Money Purchase Plan

What is a Money Purchase Plan?

A Money Purchase Plan is categorized as a “defined contribution plan”, where annual contributions made by the employer are a predetermined percentage of each eligible employee’s salary. The salary percentage for each participant does not fluctuate, as outlined in the details of the specific plan. 

This type of retirement vehicle is deemed a “qualified plan”, therefore funds within the account are tax-deferred until a distribution is made. Likewise, contributions to Money Purchase Plans are tax-deductible. Although eligible employees do not make contributions, they do decide how the funds are invested, based on the investment limitations specified by the plan. 

A major advantage of a Money Purchase Plan is that it can be a valuable addition to retirement savings. Under the guidelines outlined by the Internal Revenue Service (IRS), an employee is permitted to have additional savings plans such as a 401(k). A drawback is the higher administrative costs associated with these retirement vehicles.

 Money Purchase Plan Rollover Rules & Limitations

The IRS has stringent rollover rules that must be followed if you don’t want to incur hefty tax penalties. Funds from a Money Purchase Plan can be “rolled over” into another type of retirement account or between financial institutions within a period of 60 days. If you are under 59 ½, failing to do so within the 60-day timeframe from initially receiving the funds, will result in a 10% early-withdrawal penalty tax being levied on said funds. 

It is important to note that the details for rollover rules pertaining to Money Purchase Plans can be different based on the specifics of the respective plan. 

 

Money Purchase Plan vs. Other Retirement Accounts

The table below compares the various types of retirement plans:

Plan TypeSponsorshipRoth Option?Allows Precious Metals Stocks?Allows Precious Metals Bullion?Allows Other Alternative Investments
Precious Metals IRAIndividualYesYesYesYes
Traditional IRAIndividualYesYesNoNo
401(k)EmployerYesMaybeNoNo
SEP IRASelf-employed or Business ownerYesYesMaybeMaybe
Solo 401(k)Self-employedYesYesYesMaybe
Simple IRAEmployerYesYesMaybeMaybe
Money Purchase PlanEmployerNoMaybeNoNo
Profit Sharing PlanEmployerNoMaybeNoNo
457(b)Government or Non-governmental Tax-exempt Employer YesMaybeNoNo
SARSEPEmployerNoYesMaybeMaybe
Keogh PlanSelf-Employed or Unincorporated Employer NoMaybeNoNo
Thrift Savings Plan (TSP)Government or Armed Services EmployerYesNoNoNo
ESOPEmployerYesMaybeNoNo
AnnuityIndividualNoMaybeNoNo

Maybe” denotes where precious metals investment options are dependent upon the retirement vehicle provider.

 

Money Purchase Plan Contribution Limits

The Internal Revenue Agency (IRS) has specific contribution limits for a Money Purchase Plan. For 2020, as per the IRS regulations, the contribution limits for this type of retirement plan is “the lesser of 25% of compensation or $57,000 to cost-of-living adjustments”.

 

Major Money Purchase Plan Providers

Fidelity Money Purchase Plan

Fidelity has consistently been one of the highest-rated multinational financial services companies in the industry. It has proven to be an excellent option for retirement investing, thus why many workplaces choose to offer a Fidelity Money Purchase Plan

 

Money Purchase Plan FAQs

With a Money Purchase Plan, contributions are made by the employer and are a predetermined percentage of each eligible employee’s salary, as outlined in the details of the specific plan.

Conversely, a 401(k) is a retirement plan where the employee funds the account with paycheck deductions prior to taxation. Additionally, with some 401(k) plans, the employer will make proportionally matched contributions to the account based on elective deferrals of the employees.

The IRS has stringent rollover rules that must be followed if you don’t want to incur hefty tax penalties. Funds from a Money Purchase Plan can be “rolled over” into another type of retirement account or between financial institutions within a period of 60 days. If you are under 59 ½, failing to do so within the 60-day timeframe from initially receiving the funds, will result in a 10% early-withdrawal penalty tax being levied on said funds.

It is important to note that the details for rollover rules pertaining to Money Purchase Plans can be different based on the specifics of the respective plan.

For 2020, as per the IRS regulations the contribution limits for this type of retirement plan is “the lesser of 25% of compensation or $57,000 to cost-of-living adjustments).

The main difference is that a traditional IRA is an individual retirement vehicle that you can set up on your own. Conversely, a Money Purchase Plan is a qualified defined contribution plan offered through an employer.

If you are 59 ½ or over, you can withdraw funds from a Money Purchase Plan without penalties. However, if you are not yet 59 ½ years old, the IRS will also impose a 10% penalty tax on the withdrawal on top of the normal income taxation.

The primary benefit of rolling your Money Purchase Plan into a self-directed IRA like a Precious Metals IRA, is that this type of retirement account permits a myriad of diversified assets not allowed in other retirement vehicles. In addition, a self-directed IRA is solely managed by you the investor. Although under federal law, you must have a custodian who acts as an administrator over this type of retirement vehicle.

In essence, the IRS has imposed little restrictions on what you can hold in a self-directed IRA. Unlike many other retirement accounts, a self-directed IRA can be used to invest in everything from precious metals like gold and silver, to real estate, to commodities. Akin to other IRAs, the only investments not allowed in a self-directed IRA are S corporation stock, collectibles, and insurance investments.

What types of gold can you invest in through a Money Purchase Plan?
The investment options offered through a Money Purchase Plan are dependent upon the plan provider. Below are the types of investments available to you with this retirement account:

• Mutual funds
• Exchange-Traded Funds (ETFs)
• stocks
• bonds
• Options

It is crucial to note that as per IRS rules, a Money Purchase Plan cannot be used to invest in physical precious metals bullion. The easiest method to invest in gold, or another precious metal with a Money Purchase Plan is to buy mutual funds that include mining company stocks, or invest outright in the stocks of gold mining companies. This investment strategy is known as purchasing “paper gold.” Mining ETFs and gold ETFs are also available, which provide indirect exposure to the precious metal.

The Internal Revenue Agency (IRS) has stringent regulations on what types of gold and silver are permitted in an IRA. Essentially, the criteria include the purity levels of the gold or silver, and where it was minted. It is crucial to understand that only specific bullion coins and bars which meet IRA-approved purity levels are permitted in this type of retirement vehicle. Some examples of bullion coins that are approved by the IRS for investing in an IRA include American Eagles, Canadian Maple Leafs, and Austrian Philharmonic.

It is imperative to understand that the IRS does NOT permit things like collectible coins or numismatics as an IRA account. Any reputable IRA company will only recommend IRA-approved gold and silver bullion coins and bars. Be wary of any Gold IRA company that attempts to push collectible coins or numismatics as an investment option for an IRA - their intentions will be dubious.

A Gold IRA company is a firm that acts as a custodian for the entirety of the process for setting up Gold IRAs (in addition to other Precious Metals IRAs). The process entails setting up the account, an IRA rollover or custodian-to-custodian transfer, purchasing IRA-approved precious metals, and storing precious metals in an accredited IRS-approved depository. Usually, Gold IRA companies have established relationships with traditional IRA custodians, IRS-approved accredited depositories, and precious metal dealers, which makes the process seamless for clients.

It is crucial to understand that under federal law if you open a self-directed IRA (including a Precious Metals IRA), you must have a custodian.

This is solely dependent on your personal preferences. What Gold IRA company you choose is contingent on what components are most important to you, whether it is storage options, ratings, or client services, amongst other factors. Once you have decided on your personal preferences, select numerous companies, then contact them to receive more information pertaining to both the respective firm and products offered.

Sometimes any movement of money from one retirement plan to another is often referred to as a “rollover”. However, the IRS has specific definitions for a rollover and a transfer. As per the IRS definition, a rollover occurs when the funds being moved are paid to you directly, and you then deposit the money into the other retirement vehicle.

The IRS has strict regulations and rules pertaining to an IRA Rollover. The guidelines outlined by the IRS for an IRA rollover include having 60 days to deposit the money you have received, in the custodian of your choice. If you are under 59 ½, failing to do so within the 60-day timeframe from initially receiving the funds, will result in a 10% early-withdrawal penalty tax being levied on said funds.

If you receive distributions from a retirement plan and you rollover into another retirement plan, as per the IRS rules there will be no taxation on those funds. In addition, funds can only be rolled over once in a 365-day period from a specific IRA.

In a trustee-to-trustee transfer (as the IRS has deemed it) you request that the original IRA custodian transfers the funds to the new IRA custodian. With a trustee-to-trustee transfer, you never touch the funds and the money transferred is not subject to taxation.

Investing in precious metals such as gold is an excellent hedge to protect your investment portfolio against economic uncertainties and inflation. A diversification strategy that includes gold (or other precious metals) not only protects your portfolio against market turmoil, but gold also provides significant growth potential. A simple method for diversification is to open a self-directed IRA.