Does bitcoin belong to your 401 (k)?

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Starting in July, a small 401 (k) provider will offer plan members the option of investing up to 5% of their retirement accounts in cryptocurrencies, including bitcoin and ether, among others.

The change is monumental but still incredibly small, as it applies to 401 (k) plans of only 70,000 employees in the United States and could appeal to many young investors. So naturally, I’m here to offer a few warnings for those looking to add crypto to their 401 (k).

First, a few advantages, the main one being that investors interested in crypto could invest money before tax, which they cannot do at this time through a brokerage account (although some self-directed IRAs do offer bitcoin as an investment option), says Leanna Haakons, founder of Black Hawk Financial. It is a boon for long term holders.

Haakons adds that with plan providers capping crypto contributions to 5% of your account total, this is a good way to dip your toes into crypto investing without risking losing too much of your savings, as it might be. the case if you invested on yours and I bet everything.

“It’s almost a better option for the home investor who won’t be watching the market every day,” Haakons said. “Give them the exposure, give them the opportunity to have some of these potentially incredible gains, but give them guide rails that they can’t get out of.”

Keep crypto investments limited

That said, investors should still exercise caution. Cryptocurrencies are extremely volatile assets yes, even bitcoin, the oldest statesman of digital coins. A 401 (k) or individual retirement account should be made up of relatively stable, low-cost investments that you believe will increase in value over decades. For most ordinary investors, that means index funds.

With a few exceptions, you will not withdraw any money from your 401 (k) before age 59 without incurring taxes and penalties. So consider your timing and your investment priorities, says Haakons. Bitcoin could rise in value tomorrow, but that doesn’t really help if you’re decades away from retirement. Ask yourself where you think bitcoin, or some other crypto, will reasonably be at that time. If you are looking at it as a shorter term investment, it might be better suited for a brokerage account, giving you more flexibility in buying and selling.

It is also crucial to make sure you understand what you are investing in. Don’t buy bitcoin or other digital currency just because that’s what your friends are talking about, said Dan Kemp, chief investment officer of Morningstar Investment Management recently. Likewise, understand the differences between crypto assets and why some are memes, while others, like bitcoin, are considered better long-term bets by some investment professionals.

And remember: there are always new investments that are “guaranteed” to make the average person a millionaire overnight. They rarely flourish.

OK, assuming you are already contributing to boring investments like index funds like I wrote a few weeks ago, then allocating no more than 5% of your portfolio to bolder bets like bitcoin isn’t not necessarily a bad decision, says Haakons. It all depends on what you are willing to risk. With something that is unproven like bitcoin or some other crypto, you should only invest money that you can afford to lose.

“If you keep it at that maximum 5% of your retirement savings, unless you have tons and tons of money in there, it won’t be a huge risk,” Haakons said. “You will always have a very solid foundation with mutual funds and ETFs. “

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