Should Employer Plans Offer Cryptocurrency?
Here at Safeguard Advisors, we have been helping individuals use self-directed IRA and Solo 401(k) plans to invest in Bitcoin and other cryptocurrencies since 2015.
One of the key benefits of a self-directed retirement plan is the ability to invest in anything the IRS rules allow for, and to select the investments you deem most likely to help protect and grow your retirement savings.
Since the IRS views virtual currency as property per IRS Notice 2014-21, holding digital assets as an investment within an IRA or Solo 401(k) is allowed. There is nothing about virtual currencies that cause them to be considered a prohibited investment such as life insurance or collectibles. The logic of IRS rules for IRA investments is that anything not prohibited is allowed.
Because Bitcoin, Ethereum, and other cryptocurrencies are allowable assets, the decision to invest is left to the IRA or Solo 401(k) account holder. In an individually managed plan, that makes sense.
But what about employer 401(k) plans? Is it prudent for an employer to offer digital assets as an investment choice for their employees?
In the last few months, we have seen some back and forth between Fidelity Investments and the Department of Labor on this topic. While there is no direct impact on self-directed IRA or Solo 401(k) plans, it is an interesting discussion that may have far reaching implications for the growth of the digital asset class.
Fidelity Announcement
Fidelity Investments announced on April 26th they will be offering a Digital Assets Account feature within the 401(k) plans they administer for over 23,000 companies starting this summer.
Employers must opt-in for their employees to have access to this new feature. The maximum allocation to digital assets will be 20% of contributions as set by Fidelity. An employer can set a lower threshold if they choose.
The only offering will be Bitcoin, with trades occurring at a once daily set-price. Storage will be managed by Fidelity.
For investors who want limited access to Bitcoin in their retirement plan without having to deal with the technology hurdles of establishing an exchange account and secure storage, this may be an appealing option.
But will employers make the choice to enable this feature? It is not a simple decision.
Department of Labor Warning to Plan Sponsors
Before Fidelity made their announcement, the Department of Labor sent up a warning flare to employers who sponsor 401(k) and similar retirement plans. On March 10th, the DOL issued a Compliance Assistance release No. 2022-01on 401(k) Investments in Cryptocurrencies.
The memo reminds employers that as plan fiduciaries, they “must act solely in the financial interests of plan participants and adhere to an exacting standard of professional care.” A breach of such fiduciary duty can expose an employer to personally liability for plan losses.
In urging caution, the memo states: “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.”
These concerns are based on the speculative nature of cryptocurrency, the difficulty for average investors to make informed decisions, and other regulatory uncertainties around valuation and record keeping.
In closing, the memo notes that the Employee Benefits Security Administration (EBSA) plans to investigate employer plans that offer cryptocurrency investments, and to take appropriate action to protect the interest of plan savers.
A Hard-Hitting Response from Fidelity
On April 12th, Fidelity sent a strongly worded letter to EBSA asking them to revise or retract Compliance Assistance Release 2022-01 (CAR).
Fidelity takes issue with two key tenets of the CAR that are outside of ERISA or current guidance:
- That a specific asset is categorially considered an imprudent investment.
- That assets in a self-directed brokerage window fall under the fiduciary oversight of a plan sponsor.
Fidelity argues that ERISA rules and prior case law surrounding the matter of fiduciary prudence speak to methodology, not to specific assets. ERISA does not grant the Department of Labor the authority to make a decision about the appropriateness of a specific investment. That decision should be left to plan sponsors, who must thoughtfully evaluate the matter with the best interest of their employees and plan beneficiaries in mind.
Fidelity also notes the memo places an obligation on plan fiduciaries to assess the prudence not only of “designated investments” offered by a plan, but also assets than an individual investor may choose from a self-directed “brokerage window”. Such brokerage windows can include most any available investment. This extension of responsibility is significant and could potentially apply to any investment available in a self-directed brokerage window, not just cryptocurrency. Again, this new guidance would be in conflict with current guidance from the DOL.
So Where Does This Go?
It seems that Fidelity is ready to strike out on a new path and attempt to get the regulators to follow along. Fidelity’s Dave Gray stated, “We clearly have different views than the Department of Labor in terms of the guidance they’ve issued. We believe they should withdraw that guidance.”
Will employers choose to take the risk of having the EBSA interrogate them and question their fiduciary responsibility by making cryptocurrency an investment option?
Will employees sue their employer the first time Bitcoin has a 10% drop in one day or a sustained period of losses?
Our guess is that very few employers other than those led by true crypto enthusiasts will choose to include the Digital Asset Account. When you consider that Fidelity controls more than a third of the US retirement plan market at a value of about $2.4 trillion in 2020, even a small shift towards Bitcoin could create significant price movement.
We applaud Fidelity for their forward thinking and planning for the next generation of investors, and will be interested to see where this leads.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
