Retirement through a money purchase plan. It’s something that most of us don’t think we need to worry about until we get older. Retirement is also something that most of us don’t think we can worry about right now. After all, we have student loans, expensive healthcare costs, rising housing prices, kid’s college, aging parents, and a host of other financial worries that usually push the idea of retirement to the back of our mind. Additionally, retirement can be overwhelming. Most people have no idea what to invest in, how the investing process works, what tax implications our decisions may have, and most of all; how much money do you need to retire. 

While all of these questions will be answered in future articles, this article will start on the ground floor with the question: What are the different types of retirement plans? There are several different types of retirement plans and in this article, we will be addressing #11: Money Purchase Plans. These articles will give you an idea of what to look for when deciding on how to save for retirement and what type(s) of retirement accounts to save in.

Types of Retirement Plans

1. Traditional IRA
2. Roth IRA
3. 401(k)
4. 403(b)
5. SIMPLE IRA
6. Simplified Employee Pension (SEP)
7. Salary Reduction Simplified Employee Pension Plan (SARSEP)
8. Payroll Deduction IRA
9. Profit-Sharing Plan
10. Defined Benefit Plan
11. Money Purchase Plan (this article)
12. Employee Stock Ownership Plan (ESOP)
13. Thrift Savings Plan (TSP)
14. 457 Plan

IMPORTANT: READ THIS BEFORE CONTINUING

Before we get into the types of retirement accounts, it is important to make one key distinction. A retirement account, itself, is not an investment. If you say something to the extent of, “My 401(k) hasn’t done very well this past year and I’m thinking of picking a different one” you would be making an incorrect statement.

Think of it like this: There are 14 different types of retirement accounts (we will discuss the other 13 in different articles). Each one of those retirement accounts should be thought of as a cooking pot. If you cook something in that pot and you don’t like what it tastes like, you don’t dump the contents into another pot and hope that it tastes better. You change the ingredients of that pot to something else. Now think of the ingredients as different investment products (stocks, bonds, cash, mutual funds, and/or a host of other products/ingredients).To get the taste you want, you change the ingredients, not the pot. You may be wondering, what ingredients do I put into my pot? That is a fair question, but you cannot answer that question until you figure out what pot is best for you. Now buckle up and find out what the 14 different types of retirement accounts (pots) you have at your disposal.

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(11) Money Purchase Plan

A money purchase plan is much like a pension. Many of the rules and regulations regarding money purchase plans are the same as pensions.

In a money purchase plan, the employee (you) doesn’t contribute anything to the plan. Instead, the employer contributes to the money purchase plan. 

The amount that is contributed to the plan by the employer can vary but it is based on a percentage of the wages of the employees. And it is important to note that the contribution percentage has to be the same for ALL employees (up to the maximum allowed amount).

For example, an employer has two employees and wants to establish a money purchase plan retirement account for them. The employer decides to set the contribution percentage at 5%. This means that for an employee making $100,000, the employer will contribute $5,000 to the plan and an employee making $50,000 will have $2,500 contributed to the plan.

Once again, the money contributed to the money purchase plan is from the EMPLOYER, not the employee.

Not many companies have money purchase plans anymore just like most companies don’t utilize pensions anymore. A company that has a this plan can also have a 401k, 403b, Payroll Deduction IRA, or any other retirement plan they want in addition to the money purchase plan.

Just like a pension plan, the maximum that an employee can contribute to a money purchase plan is the lesser of 25% of an employee’s salary or $58,000.

Within a money purchase plan you can have many different investments such as:

1. Stocks
2. Bonds
3. Mutual funds
4. Unit investment trusts
5. Government securities (Treasury bills, treasury notes, and treasury bonds)
6. US government-issued gold and silver coins. 

If you don’t know what all of these different terms mean, that is perfectly fine. Just know that you can have nearly all investment within a money purchase plan.

But, there are a few items that cannot be in a money purchase plan. Money purchase plans cannot have:

1. Antiques
2. Gems
3. Rare coins
4. Works of art
5. Life insurance contracts: This is because life insurance contracts are not securities (investments).
6. Municipal bonds: This is because putting a municipal bond in an IRA would negate the tax free status of the municipal bond.

Antiques, gems, rare coins, and works of art cannot be included in money purchase plans because these items do not have a solid market value. Meaning: I might be willing to pay $50,000 for a painting, but you may be willing to only pay $3,000 for the same painting. It is too difficult to find an agreeable market value.

There are some stipulations to having a money purchase plan that are important to know.

1. Contribution Limits (as of 2021): There are generally no contribution limits to money purchase plans because you (the worker) are not the one contributing to the it, the employer is.

2. Contribution Deductions (as of 2021): Unlike a defined contribution plan, a money purchase plan does not have any tax deductions. Again, because you (the employee) are not contributing to the plan yourself.

3. Early Withdrawal (as of 2021): Generally there are no withdrawals from a money purchase plan before age 59 ½.

4. Required Minimum Distributions (as of 2021): RMDs are not really a thing with money purchase plans (as they are with defined contribution plans). Typically, the money that has been put into the money purchase plan throughout the worker’s career will be given to the worker (along with any gains or losses from investing) upon retirement after age 59 ½.

Final Thoughts

A money purchase plan can be a very useful tool for retirement. However, not many people have one at their job. My advice would be whether or not you have a money purchase plan available to you at your job, invest for retirement in another retirement account. Then, when you retire, you will be set. And if you do, in fact, have a money purchase plan, that is just EXTRA money for you to have.

Remember, you are the captain of your ship and only you can build the life that you want.

Until next time!