Can You Buy Crypto in Your 401K? Why It’s Difficult and the Reason You Should Think Twice (ANALYSIS)

Last Updated on June 19, 2021

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Is it a bad idea to buy crypto in your 401K? Even people who originally had zero interest in cryptocurrency are starting to wonder. This alternative form of investing has certified itself as more than just a flash in the pan. So skeptics are starting to take a second look.

In perhaps the biggest sign of its ascent crypto is now coming to some retirement plans. But just because you can invest in crypto in your 401K doesn’t mean you should. There are many complicating factors that we will discuss here.

Despite the fact that it’s starting to show up in some 401K options, it’s still difficult for most people to find a way to do it.  Yes, crypto is technically allowed in any 401K, as it’s tradeable just like stocks or real estate. But a lot of financial companies don’t want to get anywhere near it because of the volatility.

To explain, let’s go back to the Employee Retirement Income Security Act of 1974 (ERISA). It was established to protect those participating in company 401K plans from having options that are unnecessarily risky. As your 401K is meant to reward your hard work and help you have a secure retirement, the fund options offered are generally more conservative than day-to-day investing or a self-directed IRA.

That’s largely because of this law, which puts employers on the hook for offering overly speculative or risky funds in people’s 401K. And as you’ll find out soon, crypto investing is about as speculative as it gets. The 401K administrator is deemed a fiduciary, which means they must act prudently and in employees’ best interests, and they are liable for any losses the plan incurs. Given the risks many employers don’t want to get near it.

Does that mean you shouldn’t buy crypto in your 401k? Let’s explore the pros and cons.

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Many financial advisors feel that buying crypto in your 401K is a bad idea because of the risks involved. Photo credit: Shutterstock.com

A Good Idea?

So is crypto in your 401K a good idea? Crypto investing can be beneficial for a very simple reason: you can make a lot of money. The prices swing wildly — so much so, that the White House launched an investigation into the category — but if you catch it on the upswing and buy and sell at the right time, you can make money quickly.

A Bad Idea?

The price swings we mentioned are a double-edged sword when it comes to investing in cryptocurrency in your 401K. The wild price swings are as much of a risk as a potential boon. Meme stocks don’t move based on tangible factors like company financials, forecasting, or analyst research. That makes investing in crypto incredibly unpredictable. 

Another reason to avoid crypto in your 401K is a psychological one. You could lose a sense of basic investing: buying and holding stock of quality companies that stand to grow over time. And what’s more, if your crypto stocks don’t perform well, you could lose faith in investing entirely and, in the most extreme cases, give up. That totally negates a consistent long-term investing strategy.

The last thing you want is for your crypto investing to take your focus away from disciplined, regular investing in solid, dividend-paying stocks. When it comes to 401K retirement investing, the golden rule is to focus on companies that have solid financials, good prospects for growth, and solid management — and never, ever, prioritize your crypto investing over this prudent long-term approach.

The Bottom Line 

Crypto investing is gaining credibility as a legitimate way to make money. For that reason, more experts are recommending it. But what percentage of your overall 401K portfolio should you devote to crypto? The simple answer: a small one.

Unless you can afford to take major risks in your 401K, you should not invest more than you can comfortably afford to lose. Your 401k is for long-term investment so you can be financially secure in retirement. You should never divert funds meant for long-term growth investing into alternative investing.

If you want to try buying crypto, start small and work your way up. Dip your toe in and swim carefully.