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 Like a 401(k), a profit-sharing plan imposes a penalty on you if the money is withdrawn before the age 0f 59.5 unless certain exceptions are met.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

    Unlike a 401(k) or Individual Retirement Account (IRA), mutual funds are not classified as retirement accounts. Employers ... Read Full Answer >>
  2. Can my IRA be garnished for child support?

    Though some states protect IRA savings from garnishment of any kind, most states lift this exemption in cases where the account ... Read Full Answer >>
  3. Why is my 401(k) not FDIC-Insured?

    401(k) plans are not FDIC-insured because they are typically composed of investments rather than deposits. The Federal Deposit ... Read Full Answer >>
  4. Can I use my IRA savings to start my own savings?

    While there is no legal reason why you cannot withdraw funds from your IRA to start a traditional savings account, it is ... Read Full Answer >>
  5. Can creditors garnish my IRA?

    Depending on the state where you live, your IRA may be garnished by a number of creditors. Unlike 401(k) plans or other qualified ... Read Full Answer >>
  6. Can my IRA be used for college tuition?

    You can use your IRA to pay for college tuition even before you reach retirement age. In fact, your retirement savings can ... Read Full Answer >>
Related Articles
  1. Investing

    Automating Your 401(k) is Easier Than You Think

    If you like automation, you should check out these features that many 401(k) plans offer.
  2. Retirement

    What's a Defined Contribution Plan?

    A defined contribution plan is a company retirement plan that specifies the amount of money contributed to it.
  3. Retirement

    Infographic: How Much Money Do You Need to Retire in Hawaii?

    In this infographic we break down cost of living in Honolulu, Hawaii in terms of taxes, rent, food and other expenses and offer comparison to the cost of living in New York, Los Angeles, San ...
  4. Term

    What are Pension Funds?

    A pension fund is a company-sponsored fund that provides income for employees in retirement.
  5. Retirement

    Retirement Planning for Entrepreneurs and Small Businesses

    If your business has receiveables, here's a smart way to leverage them to build up your retirement fund fast.
  6. Retirement

    Overhaul Social Security to Fix Retirement Shortfall

    There are several theories and ideas about how we can make up for the $6.6 trillion retirement savings shortfall in America. Adjustments to Social Security and our retirement savings plans are ...
  7. Retirement

    The 3 Most Common 401k Rollover Mistakes

    No one is born knowing the tax rules for 401(k)s and IRAs, but only dummies, scaredy cats and suckers don't buckle down to learn them.
  8. Investing News

    How Does US Social Security Measure Up Abroad?

    Social Security is a hotly debated topic. After examining the retirement plans of three different countries, the U.S.'s does not come out the winner.
  9. Investing

    Five Things to Consider Now for Your 401(k)

    If you can’t stand still, when it comes to checking your 401 (k) balance, focus on these 5 steps to help channel your worries in a more productive manner.
  10. Retirement

    Strategies for a Worry-Free Retirement

    Worried about retirement? Here are several strategies to greatly reduce the chance your nest egg will end up depleted.
RELATED TERMS
  1. Qualified Longevity Annuity Contract

    A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity ...
  2. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...
  3. Current Service Benefit

    The amount of pension benefit accrued by an employee who had ...
  4. Self Invested Personal Pension (SIPP)

    A tax-efficient retirement savings account available in Great ...
  5. Elder Care

    Elder care, sometimes called elderly care, refers to services ...
  6. Eligible Transfer

    An IRS-allowed movement of assets into or out of an individual ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!