In this episode of Be[In]Crypto’s Video News Show, host Juliet Lima goes into detail about using Bitcoin in retirement accounts. In particular, she discusses Bitcoin in 401ks, which Fidelity Investments recently started offering to its clients.
What is a 401k?
The 401 stands for section 401 of the IRS code, while the k is the subsection of that code. So it’s really a section 401, subsection k, retirement account.
The 401k is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts. The government lets companies offer these accounts with some tax advantages, which its hopes will encourage people to save for retirement.
There are two types of 401k’s, a traditional and a Roth variation. In a traditional 401k, an employee’s contributions are deducted from their taxable income, while a Roth 401k allows them to contribute after-tax dollars, so they can take their money out tax-free during retirement. Both options have positives and negatives which should be considered to determine which is most suitable.
Once contributions are made to a 401k, they are sealed until the contributor reaches the age of 59 and a half. While money can ultimately be withdrawn before then, it would incur penalties in addition to the necessary tax payments. A 401k also has limits on the contributable amount which is periodically updated and requires consultation with a qualified tax professional or the IRS themselves.
Usually, companies handle 401k retirement savings plans but individuals also have the option of a self-directed 401k. A self-directed 401k plan enables individuals to make investment decisions on their own. These can include assets such as mutual funds, stocks, bonds, and even invest in more unconventional assets like real estate and commodities, but only the employer allows it. The self-directed 401k option allows more freedom, which could also result in more fees.
Recently, Fidelity Investments, the largest retirement investment provided in the US, announced they will be offering 401k investors the ability to access Bitcoin for use in their plans sometime in the summer of 2022.
Fidelity is the first retirement plan provider to make such a move, which will lead to others following suit. This has already proven to be the case with accepting Bitcoin as legal tender. Recently, the Central African Republic followed El Salvador’s lead, becoming the second country in the world to adopt Bitcoin as legal tender.
However, as 401ks are employer-offered retirement savings accounts, they must be chosen by the employer. Fidelity says that bitcoin will be “available” for the 23,000 employers that use Fidelity. But considering the substantial financial risk and effort required to understand the investment, many will understandably not offer Bitcoin to their employees.
Still, some employers will decide to take advantage of Fidelity’s decision to offer crypto for 401k retirement savings. This will lead to other investment companies offering the option for a bitcoin 401k, lest they fall behind.
Meanwhile, officials within the U.S. Department of Labor have taken issue with Fidelity Investment including Bitcoin as part of its 401(k) offerings. Some of the Department’s issues with cryptocurrencies include their volatility and inconsistent valuation methods investors could use to evaluate prices.
Other Crypto options for retirement
Along with a 401k option for Bitcoin, there are other ways to use Bitcoin or crypto to save towards retirement. In addition to a 401k, there is also an individual retirement arrangement, which also allows for tax-deferred investments to be claimed upon retirement. Companies such as iTrust Capital allow individuals to invest in Bitcoin and thousands of other assets in such accounts.
Investors can also just buy cryptocurrency themselves and hold it until retirement, while this doesn’t come with the tax benefits that a 401k offers, it can at least be redeemed before the age of 59 and a half.
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