On March 11, the US Department of Labor warned employers sponsoring 401 (k) pension schemes to “exercise extreme caution” when dealing with cryptocurrencies and other digital assets, and even threatened to provide more legal scrutiny of pension schemes with large investments in cryptocurrencies.
His reasoning is known to any crypto investor: In addition to the risk of fraud, digital assets are exposed to volatility and can thus pose a risk to the pension savings of American workers. On the other hand, we see that the well-known players in the pension market are taking steps towards cryptocurrency. For example, last year the retirement investment platform ForUsAll decided to offer cryptocurrency as an investment alternative for fixed 401 (k) pension accounts in collaboration with Coinbase. Is this the start of a bigger trend?
Why bother at all?
Besides the simplistic explanation that digital assets have the magical ability to make people extremely wealthy in a short amount of time, there are two major things to consider about cryptocurrencies and retirement investments.
First, there is the diversification of investments. At least for now, cryptocurrencies, non-fungible tokens (NFTs) and other digital assets enjoy relative independence from the larger traditional financial market. In some cases, it can make it relatively stable when stocks and other traditional markets are in turmoil.
The second point, and perhaps the most realistic, is that buying and trading cryptocurrency through a pension scheme does not have to pay as much tax. This is a matter of profit and time – every time a US investor makes a sale of cryptocurrency, he is required to register it to report it to the IRS. Pension accounts are generally exempt from this charge. As Del Virts, a partner in the law firm Lathrop GPM, explained to Cointelegraph:
“Cryptocurrency trading under a qualifying plan will be treated like any other trading in assets under the plan, so the same tax benefits will apply. Generally, the transfer of assets under a tax-free plan is the bottom line of the qualifying plan. Profits you receive may not be taxable before you receive the distribution. ”
What the law says: 401 (k) s, ERISA and IRA
Since 401 (k) investments are covered by the Employee Income Insurance Act (ERISA) of 1974, it is not surprising that cryptocurrencies fall into a legal gray area when they are part of a pension investment portfolio. ERISA does not specify classes of assets that may or may not be included in a 401 (k). In a somewhat archaic way, trustees are obliged to “show the care, skill, wisdom and prudence exercised by a wise person” when handling the money of their hard-earned pensioners.
However, the vast majority of employers choose not to break the spirit of the law; Thus, there are few opportunities to invest directly in cryptocurrency through 401 (k) plans at the moment. As Kristi Pepper, an analyst at investment advisory firm The Motley Fool, told Cointelegraph:
“Those who use a 401 (k) form to invest in retirement generally do not have the option to buy cryptocurrency when investing in subsequent years. This is because 401 (k) accounts usually limit you to a small group of mutual funds. or exchange traded funds. ”
A popular solution for those who still want to make cryptocurrency a part of their pension funds are self-managed individual pension accounts (IRAs), where the choice of assets to deposit is usually open.
The Pension Industry Association estimates that between 3% and 5% of all IRAs are invested in alternative assets such as cryptocurrencies. According to various surveys, between 49% and 54% of millennials invest in cryptocurrencies or NFTs and / or consider them part of their retirement strategy.
Werts, who includes cryptocurrencies in his personal pension investment strategy, said that while the Ministry of Labor has highlighted the general risks and challenges associated with cryptocurrencies, ERISA in no way prohibits digital assets as an investment option in a 401 (k) plan. He sees three main options for those interested in cryptocurrency as a pension fund:
You can (if available from your employer) use a 401 (k) form hosted by yourself to invest in alternative investments such as cryptocurrencies. A simple Google search shows at least one alternative to ForUsAll: BitWage. Several companies also run ETFs. (such as Vanguard and SkyBridge Capital), although not yet approved by the Securities and Exchange Commission. There are options for investing in bitcoin futures that are approved by the CFTC.