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Does your employer sponsor a Profit Sharing Plan (PSP)? Are you looking to diversify your retirement savings with precious metals or other alternative assets? Then you came to the right place.
Profit Sharing Plans come in a variety of forms, and are sometimes be used to compliment another type of retirement vehicle. While not often discussed with other predominant forms of defined contribution plans, Profit Sharing Plans are an important tax-advantaged benefit for many Americans. Here, we’ll go over what Profit Sharing Plans are and how they measure up against other leading employer-sponsored plans, like 401(k)s, and independent retirement plans like IRAs.
What is a Profit Sharing Plan?
Employers set up Profit Sharing Plans as an additional form of employee compensation that allows them to share (through a trustee) company earnings with participating employees. If you have a Profit Sharing Plan account, your employer will make contributions to your account that are invested and can grow tax-free.
Like many employer sponsored retirement plans, you will usually not be considered fully vested until several years into the plan. Unlike a Money Purchase Plan, where the percentage of annual earning that are contributed to plan accounts is predetermined, Profit Sharing Plan contributions are tied to your company’s profitability.
Typical defined contribution plan restrictions apply: no withdrawals prior to 59 ½; early withdrawals come with a 10% penalty; distributions are taxed as personal income.
Profit Sharing Plans money is usually placed into mutual funds, annuities (especially variable annuities), life insurance, or company stock. Only some plans, and under certain job conditions, allow for individual employees to direct the investments in their account.
Profit Sharing Plan Rollover Rules & Limitations
Only money that has been vested is ever eligible for a rollover, so be mindful of your vesting schedule before considering moving your retirement funds. The IRS will allow you to transfer your vested Profit Sharing Plan account funds, and requires that your plan’s administrator send you a written explanation of how to perform this tax-free.
As a tax-advantaged account, there are penalties associated with early withdrawal. If you're below the age of retirement (i.e., 59 1/2), then any withdrawal from a PSP will trigger a penalty of 10% of the withdrawal's value. That is, unless you conduct a direct account-to-account transfer known as a rollover, of which you're allowed one per year according to IRS regulations.
Profit Sharing Plan vs. Money Purchase Plan vs. 401(k) vs. Other Retirement Accounts
Below you can find a chart comparing the key differences between PSPs, Money Purchase Plans, and other employer-sponsored as well as independent retirement savings accounts.
|Plan Type||Sponsorship||2022 Contribution Limit||Roth Option?||Allow Gold Stocks?||Allow Gold ETFs?||Allow Gold Bullion|
|401(k)||Private Employer||$19,500 / $26,000||Yes||Maybe||Maybe||No|
|Solo 401(k)||Self-employed||$19,500 / $26,000||Yes||Yes||Yes||Yes|
|Keogh Plan||Self-employed or Unincorporated Employer||$58,000||No||Maybe||Maybe||No|
|403(b)||Government or Non-profit Employer||$19,500 / $26,000||Yes||Maybe||Maybe||No|
|457(b)||Government or Tax-exempt Employer||$19,500 / $26,000||Yes||Maybe||Maybe||No|
|SIMPLE IRA||Private Employer||$13,500 / $16,500||Yes||Yes||Yes||Maybe|
|SEP IRA||Business Owners & Self-employed||$58,000||Yes||Yes||Yes||Maybe|
|Profit Sharing Plan||Private Employer||$58,000 / $64,500||No||Maybe||No||No|
|Money Purchase Plan||Private Employer||$58,000||No||Maybe||Maybe||No|
|SARSEP||Private Employer||$19,500 / $25,500||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||$19,500 / $26,000||Yes||No||No||No|
(“Maybe” signifies that the asset in question may or may not be available according to the custodian's internal poicies.)
Types of Gold You Can Invest in Through a Profit Sharing Plan
Your Profit Sharing Plan investment choices are limited to what your plan provider makes available to you. In many cases, you will not be able to direct the investments made on your behalf through your plan. There are, however, several broad categories of assets that Profit Sharing Plans can invest in:
- Individual stocks
- Individual bonds (corporate and government)
- Mutual fund shares
- Exchange Traded Funds (ETFs)
Sadly, directly investing in precious metals (or any type of real asset) is strictly prohibited within a Profit Sharing Plan. Indirect exposure via “paper gold” assets is the only way Profit Sharing Plan holders can gain exposure to precious metals, and even then the selection of paper-based gold or silver assets is often limited.
Investing in Physical Gold vs. “Paper Gold”
As you can imagine, paper gold isn't the same as physical gold. When you invest in paper gold, you're buying shares of mining companies that work within the precious metals industry, such as Barrick Gold ($GOLD) or Coeur Mining Inc. (CDE). For more diverse exposure to the underlying commodity (i.e., gold, silver, or platinum), you can buy gold ETFs or indices, such as iShares Gold Trust (IAU) or SPDR Gold MiniShares Trust (GLDM).
Bear in mind, however, that paper gold assets carry a lot more risk than standard metal bullion. Gold stocks are listed on exchanges where investors can buy, sell, and trade on a moment's notice. Therefore, share prices can swing dramatically and the asset type as a whole is very much prone to volatility. Other types of risk associated with this asset class include:
- Regulatory Risk – there's no telling if the regulatory situation will change and force mining companies to adopt costly policy changes or face bankruptcy.
- Cost of Production Risk – mining is an extremely capital-intensive endeavor and a simple repair or fleet upgrade can leave a gold company significantly leveraged.
- Management Risk – mining companies can be taken over by new management who might be incompetent and lead a company to financial ruin if they're not careful.
- Fiat Currency Risk – fiat currencies like dollars and euros are susceptible to monetary manipulation, inflation, and devaluation due to increases in the money supply.
The risks outlined above are unique to paper gold and do not affect real, physical gold. When you invest in physical precious metals bullion, you do not assume counterparty risk. For thousands of years, gold and silver have retained their inherent value as a manufacturing resource and a medium of exchange; since antiquity, these assets have never gone to zero.
Should You Dedicate 5-20% of Your Retirement Portfolio to Precious Metals?
Assets like gold, silver, and platinum are often added to portfolios to shield investors from volatility and minimize the effects of economic recessions. However, that's not all they're good for. When it comes to spurring growth in a portfolio, gold and silver are excellent options.
In recent years, gold has eclipsed all-time highs as investors have looked for stability in finite resources like Bitcoin and gold. Generally, LMBA analysts are bullish on silver and foresee growth of up to +38.7% for the white metal in the near term. Therefore, not only can gold and silver protect your wealth, but they can help grow it too.
What percent of your wealth should be tied up in precious metals will depend on your age, time horizon, and willingness to embrace risk. If you're older (i.e., within 10 years of retirement), you might want to think about dedicating between 10 and 20 percent of your wealth to precious metals. For maximum protection, consider erring on the upper end of the scale if you're particularly worried about stock market volatility or the effects of the next recession.
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The stock market can't be trusted these days. As we learned in September 2008 and March 2020, the world can be turned upside down in a matter of only a few trading days. Fortunately, real assets like precious metals can help protect us from the disastrous effects of recessions and market crashes.
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