What is a Profit Sharing Plan?

Answer:
Profit sharing plans are defined contribution

plans funded by the employer, usually out of profits, at the employer’s discretion. Some companies use a formula for determining when to make contributions and how much to contribute while others will do so at their discretion.

Profit sharing plans are a type of retirement plan and as such have rules regarding taxes and withdrawals. These plans usually have restrictions on how you withdraw the money such as early withdrawal penalties.

For example, profit sharing funds are allowed to be withdrawn under certain qualifying events such as: termination of employment or the plan, permanent disability, death, retirement (as determined in the plan), and financial hardship or “in service distributions” if the plan allows for such options

The money grows tax deferred until it is withdrawn. When you withdraw the funds, they are subject to income tax. If you withdraw the funds before age 59 ½, you will pay a 10% penalty just as you would with other retirement savings plans such as 401Ks and IRAs. In addition, other guidelines apply.

For example, a company can contribute up to 25% of the total compensation to eligible employees and get a tax deduction.


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