Should I Withdraw My 401(k) and Invest It in Crypto?

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Someone asked me a great question today. Here’s a paraphrased version of it:

“I’m currently contributing to a 401(k) up to my employer’s max match. I’m 26 years old and my 401(k) has roughly a $10,000 balance. I feel like that could grow to $20,000-$30,000 by the time I’m 65, but I’m considering other options.

I’ve started to dabble in cryptocurrency investing. I feel that I could definitely take $10,000 and 2-5x it in BTC, ETH, and altcoins.

My question is would it make sense to withdraw most of, if not all, the $10,000, pay the 10% penalty, pay the income tax, and invest the funds into cryptocurrency?”

Interestingly enough, I’m actually in a similar situation. Here’s my thought process.

Let’s Break Down the 401(k)

As seen in this example, most employer-sponsored 401(k) programs offer an “employer match” of some sort. For example, a 401(k) program could offer to match 100% of your contributions each year, up to a maximum of 5% of your annual income.

Let’s say your salary is $50,000. If you contributed 5% of your pay ($2,500) to your 401(k), your employer would contribute an additional 5% ($2,500) to your 401(k) account balance. This “match” is sometimes referred to as “free money” because it’s rewarding you for investing. I did it when I had a 401(k), and I think it’s the smart play to only contribute up to the “max match”. Take the free money. After that, there are better ways to invest your money.

The biggest problem with 401(k) programs is that, unlike an IRA or Roth IRA, you are very limited as to which investment products you can invest in. My old 401(k) had about 30 pre-selected funds I could choose from, many of which only had average returns and high expense ratios (fees).

Use my Retirement Calculator

The next thing we need to look at is the expected returns in this example. With a current balance of $10,000 at 26 years old, $30,000 by 65 might be a bit of an underestimate.

Below is a screenshot of the calculation for this scenario. I used a very conservative annual interest rate of 5% and I even assumed that you never contribute any more money just to illustrate compound interest.

You can run this calculation for yourself using my Retirement Calculator.

I want to make a few key points from these numbers:

  • If left completely untouched and unadded to, that $10,000 is estimated to grow to over $73,000. You’d have to pay taxes when you withdraw it after retirement, but it would still be more than $30,000.
  • You’d probably add more to it and the annual interest rate would probably be more than 5%. So, this calculation is extremely conservative.
  • It’s impossible to say exactly what returns you’ll get over a 40 year period, but the stock market averages 8%-12%. Keep all of this in mind as we tackle the rest of this scenario.

Let’s Talk About Crypto

There is absolutely no way I’m going to provide a fair amount of information on the cryptocurrency market in this one blog post. As of writing this, I’ve been dabbling for about 5 months and I’ve barely scratched the surface. Do your due diligence before you jump in, but I’ll give my thoughts pertaining to this scenario.

Crypto is beginning to gain mainstream adoption, but the vast majority of people do not understand how it is going to change the entire world as we know it.

The total crypto market cap is $2 trillion. For reference, the market cap of the S&P 500 (the top 500 companies in the stock market) is $33 trillion. Crypto has a ways to go, but it also went from $1 trillion to $2 trillion in about 3 months…

I can’t predict the future. I’m simply sharing the numbers. There are over 10,000 cryptocurrencies. It’s not difficult to create one, so there are many duds out there. However, there are many coins, or projects, that actually serve a purpose and provide a utility of some sort.

Bitcoin (BTC), Ethereum (ETH), Binance Coin (BNB), Cardano (ADA), and Polkadot (DOT) are just a few of the top projects that have real value and multi-billion dollar market caps associated with them. With the value of USD deteriorating by the second, crypto is, at a minimum, worth exploring.

The main takeaway is that the crypto market is still very early and the long-term upside is unfathomable.

Managing Expectations

Could $10,000 invested in certain cryptocurrencies yield 200%-500% in returns? Absolutely, without a doubt. It happens quite often with low market cap coins as they gain traction.

The question is: can you make that happen and what’s the timeline?

The reason I bring this up is to manage expectations. From my experience thus far, the crypto market is a very volatile way to invest money. You have to be able to stomach that and also have realistic expectations.

Short-term, it can be rocky and your returns depend almost exclusively on how much time and energy you put into finding good projects. I know individuals that look at charts, research new coins, and swing trade 24/7. They do very well, but if that’s not what you want to be doing all day, prepare to buy and hold.

Long-term, nobody knows what will happen, but many signs point to incredible returns. As it relates to this scenario though, long-term growth might be what you’re looking for.

Withdrawal Implications

If you decide to withdraw from your 401(k) before the age of 59 1/2, there are some important details to consider.

The IRS is going to withhold 20% of the balance for taxes and you’ll pay a 10% penalty. So, you’re going to lose at least 30% of your money, potentially more depending on your tax bracket.

You will also want to make sure your employer allows full 401(k) withdrawals while still working for them. I’m not sure if that’s ever a real issue, but at minimum, you’d have to talk to your payroll department to make stop the weekly contributions.

Final Thoughts

Ultimately, I’m not a financial advisor and I can’t tell you what to do. The answer will depend on your personal risk tolerance and what your goals are.

More USD is being printed like it’s going out of style which should be somewhat of a concern. However, it’s all most of us have ever known and been the standard for a long time.

Crypto is early and some projects look promising, but the lack of regulation makes it the wild west right now. That’s good for some, bad for others. It shouldn’t be viewed as a get-rich-quick scheme and you’ll probably get burned if you treat it as such.

Regardless of what you do in life, do your due diligence and understand as much as possible before acting.

*Disclaimer: My opinions in this post are just that – my opinions. I do not manage investments for anyone other than myself and am not responsible for any losses you may incur due to financial posts I have published. Do further research and invest from an educated perspective.


Mark Joseph Szymanski

Mark Joseph Szymanski is an American entrepreneur, web designer, speaker, and investor. He is the Founder of MJS Industries, the parent company to several passion projects.



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