Will You Be Able to Retire on Crypto?

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Just a few years ago, retiring on cryptocurrency didn’t seem like a plausible possibility. While those who were investing heavily on their own — boosting the value of their crypto wallets until they could cash out to support themselves — could potentially make it happen, that was largely the only path. Today, though, the crypto landscape is changing. And crypto retirement could become reality.

If you’re interested in adding cryptocurrency to your retirement planning strategy — and also want to invest in crypto safely — crypto 401(k)s and crypto individual retirement accounts (IRAs) are two options to consider that are becoming more widely available as time passes. Along with having traditional retirement account benefits, like payroll withholdings and tax advantages, they make cryptocurrency investing for retirement more accessible. If you’re wondering how you might be able to retire on crypto, here’s what you need to know.

How Crypto Retirement Accounts Work

Cryptocurrency retirement accounts are similar to their non-crypto counterparts — at least in the way they function. They sometimes include extra features, along with the ability to add crypto to a portfolio, but can also require investors to take additional steps. Below is an overview of the two most common types of crypto retirement accounts and how they work.

Crypto 401(k)s

In the simplest sense, 401(k) plans are employer-sponsored retirement accounts that allow employees to contribute part of their wages to fund their financial future. You can choose how the income you contribute to your 401(k) is invested — or at least what it’s invested in. In most cases, employees can select between exchange-traded funds (ETFs) and mutual funds. The main exception is if you have a self-directed 401(k). In that case, you may be able to branch out into investing in other areas, including cryptocurrency.

There’s been a recent rise in crypto-specific iterations of this classic retirement savings vehicle. With a crypto 401(k), you can direct wages — at times limited to a specific percentage — to cryptocurrencies instead of traditional assets like ETFs and mutual funds. With this option, you access all of the advantages of a traditional 401(k), including its tax deferrals. However, you can branch out into new asset classes. This gives you the ability to easily add crypto to your retirement plan in a familiar way.

Crypto IRAs

IRAs are retirement plans that aren’t employer-sponsored. Instead, employees open and oversee them individually. However, like 401(k)s, IRA investors typically only have access to specific types of investments, such as mutual funds and ETFs.

If you want to add cryptocurrencies to your IRA, you’ll need either a self-directed IRA or crypto IRA. With the former, you may be able to invest in crypto along with other assets, though it could require you to form an LLC or take other steps to go that route.

With crypto IRAs, the account issuer effectively maintains a crypto wallet for you on your behalf. This lets you incorporate cryptocurrency into your investment strategy through a connection with a specific cryptocurrency exchange. By using that approach, you can capture the tax advantages associated with IRAs while still making a crypto investment.

Alternative Ways to Add Crypto to Your Retirement Plan

While traditional retirement accounts don’t commonly let people invest in cryptocurrency directly, that doesn’t mean crypto can’t be part of your retirement plan. There are alternative approaches let you introduce cryptocurrencies into the equation, each with its own benefits and drawbacks.

If you’re looking for a straightforward approach, consider opening an account with a cryptocurrency exchange. You can purchase the assets you want when you want to, which gives you more flexibility. However, these operate more like brokerage accounts, so you won’t get the tax advantages that come with retirement accounts.

Another way is to find traditional securities that include cryptocurrency-related assets in their portfolios. Crypto ETFs and cryptocurrency mutual funds are making their way into conventional marketplaces. In some cases, you may be able to add these types of investments to a typical retirement account. Otherwise, you might have to turn to brokerage accounts to add them to your non-retirement portfolio.

Incorporating Cryptocurrency Into Your Retirement Strategy

If you want to add crypto to your retirement strategy, using the right approach is essential. As with traditional investment options, diversification is often necessary. By investing in several different asset classes and securing a range of holdings, you reduce your risk. Since the cryptocurrency market is particularly volatile, it’s a critical step to ensure you’ll be able to retire comfortably.

Similarly, vetting any crypto assets before investing is vital. You’ll also want to limit your activities to reputable exchanges that align their practices with local and federal laws. Ultimately, the future of cryptocurrency is unclear, but by looking into the coins you’re considering, you can make better-informed choices that reduce your risk. Similarly, by choosing reputable platforms, you work to make sure your account can adapt to regulation changes with greater ease and limit your odds of wide-scale losses.

If you’re looking at crypto IRAs, review the fee structure, too. Many of these accounts come with higher costs than you encounter with typical traditional or Roth IRAs. In some cases, those fees offset potential tax advantages of the account. If that happens, you may want to explore other mechanisms — such as investing on your own using a regular exchange account — to determine if it’s more cost-effective.

Is Retiring on Crypto a Real Option?

Ultimately, it’s far too early to determine the overall viability of retiring on crypto if holding the cryptocurrencies (or crypto-associated assets) long-term is part of your plan. By not cashing out and sending those funds to traditional retirement assets, changing regulations and conditions could have a significant impact on your financial future.

For instance, shifts in regulations may cause cryptocurrency values to change dramatically. If they tumble, a once-comfortable nestegg may not be enough once the prices settle. Similarly, public sentiment and speculation influence crypto price points, potentially causing the overall value of your wallet to crash without a clear justification driving the change.

Since that’s the case, it may be safer initially to view crypto as part of a broader retirement strategy. By also investing in other assets, such as stocks, mutual funds or ETFs, you get the benefits and protections that typically come with diversification. That may help preserve a sizable portion of your total retirement account value if things get tumultuous, effectively keeping the overall risk level reasonable while still helping you capture the advantages of investing in cryptocurrencies.