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Money Purchase Plan

Gold IRA Guide / Types of Retirement Plans / Money Purchase Plan

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Do you participate in a Money Purchase Plan through your job? Have you ever wondered how to diversify your retirement assets by investing in physical gold and silver bullion? You are at the right place.

Money Purchase Plans do not receive much media attention, but are nevertheless an important, tax advantaged, employer sponsored retirement plan. 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 safeguard your retirement assets against stock market or currency collapse.

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control over the investments (to the degree that the plan allows) and are still responsible for deciding when money is withdrawn.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 a Individual Retirement Account (IRA).

There are penalties for taking distributions in cash prior to retirement age. Additionally, if you are going to attempt a rollover, it is highly recommended to elect to perform a direct rollover instead of an indirect rollover. Indirect rollovers have withholding requirements and run the risk of incurring early distribution penalties.

Money Purchase Plan vs. Profit Sharing Plan vs. 401(k) vs. Other Retirement Accounts

Here is a table which illustrates how a Money Purchase Plan compares to other tax-advantaged retirement vehicles:

Plan TypeSponsorship2016 Contribution LimitRoth Option?Allow Gold Stocks?Allow Gold ETFs?Allow Gold Bullion
401(k)Private Employer$18,000 / $24,000YesMaybeMaybeNo
Solo 401(k)Self-employed$18,000 / $24,000YesYesYesYes
Keogh PlanSelf-employed or Unincorporated Employer$53,000NoMaybeMaybeNo
403(b)Government or Non-profit Employer$18,000 / $24,000YesMaybeMaybeNo
457(b)Government or Tax-exempt Employer$18,000 / $24,000YesMaybeMaybeNo
SIMPLE IRAPrivate Employer$12,500 / $15,500YesYesYesMaybe
SEP IRABusiness Owners & Self-employed$53,000YesYesYesMaybe
Profit Sharing PlanPrivate Employer$53,000NoMaybeNoNo
Money Purchase PlanPrivate Employer$53,000NoMaybeMaybeNo
AnnuityIndividualNoneNoMaybeMaybeNo
ESOPPrivate EmployerVariesYesMaybeNoNo
SARSEPPrivate Employer$18,000 / $24,000NoYesYesMaybe
Traditional IRAIndividual$5,500 / $6,500YesYesYesNo
Precious Metals IRAIndividual$5,500 / $6,500YesYesYesYes
Thrift Savings Plan (TSP)Government or Military$18,000 / $24,000YesNoNoNo
"Maybe" indicates that gold investment options are at the discretion of your plan provider. For example, certain 401(k) plans offer gold mutual funds or ETFs, while other do not.

Types of Gold You Can Invest in Through a Money Purchase Plan

Your Money Purchase Plan investment choices are limited to what your plan provider makes available to you. Legally, however, Money Purchase Plans have the option of offering the following types of investments:

  • Individual stocks
  • Individual bonds (corporate and government)
  • Options
  • Mutual fund shares
  • Exchange Traded Fund (ETF) shares

In short, this means that you cannot invest in physical gold bullion (or any other approved investment metal) through a Money Purchase Plan. The simplest way to invest in gold through a Money Purchase Plan is to purchase stocks in gold mining companies, or to purchase a mutual fund that includes mining company stocks. This strategy is referred to as buying “paper gold.” There are also gold ETFs (GLD) and mining ETFs which provide indirect access to gold investing.

Investing in Physical Gold vs. “Paper Gold”

So-called “paper gold” stocks are the shares of companies that mine, produce, and explore for gold ore. There are literally hundreds of gold stocks to choose from, and the larger companies are listed on major gold indices like the Gold Miners Index (GDX) or the BUGS Index (HUI).

Gold stocks tend to be more risky than owning physical gold. This is because, historically, gold stocks will appreciate very quickly as the spot price of gold rises; if the price of gold falls, gold stocks tend to fall much faster.

Gold stocks are also exposed to additional kinds of risk. Some examples include:

  • Regulatory Risk – mining and exploration companies are subject to increased regulation and taxes.
  • Cost of Production Risk – mining equipment depreciation, rising land values, labor cost increases, etc. can all negatively impact a mining company's valuation.
  • Management Risk – mismanaged or overly leveraged companies can, and do, declare bankruptcy or close shop altogether.
  • Fiat Currency Risk – when you sell securities like gold stock or shares of a gold mutual fund, you will still be compensated in a fiat currency. In the event of currency collapse, you may be left holding worthless pieces of paper.

The value of physical gold has never hit zero and has retained value for thousands of years. In terms of staying power, physical gold beats “paper gold” hands down.

Benefits of Dedicating 5-20% of Your Retirement Portfolio to Precious Metals

Gold investments are a simple, safe way to diversify your retirement portfolio. Gold (along with other investment metals like silver, platinum and palladium) will help to protect your assets against stock market volatility and inflation.

Not only is gold a great hedge, but gold offers plenty of growth potential; in fact, many investors purchase gold for its growth prospects, and many analysts predict gold to continue to see gains in the future.

The total amount of precious metals in your retirement portfolio will depend on your own risk tolerance and retirement horizon. One of the best ways to set up a diversified retirement portfolio — and receive tax benefits on your precious metals investments — is to open a self-directed IRA.

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