement account gets interesting.
Direct gains from cryptocurrency are taxed as capital gains, so when you toss $10,000 into your coin of choice and then sell and get $15,000 out, you’re going to be paying a fair amount of tax on that $5,000 capital gain. However, getting around this isn’t impossible if the goal is a well-funded retirement. Some self-directed Roth IRAs are already allowing cryptocurrencies in the investment mix, which makes a lot of sense because of how cryptocurrency gains are taxed.
Because Roth contributions are only taxed when they go into the account, as long as you follow the rules, what comes out isn’t taxed at retirement. So, that Bitcoin you bought within your Roth IRA at $200 and is now worth around $46,000 -- it’s all yours to take and do with as you will, and Uncle Sam has to be hands-off. Had you just bought Bitcoin directly through an exchange, you’d be paying capital gains on $45,800. Sure, you can probably afford to take it out of your earnings, but why?
Crypto going into a 401(k) is less obviously clever, though it certainly will help defer some tax. The earnings will be taxed as a 401(k), not as capital gains, so you’re still ahead -- but not as ahead using this particular strategy. That’s the downside to putting anything liable to grow exponentially into a tax-advantaged retirement account.
Since 401(k)s often come with employer matching, you could still gain a lot with someone else’s money, so that’s not an entirely bad deal. It’s a lot of balance, and one a person would have to consider before making the decision to include crypto in the mix.
Roth IRAs vs. 401(k) for real estate investors
As a longer-term trend, crypto is volatile and has to be minded. The 401(k) that ForUsAll has on offer only allows 5% of the mix to be in cryptocurrency, so when those coins go up in price, the holder has to again touch their retirement account and rearrange things to get the mix back in range. If their coins drop, obviously that’s not an issue, but that’s also not the goal.
If you’re thinking about using Bitcoin or other cryptocurrencies as part of your retirement mix, perhaps as a place to put some of your real estate gains, a 401(k) isn’t optimal, for so many reasons. Look into the self-directed Roth IRA first, if it’s a possibility for your financial situation. Coins can usually grow there indefinitely until you’re ready to take them out and invest them again.
When you are ready to reinvest, the Roth IRA will allow you to directly invest in real estate in nigh-infinite forms, so long as you follow a few rules. The 401(k) can only be used for a first-time home purchase, and there are a lot of other steps you have to take to make it viable for real estate investing, including rolling it into an IRA.
The Millionacres bottom line
Having your tax liability already covered in a Roth IRA makes a lot more sense with a crypto investment. There’s no additional taxes later, no matter how much your crypto ends up being worth. Also, you don’t necessarily have to adhere to limits on the mix percentage, which allows you to buy and hold a Bitcoin until you’re ready to sell, not sell because you have to due to the plan’s limitations.
If you’re intending to invest in the real estate market from your retirement account, the 401(k) probably isn’t the right vehicle for you, even if it does offer crypto. If an employer offers it, by all means, add it to your retirement mix. It never hurts to diversify retirement investments. But if you’ve got to choose and you already know where you’re headed with your investment plans, crypto plus Roth IRA is the winning equation for future real estate investments.