Cryptocurrency has grown in popularity in recent years, and the possibility of using it as a part of your retirement saving strategy is no longer a fantasy.
Some plan providers are offering businesses the choice to provide employees with an ERISA-compliant 401(k) plan that includes a portion of contributions being directed to cryptocurrency assets. With Bitcoin and other cryptocurrencies becoming more mainstream, should you consider this choice for your employees?
Like other alternative and speculative assets, cryptocurrency can be illiquid at times, and its current values may fluctuate from the purchase price. Cryptocurrency assets can be significantly affected by a variety of forces, including economic conditions, supply and demand forces and potential regulation.
Bitcoin and other digital assets do come with several potential benefits, but these benefits should always be considered alongside the drawbacks. If you’re a retirement plan provider, weigh the advantages and disadvantages to better understand Bitcoin as a retirement plan choice.
Consideration #1: Taxes
Bitcoin is taxed like most other assets. The IRS categorizes bitcoin as property, with four additional rules:1
- If paid in bitcoin, it must be reported on a W-2 and is handled like any other income.
- Independent service providers may be paid in bitcoin and standard employment taxes apply.
- Character gains and losses on bitcoin will depend on the underlying asset.
- Payments using Bitcoin must be reported just like any other property.
Consideration #2: Opportunity For Diversification
Diversification can play a role in the health of our investments, especially for long-term investments like 401(k)s. Diversifying offers a chance to receive losses and gain, with the hope that the gains outdo the losses. Bitcoin could be helpful as a retirement savings choice by acting as another source of diversification. Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security or asset price declines.
Consideration #3: Potential Volatility
One of the biggest concerns surrounding Bitcoin may be its history of volatility. It has been known to rise and fall quickly, with drops as extreme as 80 percent.2 As a retirement choice, such volatility could be unnerving. In addition, many factors impact the volatility of bitcoin, so measuring them becomes an even greater challenge for investors.
Consideration #4: Possible Security Issues
The Consumer Financial Protection Bureau notes that digital assets may be impacted by some security issues including:2
- Password recovery: Bitcoin accounts require a password to access funds. But with no form of recovery, if your password is lost, the funds are lost as well.
- Susceptible to hacking: As an online asset, cryptocurrency may be susceptible to hacking attempts.
- Lack of support: You may not receive the same level of support as other forms of investments, especially if your funds go missing.
As a plan sponsor, you may see cryptocurrency as a part of your investment choices in the coming years (or months). With growing popularity, Bitcoin and other cryptocurrencies may be an attractive selection for your plan participants. As you consider, remember to weigh the pros and cons carefully. Work with your plan advisor to review your choices and determine whether or not this may be the right move for you and your employees.
About Boardwalk Wealth Management: Offer financial planning & wealth management for individuals and businesses in Ann Arbor, Michigan & beyond. The foundation of Boardwalk Wealth Management lies in true dedication to our clients and determining what their wealth means to them. We offer investment management, tax planning, and retirement services. As a fee-only financial advisor, we do not sell financial products or collect commissions. We enjoy working with clients both locally and remotely.