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If your company offers a SIMPLE IRA (or if you are considering establishing a SIMPLE for your organization) and you want to see if it is possible to add alternative investments such as physical precious metals, you have come to the right place.
SIMPLE IRAs are not a very common retirement plan offering, and are an interesting blend between more common employer-sponsored plans and Traditional IRAs. This page will cover what a SIMPLE IRA is, and how this type of retirement account measures up to other popular tax-advantaged accounts like 401(k)s, currency collapse and other economic uncertainties.
What is a SIMPLE IRA?
SIMPLE is an acronym for Savings Incentive Match Plan for Employees, and is the common name for this type of tax-deferred employer provided retirement savings vehicle. The SIMPLE IRA was designed to encourage smaller employers (100 or fewer employees) to provide retirement plans for workers while avoiding the complicated setup process of larger benefits packages. One of the primary benefits of a SIMPLE IRA, for instance, is that they do not fall under the guidelines of the Employee Retirement Income Security Act (ERISA), and thereby avoiding a lot of paperwork and administrative costs.
Employers who offer SIMPLE IRAs are required to provide a certain minimum contribution to their employees accounts. This can either be accomplished by setting up a match program to a minimum of 3% of employee dollars or a flat rate of 2% for each employee based on their salary.
Much like with a SEP IRA, employees who participate in a SIMPLE IRA plan are essentially opening up their own Traditional IRAs through the employer (although technically an employee could open up a 401(k) account through their SIMPLE Plan).
One major downside to a SIMPLE IRA is that contribution limits are lower than standard 401(k)s or other employer sponsored plans (the limit for 2022 is $14,000). Additionally, SIMPLE IRA rollovers are more difficult and require a waiting period before they can be initiated — typically two years from the beginning of an employee's participation in the plan.
SIMPLE IRA Rollover Rules & Limitations
During the first two years (or more, depending on the plan) of participating in a SIMPLE IRA, you are only allowed to transfer money into another SIMPLE IRA. This qualifies as a tax-free, trustee-to-trustee transfer. Any other transfer or rollover is considered a distribution and could result in a 25% tax penalty (most tax-deferred plans only carry a 10% penalty).
After the two-year waiting period, you are eligible to transfer funds from a SIMPLE IRA into another form of IRA, so long as the transfer is not from a Roth to a non-Roth account, or visa versa. Both the existing plan and the new account must allow for this to take place.
When you invest in gold and silver bullion, remember not to jump the gun. If you're younger than the federal retirement age (59 and 1/2 years), any withdrawal from a tax-deferred account will trigger an early withdrawal penalty of 10%. Plus, the money withdrawn will be considered taxable income by the IRS (if it's a traditional non-Roth IRA). To minimize the chance of human error and triggering penalties, opt for a direct IRA-to-IRA rollover every time.
SIMPLE IRA vs. SEP IRA vs. Traditional IRA vs. Other Retirement Accounts
To help you understand the differences between SIMPLE IRAs and other retirement accounts like 457(b) and 401(k), I've put together a chart below the elucidates the key variations.
|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|
"Maybe" signifies that gold investment options may be available depending on the account administrator's internal policies.
Types of Gold You Can Invest in Through a SIMPLE IRA
Your SIMPLE IRA is an investment vehicle for a large number of assets, both traditional and alternative, but ultimately it's at the custodian's discretion what types of assets you can invest in. Legally, however, SIMPLE IRAs allow for investing in the following asset types:
- individual stocks
- individual bonds (corporate or government)
- mutual fund shares
- Exchange Traded Fund (ETF) shares
- Certificates of Deposit (CDs)
- Real Estate
- precious metals bullion
SIMPLE IRAs have the same investment choices that SEP IRAs have: all of the normal options of a Traditional IRA, with the ability (albeit very infrequently encountered) to offer commodity investments. The investments are restricted by the plan custodian. These are one of the very few accounts which allow for physical gold, silver, platinum or palladium bullion investments.
Of course, SIMPLE IRAs also allow for “paper gold” investment options which provide indirect exposure to the precious metals market. In the industry, paper gold refers to individual gold mining or exploration stocks or a package of such stocks in the form of an ETF or index fund. The value of these companies is tethered to the price of gold (or other precious metal) and therefore the investor is indirectly exposed to the underlying commodity price.
Investing in Physical Gold vs. ‘Paper Gold'
If you've ever heard of “paper gold” you're probably wondering what, specifically, these assets are and what they refer to. Paper gold is another word for stocks or securities in mining-related companies active in the precious metals space, such as Barrick Gold (GOLD), Franco-Nevada (FNV), or Kuya Silver (KUYAF). Often, paper gold includes ETFs such as the Gold Miners Index (GDX) or the BUGS Index (HUI) which contain companies that mine gold or silver ore.
Paper gold has its share of drawbacks. Generally, paper gold is a riskier investment than physical gold because it's more volatile. As an exchange-traded asset, a gold stock has dramatic intra-day price movements compared to physical bullion which is far less liquid by comparison. But that's not the only type of risk associated with this asset class, which also suffer from:
- Regulatory Risk – gold and silver mining companies are subject to intensive scrutiny from regulators that can threaten a firm's operations.
- Cost of Production Risk – land, labor, and equipment are significant expenses within the mining industry and simple repairs and equipment upgrades can heavily indebt a company
- Management Risk – there's always the risk that a new management team will buy out a mining company and cause operational failures due to inexperience or mismanagement
- Fiat Currency Risk – paper gold stocks are bought and sold with fiat currencies that can devalue in the event of a monetary crisis.
Physical gold beats out paper gold in terms of staying power. Not only does physical gold not suffer from the types of risk outlined above, but neither silver nor gold have hit zero or had their value eradicated during a market shock. For thousands of years, gold and silver have always held their value and have been sought after for their portfolio-stabilizing properties.
Dedicating 5-20% of Your Retirement Portfolio to Precious Metals: The Benefits
Gold and silver are both risk management tools and growth catalysts in a portfolio. For millennia, assets like gold and silver have been reliable stores of value that have helped investors hang onto more of their wealth during market crashes. However, that's not the only benefit that gold and silver offer investors.
Precious metals are entering a renaissance period. President Biden's investments in renewable energy are set to skyrocket the price of silver thanks to the metal's use in the construction of solar panels. Likewise, gold has recently hit record high prices due to instability in traditional financial markets. As long as the stock market remains detached from its underlying fundamentals, we should expect gold to steadily rise in value.
How much of your wealth you put into precious metals will depend on your age, retirement goals, and your readiness to accept risk. More conservative investors, or those who are fewer than 10 years from their retirement, should think about allocating more of their wealth (i.e., 15-20%) to precious metals. This way, they can retire on time even if another stock market crash wreaks havoc on the economy. You can get started by opening a self-directed IRA.
Start Your Diversification Journey Today
You never know what the future holds for the stock market. That's why it's unwise to trust it with your wealth. By contrast, gold and silver are safe and reliable stores of value that, when held in moderation, can protect your life savings from disaster.
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