Is Crypto Part of Your Retirement Plan?

Dec 27, 2022 by Kelsey Banerjee

Looking at sky-high inflation, many investors are wondering whether or not the potential high crypto gains could be a solution for their retirement plan. And they aren’t the only ones.

In September, the U.S. Senate Committee on Banking, Housing, and Urban Affairs announced the Retirement Savings Modernization Act, which would amend ERISA and allow 401(k) investors to choose from a broader range of asset classes. Combined with standardized tax rules regarding digital assets, it’s clear that crypto is here to stay. At least in the United States.

But given the asset’s high volatility, many investors are still wary of using crypto to fund their retirement accounts. And this concern makes sense.

In 2018 alone, Bitcoin’s value dropped from $17,527 to $3,236—it fell by 80%. Then, in 2020, it skyrocketed by 300%, and by the following year, this single digital asset was worth $68,000.

Where there is room for huge gains, there are also changes for significant losses. But that doesn’t mean crypto shouldn’t be a part of your plan.

In this article, we’ll review what we know so far about crypto and retirement plans.

How Much Should You Rely on Crypto to Fund Your Retirement?

The percentage of your retirement portfolio that should be invested in crypto differs on several factors, just as with any asset class. However, due to crypto's high volatility, many industry professionals have kept a cap of 5% to 30%.

The further away you are from retirement, the more you can invest in digital assets. This is the same logic used to determine the allocation of stocks versus bonds and CDs. As you age, you want to progressively put money into less volatile investments.Cryptos volatility is one of the main draws for younger investors—the rapid value changes provide an opportunity for potential growth. (1)

And cryptocurrency is certainly volatile. But, in fact, that’s one of the main draws for younger investors—the rapid value changes provide an opportunity for potential growth.

How Do You Set up a Crypto 401(K) Or IRA?

With the popularity of crypto, more and more traditional brokers have integrated digital assets into their 401(k) offerings.

Fidelity was the first to sign on to create 401(k) plans open to crypto, but there are many cryptocurrency-specific IRA brokers, too, such as Bitcoin IRA, iTrustCapital, and Equity Trust.

Generally, setting up a 401(k) or self-directed IRA with a cryptocurrency option works the same way as opening a traditional account. You will need to choose a brokerage account that offers digital asset options and simply fund your account.

In most cases, a crypto retirement fund may require a few different components. Outside of your brokerage account or custodian, you will also need access to an exchange for buying and selling your virtual currency. You may also prefer to have a storage solution or backup wallet to ensure you can always tap into your funds.

There are a few things to note, however. In March 2022, the U.S. Department of Labor (DOL) released a warning regarding crypto retirement options. In this announcement, the DOL cautions investors and plan providers to be wary of crypto assets due to several challenges.

In particular, the government suggests that investors consider:

  • The extreme market volatility
  • Difficulty in evaluating each asset
  • Lack of reliability in asset valuations
  • Recordkeeping and custodial issues—such as losing access to investments from forgetting your crypto wallet credentials.
  • Shifting regulatory environments

In addition, it’s important to know that few crypto investments are insured. Furthermore, while blockchain technology is nearly impossible to hack, social engineering fraud can still lead investors to unintentionally lose their assets.

What about Taxes?

Virtual currency is subject to taxes in the United States and abroad. But since the IRS treats cryptocurrencies as property, they attract capital gains taxes. If, for example, you buy $10,000 worth of Bitcoin (BTC) and sell it at $20,000, you would owe capital gains taxes on the $10,000 profit.

How long you hold your cryptocurrency invest for matters. For example, if you sell your crypto investments within a year, you are subject to short-term capital gains, and this amount will be included in your annual income. Short-term capital gains can be triggered when you sell your investments or even if you purchase goods or services using crypto.

For long-term capital gains, your crypto asset will be considered an asset and taxed anywhere from 0% to 20% depending on your income bracket.

Considering taxes doesn’t just help you estimate your actual earnings. For those closer to retirement age, which accounts you withdraw from can significantly impact how long your savings will last. For that reason alone, you may want to work with a tax professional or fiduciary financial advisor to manage your overall retirement withdrawal plan.

The Future of Crypto, Payments, and Retirement

Crypto-powered retirement funds are still in their early days. Regulators are still hashing out the details and limitations of cryptocurrency, from refining tax laws to investing standards.

But many organizations continue to make strides and push for crypto acceptance. ForUsAll is one example—a fintech platform that allows employers to offer alternative 401(k) plans that include crypto assets as an employee benefit. Likewise, Allio Finance is another upcoming platform that allows individual investors to streamline their portfolio with an Acorns-style, automated investing app with access to crypto.

Of course, retirement planning and personal finance isn’t the only area where crypto is making gains. At Paystand, businesses can also benefit from blockchain technology to securely and rapidly collect traditional payments. But we also offer Bitcoin-based cashback rewards with our corporate credit card.

The fact is that even with value volatility and a few bad apples, the blockchain infrastructure is solid. And in the long term, it’s an opportunity for a more secure and efficient financial system.

Optimizing B2B Payments with Blockchain

For businesses that want to do more than offer crypto retirement options, it’s possible to revolutionize your payments system with blockchain technology. Built for speed, accuracy, and security, blockchain can streamline invoicing and payments collection—ensuring a healthier cash flow and more resources for growth.

Check out our complimentary ebook for the full story on blockchain payments.