A:

Profit-sharing plans are retirement plans with companies that give employees a percentage of the company's earnings. A profit-sharing plan is similar to a 401(k) because it is considered a defined-contribution plan. The only difference is that the only entity contributing to the plan is the employer – based on the company profits at the end of each fiscal year.

Whether you can use your profit-sharing money to put a down payment on a house relies on constraints that may prevent you from withdrawing the money from the company. With profit-sharing plans, the employer may impose a vesting schedule that determines how long an employee must work at a company to claim their portion of the profit-sharing money. When you meet the requirements of your company's vesting schedule, you have to meet the age requirement. Like a 401(k), a profit-sharing plan imposes a penalty on you if the money is withdrawn before the age 0f 59.5 unless certain exceptions are met. So, if you want to withdraw money from the plan and you have not reached the qualifying age, be ready to be assessed a 10% penalty.

If you must withdraw money from a profit-sharing plan before the qualifying age, you may be able to avoid the penalty by meeting the withdrawal exception(s) for your company's plan. Like 401(k)s, profit-sharing plans have exceptions that may exempt participants form the 10% penalty. Unlike 401(k)s, profit-sharing plans are more flexible about early-withdrawal exceptions because the early-withdrawal rules are set by each company.

For more, check out our 401(k) And Qualified Plans Tutorial.

This question was answered by Chizoba Morah.

RELATED FAQS
  1. What can I do with my profit sharing check?

    I plan to retire soon. My company offers profit sharing and a 401k. When I receive the profit sharing check, do I have to ... Read Answer >>
  2. I participate in a profit-sharing plan at work. If I retire at age 62, will I be ...

    The money in your profit-sharing account will be taxable when it is withdrawn from the account. You may leave the money in ... Read Answer >>
  3. What happens if I take out the $15,000 profit sharing I made in a company that I ...

  4. Can I roll the funds in an SEP-IRA over to a profit-sharing plan or self-directed ...

    Yes. Funds can be rolled over from an SEP IRA to a profit-sharing plan, provided the plan document that governs the profit-sharing ... Read Answer >>
  5. What types of plans allow catch-up contributions?

    Catch-up contributions can only be made to plans with salary deferral features.If you want to make catch-up contributions, ... Read Answer >>
  6. What are qualified retirement plan types?

    Understand the different types of qualified retirement plans and what they mean in terms of employee and employer contribution ... Read Answer >>
Related Articles
  1. Retirement

    Plans The Small-Business Owner Can Establish

    Don't hesitate to adopt a smart plan for you and your employees.
  2. Retirement

    The Basics Of A 401(k) Retirement Plan

    This plan has become one of the most popular retirement options. Find out why.
  3. Retirement

    Self-Employed? Top Plans For Retirement Savings

    Here are 5 smart ways the self-employed can save for retirement. Some also work for your employees. But get financial advice before picking a strategy.
  4. Retirement

    401(k) Plans For The Small Business Owner

    If you own a business, this may be the plan for you! Find out about its benefits and eligibility requirements.
  5. Markets

    Delta's Unique Employee Structure and Its Logic Behind It (DAL)

    Find out if new profit sharing will affect the unionization efforts of Delta employees or if bigger raises keep employees happy in this unique workforce.
  6. Retirement

    Job Hunting: Higher Pay vs. Better Benefits

    Focusing on pay when job hunting may be a mistake. Find out which benefits have the highest long-run payoff.
  7. Retirement

    5 Lesser-Known Retirement And Benefit Plans

    These plans aren't widely used, but they fill a specific niche for employees in certain situations.
  8. Retirement

    Introduction To SIMPLE 401(k) Plans

    Learn about the features and benefits of the plan that is a cross between a SIMPLE IRA and a traditional 401(k) plan.
  9. Retirement

    Retirement Planning for the Self-Employed

    How to select a qualified retirement plan if you are self-employed and have no employees.
  10. Retirement

    Common Questions About Retirement Plans

    We offer some solutions for the individual taxpayer as well as the small business owner.
RELATED TERMS
  1. Profit-Sharing Plan

    A plan that gives employees a share in the profits of the company. ...
  2. 401(k) Plan

    A qualified plan established by employers to which eligible employees ...
  3. Defined-Contribution Plan

    A retirement plan in which a certain amount or percentage of ...
  4. Qualified Trust

    A tax-advantaged fiduciary relationship between an employer and ...
  5. Qualified Retirement Plan

    A plan that meets requirements of the Internal Revenue Code and ...
  6. Form 1099-R

    An Internal Revenue Service (IRS) form with which an individual ...
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center