Are Crypto and Retirement Savings a Risky Mix?

November 11, 2022
Some 401(k) plans may soon offer Bitcoin as an investment option. Should you consider cryptocurrencies for your retirement savings?

Despite cryptocurrencies' massive sell-off this year,1 investor interest remains strong—so strong that some 401(k) plans may soon offer Bitcoin as an investment option. But just because you can invest your retirement savings in Bitcoin doesn't mean you should.

"Cryptocurrencies are still relatively new, largely unregulated, and very volatile, which isn't a great mix for a traditional long-term portfolio," says Rob Williams, managing director of financial planning, retirement income, and wealth management at the Schwab Center for Financial Research. "Think of your retirement savings as the foundation of your financial house. You want to build your foundation out of strong, trusted materials."

That means investing in tried-and-true asset classes like stocks and bonds, which have a track record of long-term growth potential and are valued against assets, earnings, and other tangible factors. 

"These securities are tied to the intrinsic value of their underlying companies, whereas cryptocurrencies do not yet have such inherent value," Rob explains. "And, unlike fiat currencies, cryptocurrencies aren't backed by the full faith and credit of a government—they're worth only what others in the market are willing to pay for them."

There's also the matter of taxes to consider. If the cryptocurrency you hold in a traditional 401(k) or IRA appreciates, those gains will be subject to ordinary income taxes upon withdrawal—whereas crypto held in a taxable account for longer than a year2 would be subject to the more favorable long-term capital gains rates of 0%, 15%, or 20%, depending on your income. (Taxes would not apply to any crypto investment gains within a Roth 401(k) or a Roth IRA.) 

What's more, if the crypto you hold in any retirement account loses value, those losses can't be used to offset realized gains or income like they can in a taxable account. "Given the volatile nature of cryptocurrencies, losses are bound to happen, so you want to be able to use them to your advantage—which is another reason why speculative trades such as these generally make less sense in retirement accounts," Rob says.

While some cryptocurrency investments have paid off—particularly for early investors—many more have lost money. "If you do want to enter the cryptocurrency fray," Rob cautions, "be sure to do so carefully—and far away from your nest egg."

1Joanna Ossinger and Tanzeel Akhtar, "Bitcoin's Unrelenting Selloff Puts Prices on Verge of $20,000," bloomberg.com, 06/15/2022.

2Assets held for a year or less are generally taxed at the short-term capital gains tax rates.

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Digital currencies, such as Bitcoin, are highly volatile and not backed by any central bank or government. Digital currencies lack many of the regulations and consumer protections that legal‐tender currencies and regulated securities have. Due to the high level of risk, investors should view Bitcoin as a purely speculative instrument. 

Please read NFA Investor Advisory–Futures on Virtual Currencies Including Bitcoin and CFTC Customer Advisory: Understand the Risk of Virtual Currency Trading

Currencies are speculative, very volatile, and are not suitable for all investors.

Investing involves risk, including loss of principal. Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks, including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk.

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