• Assuming the U.S. Securities and Exchange Commission approves spot bitcoin ETFs, more companies might decide to offer it within their 401(k) lineup.
• Retirement savers who believe in the long-term potential of the cryptocurrency will have more access to crypto as an asset class, either through their company 401(k) plan or through solo 401(k)s, if applicable, and self-directed IRAs.
• Bitcoin is up over 150% year to date, but it is extremely volatile, and many investors don't have the risk appetite to invest even a portion of their retirement dollars in this emerging asset class.

Retirement savers who want a taste of bitcoin without owning the cryptocurrency coins directly could soon gain the access they've been craving.

The Jan. 10 deadline is nearing for U.S. regulators to decide whether to allow a spot bitcoin exchange-traded fund, which would attempt to track the real-time price of bitcoin, and industry participants are feeling hopeful the U.S. Securities and Exchange Commission will give it a thumbs-up.

It remains to be seen how popular such an ETF would be with retail investors, but more than 10 asset managers, including the world's largest, BlackRock, are working to get their version of a spot bitcoin ETF approved. Industry participants predict that after these offerings become available, it won't just be high-risk traders, but also retirement savers who will have more access to crypto as an asset class, either through their company 401(k) plan or through solo 401(k)s, if applicable, and self-directed IRAs.

"It's a big step toward mainstream adoption of bitcoin and cryptocurrency. [Investors] will have more options available," said Chris Kline, chief revenue officer of Bitcoin IRA, which allows retirement savers to invest in more than 60 cryptocurrencies within retirement accounts. 

Right now, interest in bitcoin is high. The cryptocurrency is up over 150% this year after a dismal 2022, and the spot bitcoin ETF race has helped push its value higher. But it remains an extremely volatile asset class with as many enemies as true believers.

Many major pension funds have earmarked dollars to crypto as an asset class in recent years. According to the 2022 CFA Institute Investor Trust Study, 94% of state and local pension plans had some crypto exposure. Fidelity Investments, the largest 401(k) plan administrator in the U.S., first added a bitcoin fund option in the fall of 2022 to allow employees who are comfortable with the risks and volatility of cryptocurrency to invest in bitcoin within their company-sponsored 401(k) plan.

Here's what retirement savers who do see long-term potential in cryptocurrency as an asset class need to know about the potential use cases for spot bitcoin ETFs.

Options to own crypto in retirement accounts are limited

Many employers have been hesitant to offer crypto in a 401(k) based on 2022 guidance from the U.S. Department of Labor, according to industry experts.

With options to own crypto within retirement accounts such as 401(k)s and IRAs being limited, most people who own crypto today do so outside of retirement accounts. Many take a self-custody approach or use an exchange such as Coinbase or Gemini. Options are also available in nonretirement accounts at Fidelity and Betterment, for example.

Accordingly, retirement savers seeking to hold crypto assets in a retirement account typically need to find a self-directed provider that allows crypto investments, and that list is also limited. Once spot bitcoin ETFs are approved, however, expect more providers to allow them, and more options for retirement savers to invest in this fashion, say industry experts. 

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

Assuming the SEC gives an affirmative nod to spot bitcoin ETFs, as expected, more companies might decide to offer it within their 401(k) lineup, said 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 doesn't prohibit crypto in company retirement plans, but in its March 2022 guidance, "it put a pretty heavy thumb on the scale for plan sponsors considering it," said Joshua Rubin, vice president of legal at Betterment. 

"At this early stage in the history of cryptocurrencies, the Department has serious concerns about the prudence of a fiduciary's decision to expose a 401(k) plan's participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies," the Department of Labor wrote in a compliance assistance release. 

A spot bitcoin ETF may solve some of the hesitancies the DOL outlined, including concerns related to custody and recordkeeping and valuation, Rubin said. Still, employers may be hesitant to jump on board, at least initially, some industry watchers said.

"Employers will be very reticent about being the first ones out there to allow this," said Tim Picciott, a CFP with Lexington, Massachusetts-based Innovative Advisory Group. "I don't see most HR departments and plan trustees just signing on. I think it's going to have to be a move from the workers" asking for it, he said. 

Spot bitcoin ETFs likely to 'be everywhere'

While market-leading custodians such as Schwab and Fidelity don't allow investors to invest directly in cryptocurrencies within individual retirement accounts, they have become more involved in the crypto market on multiple fronts, from venture investments both financial services giants made in a crypto trading infrastructure company to a thematic crypto fund launched by Schwab.

But to invest directly, retirement investors need to work with other providers such as Bitcoin IRA, BitIRA and iTrustCapital.

However, market watchers predict more mainstream custodians will offer spot bitcoin ETFs once they become available. "It will be everywhere once these come out," said Larsen, who is also the founder of Defi Steward, which helps investment advisors manage digital assets for clients. "This is great for people who want exposure to bitcoin as an asset class," he said.

Tax advantages for long-term crypto investors

There are a lot of factors that go into whether bitcoin has a place in your retirement portfolio. First and foremost, bitcoin is extremely volatile and many investors don't have the risk appetite to invest even a portion of their retirement dollars in this emerging asset class. Investors also need to consider whether they want to hold bitcoin directly in a self-directed IRA, or solo 401(k), if applicable, or invest in bitcoin through an ETF. 

With a spot bitcoin ETF, having a professional manager who is going to be diversifying access to crypto could lessen — though not eliminate — risk, said Mark Parthemer, chief wealth strategist at Glenmede, a wealth management firm.

On the other hand, there can be advantages to owning bitcoin directly through a self-directed IRA, Kline said. For instance, when it comes time to take your withdrawals after age 59½, you may be able to receive your distribution as the crypto asset itself, instead of taking the cash. When you sell the spot bitcoin ETF, the redemption would likely be for cash, he said. It's an approach the SEC regards as safer.

In either case, there can be tax advantages for long-term investors who invest in crypto through a retirement account versus a brokerage account, Parthemer said. Assuming the investment increases dramatically, a retirement account allows investors to avoid the tax at the time of sale. If it's in a Roth IRA and you meet the holdings requirements, the withdrawals aren't subject to tax. By contrast, if you held it in a regular brokerage account and sold it, you could be subject to capital gains taxes at the time of sale, Parthemer said.

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

If your employer won't offer a spot bitcoin ETF in its 401(k) plan, you could always ask your employer to reconsider. If the answer is no, you can still open an IRA with a provider that makes spot bitcoin ETFs available.

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

"Given the outsized returns that many people expect these ETFs to produce over time, buying them inside an IRA account is going to be a common recommendation by financial advisors," said Edelman, who wrote the 2022 book, "The Truth About Crypto" to educate advisors on the asset class and has described it as a once-in-a-generation wealth opportunity.

There are applications for an Ether ETF, but that's likely to be approved by the SEC at a later point, Larsen said. "The spot bitcoin ETF will be the test case."