Investing in Gold Through a SARSEP
Do you have a SARSEP eligible employer who offers a salary-deferral Simplified Employee Pension (SEP)? These plans are fewer and farther between than most tax-advantaged employer sponsored retirement plans, and it can be difficult for those who still participate in SARSEP plan to find useful information about their options.
If you are looking to add precious metals bullion as a hedge to your retirement portfolio, or are wondering how your retirement account treats gold or silver investments, then you are at the right place. We'll go over what a SARSEP is, how they compare and differ from other retirement plans, how precious metals investing works, and how you can safeguard your retirement assets against stock market and currency collapse.
What is a SARSEP?
It is possible that many employees have never heard of a SARSEP plan. Beginning the tax year effective January 1, 1997, SARSEPs could no longer be established (in favor of SIMPLE IRA plans), although existing SARSEPs were ‘grandfathered' in and allowed to remain unchanged. These changes were made as a part of the Small Business Job Protection Act of 1996.
SARSEP stands for Salary Reduction Simplified Employee Pension Plan and is a retirement vehicle that was only made available to small businesses with 25 or fewer employees. Under a SARSEP, employees have individual SEP IRAs established in their names and both the employer and the account owner are able to make contributions.
Contributions are pre-tax through salary reductions, and the employer contribution may not exceed either $52,000 or 25% of the employee's salary, whichever is less. Employee contributions are dependent on salary reduction agreements set forth in the plan, but ultimately cannot exceed $17,500 (for 2014). Additionally, all contributions are limited by net profits (cannot exceed 18.6% in net profits in 2014, just like a self-employed SEP IRA).
In short, SARSEP is a collection of SEP IRAs, and individual employee accounts operate through SEP IRA rules (for more on SEP IRAs, visit here)
SARSEP Rollover Rules & Limitations
The IRS permits rollovers or transfer from SARSEPs (that is, the individual SEP IRAs within a SARSEP) to be executed tax-free as long as the money is moved to another qualified account. The only caveat is that both plans (the SEP and the receiving plan) must allow for retirement savings account rollovers.
If you have as SEP and are looking to perform a rollover, you can elect to move the entire balance of the account or only a portion of the account. There are penalties for taking distributions in cash prior to retirement age (59 1/2). Additionally, if you are going to attempt a rollover, it is highly recommended that you opt for a direct rollover instead of an indirect rollover. Indirect rollovers have withholding requirements and run the risk of incurring early distribution penalties.
SARSEP vs. SEP vs. IRA vs. Other Retirement Accounts
Here is a table which illustrates how a SARSEP compares to other tax-advantaged retirement vehicles:
| Plan Type | Sponsorship | 2016 Contribution Limit | Roth Option? | Allow Gold Stocks? | Allow Gold ETFs? | Allow Gold Bullion |
|---|---|---|---|---|---|---|
| 401(k) | Private Employer | $18,000 / $24,000 | Yes | Maybe | Maybe | No |
| Solo 401(k) | Self-employed | $18,000 / $24,000 | Yes | Yes | Yes | Yes |
| Keogh Plan | Self-employed or Unincorporated Employer | $53,000 | No | Maybe | Maybe | No |
| 403(b) | Government or Non-profit Employer | $18,000 / $24,000 | Yes | Maybe | Maybe | No |
| 457(b) | Government or Tax-exempt Employer | $18,000 / $24,000 | Yes | Maybe | Maybe | No |
| SIMPLE IRA | Private Employer | $12,500 / $15,500 | Yes | Yes | Yes | Maybe |
| SEP IRA | Business Owners & Self-employed | $53,000 | Yes | Yes | Yes | Maybe |
| Profit Sharing Plan | Private Employer | $53,000 | No | Maybe | No | No |
| Money Purchase Plan | Private Employer | $53,000 | No | Maybe | Maybe | No |
| Annuity | Individual | None | No | Maybe | Maybe | No |
| ESOP | Private Employer | Varies | Yes | Maybe | No | No |
| SARSEP | Private Employer | $18,000 / $24,000 | No | Yes | Yes | Maybe |
| Traditional IRA | Individual | $5,500 / $6,500 | Yes | Yes | Yes | No |
| Precious Metals IRA | Individual | $5,500 / $6,500 | Yes | Yes | Yes | Yes |
| Thrift Savings Plan (TSP) | Government or Military | $18,000 / $24,000 | Yes | No | No | No |
"Maybe" indicates that gold investment options are at the discretion of your plan provider or brokerage. For example, certain 401(k) plans offer gold mutual funds or ETFs, while others do not.
Types of Gold You Can Invest in Through a SARSEP
Your SARSEP investment choices are limited to what your is written in your employer agreement and what your individual SEP IRA custodian makes available to you. Legally, however, your SAR-SEP IRA has the option of offering the following types of investments:
- Individual stocks
- Individual bonds (corporate and government)
- Options
- Mutual fund shares
- Exchange Traded Funds (ETF) shares
- Certificates of Deposit (CDs)
- Real Estate
- Precious Metals Bullion
SEP IRAs have one of the more interesting range of investment choices in the tax-advantaged world. They not only allow all of the same investments of a Traditional IRA (and carry along the same Custodian-dependent restrictions), but some SEPs even allow for precious metals or other commodity investments.
In these circumstances, SARSEPs, through the individual SEP IRA, represent one of the very few ways to hold real gold, silver, platinum or palladium in an investment account. Of course, SEPs can also invest in ‘paper gold’ through the purchase of stocks of gold mining companies, or mutual funds that hold mining company stocks, or ETFs that include mining companies. This is an indirect way to invest in gold.
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, including:
- 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 gold mutual funds, 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) will help you 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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