Are Crypto and Retirement Savings a Risky Mix?

March 16, 2023
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,", 06/15/2022.

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