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Don't invest in crypto before a 401(k) or IRA, warns these experts
Here's why you shouldn't forfeit your retirement fund just to get in on the crypto craze.
Many investors are pouring their cash into crypto — with the youngest segment making up the majority.
A recent survey by Select and Dynata found that nearly half (45%) of 18- to 34-year-olds say they have purchased crypto. They represent the greatest share of crypto investors, followed closely by 37% of 35- to 44-year-olds. Meanwhile, only 11% of 55- to 64-year-olds and a mere 4% of 65+ investors are buying into the digital currency fad.
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Investors may purchase coins for various reasons, whether it's with hope of turning a quick profit, the potential for long-term growth or just to get in on the excitement. Some young investors, however, are choosing crypto over investing for their retirement. And herein lies the problem.
The same survey found that 44% of investors who have less than $10,000 in investable assets are currently investing in crypto, but only 26% have a 401(k) or 403(b) and 17% have an IRA.
While cryptocurrencies can certainly be fun, short-term investments, Lindsey Bell, chief markets and money strategist at Ally Invest, doesn’t recommend putting a substantial portion of your portfolio into these assets or forfeiting your retirement fund.
"Investing for the long term should always take precedence over investing for the short term," she says. "The advantages of a 401(k) or IRA, including a company match, should be pursued before allocating short-term, fun money."
Here's what to consider
Tony Molina, a CPA and product evangelist at Wealthfront (the first robo-advisor to offer crypto access — up to 10% of your portfolio), agrees that the eagerness to join the crypto craze shouldn't get in the way of building long-term wealth for retirement. And it's even more important if your employer offers a 401(k) contribution match (hey, that's essentially free money).
But saving for retirement doesn't need to mean missing out on crypto if that's something you're really excited about, Molina says. If you have a 401(k), he recommends you contribute at least up to the amount your employer will match and then think about buying crypto with the extra funds you have leftover. For example, if your company matches up to 6% of your salary, contribute 6% so you're first doubling what you're able to put away before you're strategizing investing elsewhere.
"I'd encourage investors to think of cryptocurrency as one type of asset class they could include in their long-term, wealth-building strategy," Molina adds. "Crypto shouldn't necessarily be the main focus of your strategy because of the uncertainty and risk involved, but it can fit into your portfolio overall."
Crypto investing, though easily accessible through finance apps like Square's Cash App and PayPal, comes with risks. Most cryptocurrencies and crypto tokens see significant price volatility, which is why it's seen as a risky choice for many retail investors.
"While it’s easy to get caught up in the hype and potential instant gratification of crypto or other hot asset classes, it’s important to remain grounded in reality as well," Bell says. "These types of assets are very volatile, and while they are becoming more mainstream, the future around growth and regulation remains uncertain."
Don't have 401(k) access to save for retirement?
For those whose companies don't offer retirement benefits, prioritize opening a tax-advantaged traditional or Roth IRA before setting aside money for crypto.
"An IRA is a great option for saving for retirement because you have a lot of control over what you're invested in, you may be eligible for some great tax breaks and you can open an account on your own without relying on your employer," Molina says.
You can find IRA options offered through many national banks, investment firms, online brokers and robo-advisors. Select narrowed down those offering the best IRAs for all types of investors, as well as the best Roth IRAs for growing your money tax-free. Charles Schwab, Fidelity Investments and Betterment made both rankings.
Whether you want to invest in cryptocurrency because it has performed well in the past or because you feel pressure seeing everyone else do it, it's important to first prioritize your retirement funds. Crypto's past performance doesn't necessarily mean it will continue to do well in the future, and FOMO isn't a solid reason to get involved, warns Molina.
Investors curious about crypto can get the best of both worlds by first contributing enough to their 401(k) to meet an employer's match, if offered, or funneling funds into an IRA. If you have extra money, then consider buying crypto but make sure you know what you're getting into beforehand and don't allocate more than 10% of your portfolio to these risky investments. Remember, diversification is key to a successful investing portfolio.
"Before you go all in on any investment, especially a riskier asset like crypto, make sure you have a logical argument for why you believe that investment will increase in value over time," Molina adds.
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