Your 401(k) retirement plan could soon be impacted by the competition for the first bitcoin ETF.

• If the U.S. Securities and Exchange Commission approves spot bitcoin ETFs, more companies may choose to include it in their 401(k) offerings.
• If you are a retirement saver who trusts the long-term potential of cryptocurrency, you will have more opportunities to include crypto as an asset class in your 401(k) plan or solo 401(k)s, as well as self-directed IRAs.
• Despite Bitcoin's impressive 150% increase in value year to date, its volatility makes it an unattractive investment option for many, particularly those with a risk-averse approach to retirement planning.

Soon, retirement savers who desire a taste of bitcoin without owning the cryptocurrency coins directly will have the opportunity they've been seeking.

The deadline for U.S. regulators to decide on a spot bitcoin exchange-traded fund is fast approaching, and industry participants are optimistic that the U.S. Securities and Exchange Commission will approve it.

The success of a spot bitcoin ETF with retail investors is uncertain, but over 10 asset managers, including BlackRock, are working to obtain approval for their version. It is predicted that once these offerings are available, both high-risk traders and retirement savers will have greater access to crypto as an asset class through their company 401(k) plans, solo 401(k)s, and self-directed IRAs.

Chris Kline, chief revenue officer of Bitcoin IRA, stated that the increased adoption of bitcoin and cryptocurrency is a significant step towards mainstream acceptance. This will provide investors with more options for investment. Bitcoin IRA allows retirement savers to invest in over 60 cryptocurrencies within their retirement accounts.

Currently, the demand for bitcoin is increasing, with its value rising more than 150% this year. However, despite its recent success, bitcoin remains a highly volatile asset class with both supporters and detractors.

In recent years, many major pension funds have designated crypto as an asset class, with 94% of state and local pension plans having some exposure to it, according to the 2022 CFA Institute Investor Trust Study. Fidelity Investments, the largest 401(k) plan administrator in the U.S., introduced a bitcoin fund option in the fall of 2022, allowing employees who are comfortable with the risks and volatility of cryptocurrency to invest in bitcoin within their company-sponsored 401(k) plan.

Retirement savers who view cryptocurrency as a promising asset class should understand the potential applications of spot bitcoin ETFs.

Options to own crypto in retirement accounts are limited

Industry experts suggest that many employers are still hesitant to include crypto in their 401(k) offerings due to 2022 guidance from the U.S. Department of Labor.

Retirement accounts such as 401(k)s and IRAs have limited options for owning crypto, so most people who own crypto today do so outside of these accounts. Many take a self-custody approach or use an exchange such as Coinbase or Gemini. Nonretirement account options are available at Fidelity and Betterment.

Retirement savers looking to invest in crypto assets through their retirement accounts must find a self-directed provider that allows crypto investments, which is currently limited. However, once spot bitcoin ETFs are approved, more providers are expected to offer them, providing more investment options for retirement savers, according to industry experts.

If SEC approves over Department of Labor concerns, what happens next

If the SEC approves spot bitcoin ETFs, as anticipated, more companies may include it in their 401(k) offerings, according to Steven T. Larsen, a certified financial planner and founder of Columbia Advisory Partners in Spokane, Washington.

The question is how many.

The Department of Labor does not prohibit cryptocurrency in company retirement plans, but in its March 2022 guidance, it favored plan sponsors considering it, according to Joshua Rubin, vice president of legal at Betterment.

The Department of Labor has expressed concerns about the wisdom of a fiduciary's decision to expose 401(k) plan participants to direct investments in cryptocurrencies or other products whose value is linked to cryptocurrencies.

An ETF that focuses on a single bitcoin may address some of the concerns that the DOL has raised, such as custody, recordkeeping, and valuation, according to Rubin. However, some industry observers believe that employers may still be hesitant to adopt this solution, at least in the beginning.

According to Tim Picciott, a CFP with Lexington, Massachusetts-based Innovative Advisory Group, employers will likely be hesitant to be the first to allow this. He believes that most HR departments and plan trustees will not sign on unless it is initiated by the workers themselves.

Spot bitcoin ETFs likely to ‘be everywhere’

Although market-leading custodians like Schwab and Fidelity do not allow investors to directly invest in cryptocurrencies within individual retirement accounts, they have become more involved in the crypto market in various ways, including venture investments in a crypto trading infrastructure company and a thematic crypto fund launched by Schwab.

To invest directly in Bitcoin, retirement investors must collaborate with providers such as Bitcoin IRA, BitIRA, and iTrustCapital.

Once spot bitcoin ETFs become available, market watchers predict that more mainstream custodians will offer them, making bitcoin exposure more accessible to the public. Larsen, founder of Defi Steward, believes that this will make bitcoin an asset class that is widely accepted and easy to manage for investment advisors and their clients.

Tax advantages for long-term crypto investors

Whether bitcoin is suitable for retirement portfolios depends on several factors. Bitcoin's volatility may deter many investors from investing a portion of their retirement funds in this emerging asset class. Investors must decide whether to hold bitcoin directly in a self-directed IRA or solo 401(k), or invest through an ETF.

A spot bitcoin ETF with a professional manager who diversifies access to crypto could potentially reduce risk, although it may not completely eliminate it, according to Mark Parthemer, chief wealth strategist at Glenmede, a wealth management firm.

Owning bitcoin directly through a self-directed IRA can have advantages, such as the ability to receive your distribution as the crypto asset itself when you withdraw after age 59½, instead of taking the cash. However, when you sell the spot bitcoin ETF, the redemption would likely be for cash, which is considered safer by the SEC.

Long-term investors can benefit from tax advantages when investing in crypto through a retirement account rather than a brokerage account, according to Parthemer. If the investment increases dramatically, a retirement account allows investors to avoid paying taxes at the time of sale. If the investment is held in a Roth IRA and meets the holding requirements, withdrawals are not subject to tax. However, if the investment is held in a regular brokerage account and sold, investors may be subject to capital gains taxes at the time of sale.

Options if your employer won’t offer a spot bitcoin ETF

If your employer does not offer a spot bitcoin ETF in its 401(k) plan, you can still open an IRA with a provider that offers this option.

Ric Edelman, founder of Edelman Financial Services, stated in an email that the new spot bitcoin ETFs will be eligible for use in all types of IRA accounts, including deductible, nondeductible, Roth, and SEP, as well as solo 401(k) plans.

Financial advisors are likely to recommend buying ETFs inside an IRA account due to the potential high returns that many people expect, according to Edelman, who wrote the book "The Truth About Crypto" to educate advisors on the asset class and described it as a once-in-a-generation wealth opportunity.

The Ether ETF is not yet approved by the SEC, but the spot bitcoin ETF will serve as a test case, according to Larsen.