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, 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, 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 2014 is $12,000). 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.
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.
SIMPLE IRA vs. SEP IRA vs. Traditional IRA vs. Other Retirement Accounts
Here is a table which illustrates how a SIMPLE IRA compares to other tax-advantaged retirement vehicles:
"Maybe" indicates that gold investment options are a the discretion of your plan provider or brokerage. 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 SIMPLE IRA
Your SIMPLE IRA investment choices are limited to what your custodian makes available to you. Legally, however, SIMPLE IRAs have the option to offer the following investment types:
individual bonds (corporate or government)
mutual fund shares
Exchange Traded Fund (ETF) shares
Certificates of Deposit (CDs)
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 real gold, silver, platinum or palladium investments.
Of course, SIMPLE IRAs 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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