How To Invest in Bitcoin Within a 401(k)

Are you interested in buying crypto in your retirement account, but need to figure out how? Cryptocurrencies like Bitcoin are digital assets, treated as property, that can be purchased, sold, or traded. Whether you want to diversify your portfolio or start investing in digital currency, adding crypto to your 401(k) has many advantages. Keep reading to find out how to invest in Bitcoin within a 401(k).

Benefits of Investing in Bitcoin Within Your 401(k)

Saving money for retirement sets you up for a better future. Investing in Bitcoin within your 401(k) adds the following benefits.

Opportunities for Growth

Cryptocurrencies are digital assets that have increased in popularity due to the potential for explosive profit. The underlying blockchain technology in crypto offers investors more security and freedom over their portfolios. With thousands of crypto platforms, you can diversify your portfolio and potentially increase your wealth.

Many cryptocurrencies, such as Bitcoin, place limits on the number of coins in circulation. The limited supply makes Bitcoin a possible hedge against rising inflation, and encourages periodic supply shock during bull cycles, driving its price higher.

Tax Advantages

When you hold Bitcoin in a traditional brokerage account, you pay capital gains tax if you sell, exchange, or trade for profit. The tax rate you pay is based on your income, filing status, and how long you held Bitcoin before you realized a profit.

If you instead keep Bitcoin in a retirement account, not only will you never pay capital gains tax on any profits, but you also postpone paying taxes until you take distributions at retirement age. In a 401(k) retirement plan, your taxable income may be reduced by any contributions you make. When you retire, you will pay ordinary income tax rates on your distributions. If you expect to be in a lower tax bracket when you retire, you may pay less taxes when you use your retirement account to invest in Bitcoin.

Diversify Retirement Holdings

Holding a variety of investments can insulate your retirement plan from losses. Suppose too much of your retirement account is allocated in a stock that plunges, or you’ve invested heavily in an industry suffering from a market downturn. In that case, a diversified retirement portfolio lessens the risk of loss. Adding crypto to your retirement account can help protect the value of your portfolio.

Should I Invest in Crypto in My 401(k)?

With a crypto 401(k) account, you can invest in digital assets like Bitcoin or Ethereum. Adding crypto helps diversify your 401(k) portfolio. Holding diverse types of investments can lessen the risk of loss if the market declines. Plus, you can realize tax benefits by investing in your crypto 401(k).

Steps To Invest in Bitcoin Within Your 401(k)

How can I invest in Bitcoin within my 401(k)? Follow these key steps to begin investing in your crypto 401(k).

Step 1: Choose Your Crypto-Friendly Retirement Account

Not every 401(k) account provider supports cryptocurrency. If you plan to invest in Bitcoin in your 401(k), make sure the retirement account provider supports crypto transactions. Otherwise, consider another 401(k) provider.

Step 2: Fund Your Account

You need to fund your 401(k) account to begin investing. An easy way to do this is to direct a portion of each paycheck to be automatically contributed to in your 401(k). If you have an existing 401(k) plan, you may wonder: can I transfer my current 401(k) to one invested in Bitcoin? The answer is yes. You can roll over your retirement funds to buy crypto in a new account.

Step 3: Buy Bitcoin and Other Cryptos

Once your 401(k) is open and funded, you can start investing in crypto. However, choosing where to invest your money can be overwhelming. You may stick with well-known cryptos like Bitcoin (BTC) or Ethereum (ETH). Or you may pick a crypto that is newer to the market.

Whatever coin you choose, it’s a good idea to research before investing in crypto. Read the crypto’s whitepaper to learn more about the coin or token’s purpose, and what the project is intended to do. You can read about who is leading the project and how far it has progressed along its roadmap. Other factors to consider before you invest include whether the crypto trades on reputable exchanges and how frequently it is bought and sold.

You might also consider investing in a crypto exchange-traded fund (ETF). A crypto ETF holds a collection of digital assets. With relatively more-diversified holdings, a crypto ETF may experience less market volatility than investing in just one digital asset.

Alternatives to Investing in Bitcoin Within Your 401(k)

Here are a few ways to invest in crypto outside of your 401(k) account.

Traditional Brokerage Account

You can buy, sell, and hold investments through a traditional brokerage account. If you prefer to work with a broker rather than invest alone, you can open a traditional brokerage account at a financial institution or online.

Not every brokerage account supports crypto investments; check with a brokerage before you open an account if you plan to invest in Bitcoin or other digital currency.

Cryptocurrency Exchange

Crypto exchanges offer a platform for buyers and sellers to trade crypto. Different crypto exchanges may support different types of assets. You can choose between decentralized crypto exchanges, which allow sellers and buyers to easily connect through peer-to-peer trading, or centralized crypto exchanges owned and operated by a private company. When trading through a decentralized exchange, you may pay lower fees than if you went through a broker.

Cryptocurrency IRA

If you are self-employed or don’t have access to an employer-sponsored retirement plan, you can invest in Bitcoin through a crypto individual retirement account (IRA). By investing Bitcoin in a crypto IRA, you may be able to take advantage of tax benefits such as deducting contributions and deferring taxes. You never pay capital gains taxes on distributions from a retirement account. The tax is the same whether your investments made money or lost money.

With a traditional IRA, your contributions may reduce your taxable income. You’ll pay tax on your distributions when you retire, but you may still save in taxes if you are in a lower tax bracket.

When you open a crypto Roth IRA, you don’t benefit from reducing your income by your contributions. However, you likely will not pay tax when taking retirement distributions with a crypto Roth IRA. So, you can pay less tax when your portfolio sees significant gains.

Invest Bitcoin in your 401(k) account

Cryptocurrency is a popular investment because of the potential for outsized gains. Portfolio diversification, tax savings, and growth opportunities are many reasons to add Bitcoin to your 401(k). With more retirement accounts designed to adopt digital assets, investing in your crypto 401(k) account has never been easier.