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 Like a 401(k), a profit-sharing plan imposes a penalty on you if the money is withdrawn before the age 0f 59.5 unless certain exceptions are met.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.

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RELATED TERMS
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  2. 401(k) Plan

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  4. Defined-Contribution Plan

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  5. Cash Or Deferred Arrangement - CODA

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  6. Qualified Retirement Plan

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