Pros and Cons of Holding Digital Assets in a 401(k)

Pros and Cons of Holding Digital Assets in a 401(k)

January 03, 2024

With the evolution of Bitcoin and other digital assets dominating the financial headlines for more than a decade, it stands to reason that many retirement investors are wondering if crypto has a place in their 401(k). 

In this blog, we will explore the pros and cons of holding digital assets in a 401(k) or similar employer-sponsored retirement plan and explain how a financial advisor can be instrumental in making informed investment decisions. Here's what you need to know.

What Are Digital Assets?

Digital assets are virtual or electronic representations of value that exist in digital form and can be owned or controlled by individuals or entities. These assets encompass a wide range of digital content and properties. This includes cryptocurrencies like Bitcoin and Ethereum, digital tokens, digital certificates, digital collectibles, digital media files (music, videos, and ebooks), and even virtual real estate in online games and virtual worlds. One research report predicts virtual gaming worlds alone could be worth $400 billion by 2025, with the broader metaverse industry worth over $1 trillion.

What sets digital assets apart is their existence in distributed ledger technology. This involves a blockchain, which provides transparency and security. Digital assets can be bought, sold, traded, or transferred digitally, and they have gained popularity as a form of investment, a means of conducting transactions, and a new way to represent ownership and value in the digital age. Let's dive deeper into the pros and cons of digital assets.

Pros of Holding Digital Assets in a 401(k)

There can be advantages to having digital assets in a 401(k) account. Notably, Bitcoin has seen remarkable growth of 150% over the last decade, surpassing the returns typically seen with traditional 401(k) investments like mutual funds. Here's a look at some of the advantages of having digital assets in your 401(k):

  1. Diversification: Including digital assets in your 401(k) can help diversify your investment portfolio. Cryptocurrencies and other digital assets have shown a relatively low correlation with traditional assets like stocks and bonds. This can help reduce the overall risk in your retirement portfolio.
  2. Growth Potential: Digital assets have the potential for substantial growth over the long term. Bitcoin, for example, has experienced significant price appreciation since its inception. Including such assets in your retirement account may help you benefit from this growth potential.
  3. Tax Advantages: Storing digital assets in a 401(k) allows you to delay taxes on gains until retirement withdrawals. This is a long-term advantage, especially for appreciating investments. If you're already trading cryptocurrencies and have a secure retirement plan independent of crypto, utilizing a 401(k) for crypto trading can help reduce your tax liability. In particular, Roth 401(k) accounts offer tax advantages by exempting capital gains from crypto investments.
  4. Security: Some proponents argue that holding digital assets in a 401(k) may offer the potential for enhanced security and the opportunity for higher gains when compared to assets traditionally held in 401(k) accounts. However, it's important to note that even well-established cryptocurrencies can be highly volatile, and the level of security can vary based on individual investment choices.

Cons of Holding Digital Assets in a 401(k)

One of the main disadvantages of holding digital assets in a 401k is the instability it offers investors. Digital assets such as cryptocurrency are unstable in several ways:

  1. Price Volatility: Digital assets are known for their price volatility. While this volatility can present investment opportunities, it can also lead to significant losses. Investors should be prepared for the rollercoaster of holding cryptocurrencies in their retirement accounts.
  2. Lack of Regulation: Since digital assets are still relatively new, they operate in an environment with limited regulatory oversight. This lack of clear long-term regulations can contribute to uncertainty surrounding the future of these assets, including their price trajectory and viability as a recognized asset class. It's important to stay informed about any regulatory changes that may affect your investments.
  3. Limited Investment Choices: Not all 401(k) plans provide the flexibility to invest in digital assets. Therefore, your investment choices may be constrained by the plan offered by your employer, potentially limiting your investment diversification. It's essential to check with your plan administrator to determine whether digital assets are available as an investment option within your specific 401(k) plan.
  4. Technical Know-How: Investing in digital assets can be challenging for individuals without a strong understanding of blockchain technology and the complexities of the digital asset market. If you lack familiarity with these concepts, making informed investment decisions may be daunting. Working alongside a skilled financial advisor can help you navigate this dynamic terrain confidently.

Finding Balance With a Financial Advisor

Working with a retirement income planner, especially a fiduciary advisor, can be helpful if you find it challenging to strike the ideal balance in managing your digital assets within your 401(k).

At Agemy Financial Strategies, one of the key advantages of working with our fiduciaries is our legal obligation to prioritize your best interests, offering impartial guidance to empower you in making well-informed choices. Here's how we can help:

  • Risk Assessment: Our financial advisors can help you assess your risk tolerance and risk assessment, providing valuable insights to determine whether digital assets are a suitable addition to your 401k. We'll work with you to comprehend the potential risks and rewards of your investment choices.
  • Asset Allocation: Our advisors will help you establish the ideal allocation of digital assets within your comprehensive retirement portfolio. Proper asset allocation can help you achieve a well-balanced approach that aligns perfectly with your financial goals.
  • Tax Implications: The taxation of cryptocurrencies can be intricate, and tax laws can vary across jurisdictions. Agemy Financial Strategies will be your guide, helping you navigate the complex tax implications of buying, holding, and selling digital assets within the context of your retirement plan.
  • Long-Term Strategy: Crafting a robust, long-term retirement strategy is essential. Our dedicated fiduciary advisors will work closely with you to set realistic goals, conduct periodic plan reviews, and make necessary adjustments to secure your financial well-being throughout your retirement journey.

Final Thoughts

Holding digital assets in a 401(k) can be a strategic move for some investors, offering diversification and growth potential. However, it's essential to consider the risks and consult a financial advisor to make informed decisions that align with your financial goals.

At Agemy Financial Strategies, we are dedicated to helping clients navigate the intricacies of planning for retirement to help ensure you never outlive your savings. Our fiduciary advisors can be a valuable resource in helping you navigate the digital asset landscape, assess the risks, and help you integrate these assets into your retirement strategy to align with your financial goals and risk tolerance.

If you're ready to explore the world of digital asset investing, contact us today to set up your complimentary consultation here.