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Does bitcoin belong in your 401(k)?


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

The change is monumental — though still incredibly limited, as it applies to the 401(k) plans of just 70,000 employees in the U.S. — and might appeal to many young investors. So naturally, I'm here to offer a few warnings to those interested in adding some crypto to their 401(k). 

First, a couple of benefits, the main one being that investors interested in crypto would be able to invest pretax money, which they cannot do right now through a brokerage account (though some self-directed IRAs offer bitcoin as an investment option), says Leanna Haakons, founder of Black Hawk Financial. That's a boon for long-term holders.

Haakons adds that with plan providers capping crypto contributions at 5% of your account's total, it is a good way to dip your toe into crypto investing without the potential to lose too much of your savings, as could potentially be the case if you invested on your own and went all in. 

"It's almost a better option for the at-home investor that's not going to be watching the market every day," Haakons says. "Give them the exposure, give them the opportunity to have some of those potentially incredible gains, but give them guide rails they can't go outside of."

Keep crypto investments limited

That said, investors should still tread carefully. Cryptocurrencies are extremely volatile assets — yes, even bitcoin, the elder statesman of digital coins. A 401(k) or individual retirement account should consist of relatively stable, low-cost investments you believe will increase in value over many decades. For most everyday investors, that means index funds. 

With a few exceptions, you won't be withdrawing money from your 401(k) until age 59½ without incurring taxes and a penalty. So consider your investing timeline and priorities, Haakons says. Bitcoin might shoot up in value tomorrow, but that doesn't really help you if you're still decades away from retirement. Ask yourself where you think bitcoin, or another crypto, will reasonably be at that point in time. If you envision it as a shorter-term investment, then it might be a better fit in a brokerage account, that gives you more buying and selling flexibility.

It's also crucial to make sure you understand what you're investing in. Don't buy bitcoin or another digital currency solely because it's what your friends are talking about, Dan Kemp, chief investment officer of Morningstar Investment Management, said 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 investing professionals.

And remember: There's always some buzzy new investment that's "guaranteed" to make the average person a millionaire overnight. They rarely pan out.

OK, assuming you're already contributing to boring investments like index funds, as I wrote a few weeks back, then allocating no more than 5% of your portfolio to bolder bets like bitcoin isn't necessarily a bad move, Haakons says. It all comes down to how much you are willing to risk. With something unproven like bitcoin or another crypto, you should only invest money you can afford to lose.

"If you're keeping it at that 5% maximum of your retirement savings, unless you have tons and tons of money in there, it's not going to be a huge risk," Haakons says. "You're still going to have a really solid base through mutual funds and ETFs."

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