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Are you signed up for a money purchase plan through your employer? Have you ever wondered how to diversify your retirement savings through alternative investments like physical gold and silver bullion? If so, you've come to the right source.
Money Purchase Plans do not receive much media attention, but are nevertheless an advantageous employer-sponsored retirement plan. In this article, we'll go over what Money Purchase Plans are, how they compare to more traditional retirement plans like IRAs or 401(k)s, how precious metals investing works, and most importantly how you can protect your retirement nest egg from volatility and losses in the stock market.
What is a Money Purchase Plan?
Money Purchase Plans are a retirement vehicle offered by some for-profit companies where contributions are made (by both employer and employees) based on a percentage of annual earnings. Unlike a Profit Sharing Plan, where contributions are tied to employer profitability on an annual basis, the percentage of annual earnings that are devoted to Money Purchase Plans remains the same each year based on the terms of the plan.
Despite the required employer contributions, Money Purchase Plans are still defined contribution plans, just like a 401(k). This is because you, as the employee, still maintain control over the investments (to the degree that the plan allows) and are still responsible for deciding when money is withdrawn.
All contributions made to your Money Purchase Plan are tax deductible, and all growth is tax-deferred. One major downside to some Money Purchase Plans is that they tend to have high administrative costs for a retirement account, which does eat into your investment returns. Also, you cannot take loans out of your Money Purchase Plan, unlike many defined contribution plans.
It can be difficult to roll over Money Purchase Plans, depending on the plan guidelines.
Money Purchase Plan Rollover Rules & Limitations
If you are still employed and under retirement age, check with your specific plan documents for Money Purchase Plan rollover rules. As far as the IRS is concerned, however, Money Purchase Plans are treated like any other qualified retirement plan and can be rolled over into a new employer's 401(k) or an Individual Retirement Account (IRA).
If you withdraw from your Money Purchase Plan prematurely (i.e., before the age of 59 1/2), you will incur early withdrawal penalties and the funds will be considered taxable by the IRS. Be aware of this before you get started with an MPP rollover. Furthermore, it's advisable that you conduct direct rollovers rather than indirect since direct ones will be deposited directly into the receiving account and minimize the risk of human error.
Money Purchase Plan vs. Profit Sharing Plan vs. 401(k) vs. Other Retirement Accounts
Below you'll find a chart that compares Money Purchase Plans with other retirement accounts that offer tax advantages, such as IRAs and 401(k)s.
|Plan Type||Sponsorship||2022 Contribution Limit||Roth Option?||Allow Gold Stocks?||Allow Gold ETFs?||Allow Gold Bullion|
|401(k)||Private Employer||$20,500 / $27,000||Yes||Maybe||Maybe||No|
|Solo 401(k)||Self-employed||$61,000 / $67,500||Yes||Yes||Yes||Yes|
|Keogh Plan||Self-employed or Unincorporated Employer||Depends on Type of Plan||No||Maybe||Maybe||No|
|403(b)||Government or Non-profit Employer||$20,500 / $27,000||Yes||Maybe||Maybe||No|
|457(b)||Government or Tax-exempt Employer||$20,500 / $27,000||Yes||Maybe||Maybe||No|
|SIMPLE IRA||Private Employer||$14,000 / $17,000||Yes||Yes||Yes||Maybe|
|SEP IRA||Business Owners & Self-employed||$61,000 or 25% of Compensation||Yes||Yes||Yes||Maybe|
|Profit Sharing Plan||Private Employer||$61,000 or 100% of Compensation||No||Maybe||No||No|
|Money Purchase Plan||Private Employer||$61,000 or 25% of Compensation||No||Maybe||Maybe||No|
|SARSEP||Private Employer||$61,000 or 25% of Compensation||No||Yes||Yes||Maybe|
|Traditional IRA||Individual||$6,500 / $7,500||Yes||Yes||Yes||No|
|Precious Metals IRA||Individual||$6,500 / $7,500||Yes||Yes||Yes||Yes|
|Thrift Savings Plan (TSP)||Government or Military||$20,500 / $27,000||Yes||No||No||No|
If an entry is labelled "Maybe" this denotes that the specific availability is at the broker or account administrator's discretion.
What Types of Gold You Can Invest in With a Money Purchase Plan?
Money Purchase Plans have a finite number of investment options available to the account holder. We've listed the various types of assets that are eligible for inclusion in all MPPs below:
- Individual stocks
- Individual bonds (corporate and government)
- Mutual fund shares
- Exchange-Traded Fund (ETF) shares
It is impossible to directly invest in physical precious metals, like silver or gold bullion, within a Money Purchase Plan. The only eligible exposure to gold or silver in an MPP is through individual stocks or ETFs containing gold stocks. These types of assets are referred to as paper gold, and they are generally considered to be riskier and do not pose the same diversification benefits as physical bullion.
Investing in Physical Gold vs. “Paper Gold”
There are many ways to invest in gold and silver. However, some are better than others. In tax-advantaged plans like 401(k)s or MPPs, account holders are prohibited from investing in real assets. Nonetheless, they can invest in gold stocks such as Karora Resources (KRR.TO) or Dundee Precious Metals (DPM.TO), or even popular gold indices like SPDR Gold Shares (GLD) or iShares Gold Trust (IAU).
The stocks and ETFs mentioned above provide indirect exposure to gold. This is because they represent shares of companies involved in gold or silver mining or exploration. Therefore, the valuation of their business is highly dependent on the price of the underlying asset. Since there are countless “paper gold” stocks available on the TSX or NASDAQ, there's no shortage of options available to investors looking for exposure this way.
Be warned, however, that paper gold poses numerous risks to your portfolio. Gold stocks are volatile assets that, like any stock, can be easily bought or sold in an instant depending on market conditions and investor sentiment. For this reason, gold stock prices vary widely from one day to the next. That's not the only type of risk you need to consider, either. You also have to account for the following risks of paper gold:
- Regulatory Risk – since the mining sector is subject to a high degree of oversight and regulatory scrutiny, there's no telling if a changing political environment will create insurmountable issues for companies involved in the industry.
- Cost of Production Risk – mining is a labor and capital-intensive process, and equipment regularly requires replacing and upgrading, which can spell doom for a highly leveraged gold or silver company.
- Management Risk – new management may be incompetent and mismanage the company's assets, causing bankruptcy or longevity issues.
- Fiat Currency Risk – gold stocks are purchased on exchanges for fiat currencies that are susceptible to hyperinflationary and monetary crises that can undermine their value.
Fortunately, physical gold is free of these types of risks. Gold and silver, in their thousands of years of use as a store of wealth, have never hit zero or lost their value as a commodity. Since you own the bullion itself, there's no counterparty risk or threat of another party filing for bankruptcy or being regulated to death.
Dedicating 5-20% of Your Retirement Portfolio to Precious Metals: The Advantages
Many analysts and experts agree that dedicating a small portion of your wealth (i.e., 5-20%) is a safe and responsible way to protect your savings from market volatility. These days, you never know what to expect from the stock market. The more your retirement savings are held in the form of gold or silver, the more resilient your portfolio becomes to shocks, crashes, and recessions.
Not only that, but gold and silver are also A-grade growth assets. Think large-cap tech stocks are the only assets that are booming right now? Consider that the spot price of gold, which was only $1,524 in January 2020, is now valued at $1,769 only a year later (as of May 2021). That represents a gain of over +16% in less than one and a half months, gains that even the S&P 500 would have a hard time competing with.
Ultimately, the share of your wealth dedicated to precious metals should reflect your risk tolerance and proximity to retirement. The closer to retirement you are, and the less risk-tolerant you happen to be, the more your wealth should be spread across gold and silver assets.
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It's impossible to predict what the future holds for the stock market. That's why prudent investors always diversify their holdings, so their wealth can't evaporate overnight in the event of a market crash or recession. Investing in precious metals in a self-directed IRA is one of the best ways of achieving portfolio diversification.
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