Here’s Why Your Retirement Account is the Best Place to Hold Your Crypto

If you are like most working professionals, you are probably seeking ways to grow your savings on your way to building a secure retirement. And while cryptocurrency—commonly simplified to crypto—can be a risky investment, it also has the potential to add significant returns to any portfolio. For this reason, it is natural to wonder whether you should consider investing in crypto. However, with the latest string of bankruptcies and indictments related to some of the most vaunted crypto brokerages and custodians, confidence in the industry seems quite fragile right now.

Mildly put, 2022 was rough for crypto investors; and so far, 2023 isn’t shaping up to be any better. Rather than focusing on whether to invest in crypto or determining which token is best to own, this article emphasizes the best and most secure location to hold your crypto should you decide to own it.

Many of the safety issues surrounding cryptocurrency pertain to how it is stored. Crypto investors must be especially vigilant in preventing theft and loss. This may require you to personally take additional security precautions since cryptocurrency trading platforms are not regulated the same way that more established exchanges are, and security measures can vary greatly from exchange to exchange.

Investors may be wondering if their investments in assets like Bitcoin and Ether are actually safe, and for good reason. Since the public collapse of the leading crypto brokerage FTX Trading Ltd.—or FTX—and with the potential for more companies with questionable practices related to crypto trading and lending to be revealed before the end of 2023, it is important to understand and consider both the security and storage of your crypto assets.

When storing crypto on one of the more popular exchanges like Coinbase or Robinhood, you are utilizing what is referred to as a “custodial wallet.” As a result, you can easily trade the assets in your account because the exchange is holding the private keys to your account on your behalf. However, in return for that ease of use, there are tradeoffs that you should be aware of.

As investors witnessed firsthand in 2022, exchanges like FTX are not completely safe. When an exchange goes bankrupt, it is not particularly clear what individual investors can do to get their money back if the company does not have the cash to pay up. At present, it is estimated that FTX could owe money to more than one million of its customers, many of whom are retail investors. There are no guarantees that any of those investors will see a dime of what they are owed, let alone their account’s full value.

In a standard bank account, your deposits are protected up to the legal limits set by the Federal Deposit Insurance Corporation (FDIC). However, the federal government does not provide any protections for cryptocurrency deposits made at exchanges. This is because cryptocurrencies are not regarded as legal tender, nor are they treated as investments by any centralized government body the way stocks or bonds are.

Rather than keeping your cryptocurrency in a custodial wallet with an exchange, some crypto professionals recommend a hardware wallet, also referred to as cold storage. Many industry experts consider cold storage to be the safest way to hold crypto assets. Using a hardware wallet guarantees that you, and not a third party like an exchange, are responsible for maintaining your assets. These cold storage wallets keep your cryptocurrency offline, thus eliminating the chance of being hacked.

However, if you want to trade those offline assets, you will have to go through the trouble of moving them back into an exchange to complete the transaction and then back to your cold storage wallet for safekeeping. This process can be a hassle. It is also important to remember not only your password but the location of your device when using a hardware wallet as well. If you were to misplace either, you might lose access to those assets forever.

For this reason, the best place to invest in crypto might be within your retirement account. Although providing custody of digital assets within a retirement account does not automatically qualify them for the same insurance coverage applied to stocks and bonds by the Securities Investor Protection Corporation (SIPC), the brokerages themselves are subject to a higher level of scrutiny and oversight from multiple government bodies that provide an added layer of protection for consumers.

With the most dominant 401(k) providers, such as Fidelity and Charles Schwab, now offering Bitcoin and Ethereum as investment options inside of both 401(k) and Individual Retirement Accounts (IRAs), account holders are able to trade as they wish with the confidence that comes from doing business with a reputable organization.

Crypto custodians are the holy grail for hackers looking to make a big score. Despite claims that newer companies place a premium on security and allocate their resources accordingly, the scale and budget of their respective cyber security teams pale in comparison to a more traditional custodian, like Fidelity, that has spent decades protecting its clients' money from online dangers.

Trading crypto inside a tax-deferred retirement account also means that you will not accidentally run afoul of any newly-enacted and nuanced tax rules. In a taxable brokerage account, you are required to keep detailed records and report every transaction you make on a ledger to the IRS. This can be tough if you actively trade crypto.

While having access to trade your cryptocurrency inside of an account that defers it from taxation can be appealing, it is also important to think ahead. Retirement savings are meant to remain untouched for decades, and by holding an asset as volatile as crypto inside a retirement account, it will help you avoid making any rash decisions to big intraday market moves. Some retirement plan providers even restrict the number of trades you are allowed to place each month or annually. This means you will be more likely to resist the urge to trade your crypto as frequently as you would if it were held in your brokerage account.

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Malcolm Ethridge, CFP® is the Managing Partner of Capital Area Planning Group based in Washington, DC. He is also the Managing Partner of Capital Area Tax Consultants. 

Malcolm’s areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits. 

 Disclosures:

The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your legal advisors before taking any action that could have tax and legal consequences.

Investments in securities and insurance products are:

NOT FDIC-INSURED | NOT BANK-GUARANTEED | MAY LOSE VALUE