Planning Your Retirement: Crypto Investing vs. 401(k)

401(k) plans are the starting point for many American employees and an essential step to comfortable living down the road.

Although 401(k) retirement plans have been the gold standard for decades, rising inflation and underperforming mutual funds force you to think outside the box to ensure adequate retirement savings. By now, you’ve probably heard of cryptocurrencies, and you’ll find how they can offer a new edge to your retirement savings below.

What Is Crypto Investing?

Investing in cryptocurrencies is similar to investing in stocks and bonds in the belief that the asset’s value will rise over time.

Unlike the traditional stock market, the cryptocurrency market is open 24/7, global, and available to anyone with an internet connection. Overall, you must have a long-term horizon if your goal is to use crypto investments as part of your overall retirement strategy.

The Pros and Cons of Crypto Investing for Your Retirement Plan

Although cryptocurrencies experience increased chances of volatility, they may offer substantially higher returns than average mutual funds and individual stocks.

Pros

• You can choose from thousands of crypto assets to invest in
• There isn’t a time limit on how long you can invest in cryptocurrencies
• You can sell crypto to cash at any time
• You don’t need a sponsor employer to invest in crypto
• You don’t have to wait until a certain age to sell your crypto portfolio

Cons

• Cryptocurrencies can experience wide price fluctuations
• The crypto market is relatively young
• Long-term capital gains are as high as 20%, and short-term capital gains are as high as 37%
• The regulatory landscape may change in the medium to long-term

What Is a 401(k)?

A 401(k) is a retirement savings plan employers in the United States offer.

The basis behind a 401(k) is a percentage of each paycheck is placed into an investment account, such as a mutual fund. From securities to bonds, 401(k) savings plans are relatively safe to grow your retirement account with additional tax-related benefits.

Additionally, some employers offer to match up to a certain amount of your contribution into your retirement account.

What Is a Traditional 401(k)?

Regarding traditional 401(k) plans, all contributions and earnings from dividends are tax-deferred. Although this sounds ideal, taxes (20%) come home to roost once you withdraw your funds from the 401(k) account.

What Is a Roth 401(k)?

Unlike traditional 401(k) plans, the Roth 401(k) contribution is made with after-tax income.

Since all contributions under a Roth 401(k) plan are made with after-tax income, you’re always settled with the IRS. Once it comes time to withdraw (distribute) your Roth 401(k), you won’t need to worry about paying a lump sum of taxes.

The Pros and Cons of 401(k) Retirement Plans

Proponents of 401(k) retirement plans cite relative safety and overall stability as the primary reasons individuals should choose a 401(k) plan as their preferred retirement plan.

Pros

• Well-regulated industry
• Abundant tax breaks
• Employers typically match your contributions
• 401(k) plans can be withheld from creditors

Cons

• You cannot withdraw your funds until the age of 59½ without triggering a 10% fee
• You must begin liquidating your funds at the age of 72
• It may take decades to save notable savings
• All contributions are tax-deferred or paid during each tax year, depending on the type of 401(k) plan

Which Retirement Plan Is Better — Investing in Crypto or a 401(k)?

The best option comes down to your risk tolerance and time horizon.

Trading crypto to accumulate retirement funds can produce significant short- and long-term gains. However, trading crypto comes with its fair share of risk.

Alternatively, a 401(k) retirement plan is a longstanding option that many Americans opt in during their careers. Although a 401(k) savings plan is considered safe, the gains are slow and take decades to produce substantial sums necessary for retirement.

The Next Best Thing — Combining Crypto and Your 401(k)

If you don’t want your retirement hanging on the volatility of crypto or the sluggishness of traditional 401(k) plans — your next best option is to combine the two.

Known as crypto 401(k), investment groups are beginning to add crypto (e.g., Bitcoin) to their list of offerings. Thus, you can harness the benefits of traditional 401(k) accounts while gaining exposure to top cryptocurrencies like Bitcoin.

Outside traditional mutual funds, SEC-registered investment advisors will soon begin offering retirement accounts that utilize automated financial services that invest in cryptocurrencies on your behalf.

Investment advisors allocate your retirement account into a broad basket of cryptocurrencies (similar to an ETF) that would not otherwise be available via mutual funds. Ultimately, crypto 401(k) accounts are effectively bridging the gap between the old and new ways of saving for your eventual retirement.

_{Shrimpy is providing an endorsement of Shrimpy Advisory. Shrimpy and Shrimpy Advisory are affiliated companies. A conflict of interest exists because Shrimpy Advisory will be compensated if a client utilizes Shrimpy Advisory’s services.}