In a 401(k) profit sharing plan, an employer sets aside a proportion of total profits each year to contribute to their employee's 401(k)s. It is different from how employers match contributions in a traditional 401(k) because the employer has the freedom to choose how much, if anything, to contribute.
401(k) Profit Sharing Plan FAQs
A 401(k) Profit Sharing Plan is an employer-sponsored retirement savings plan, where employees can make pre-tax contributions from their salary and the employer can contribute additional funds, known as "profit sharing", based on company performance.
Most employers offer 401(k) Profit Sharing Plans to full-time employees who are at least 21 years of age and have worked with the company for more than one year. However, other eligibility requirements may apply depending on the specific plan offered by each employer.
Employers can choose to make either discretionary or nondiscretionary contributions to their employees’ 401(k) plans. Discretionary contributions are made when employers decide how much they want to contribute each year while non-discretionary contributions are based on a percentage of employee compensation or company profits. Employees can then choose to accept or defer the contributions into their retirement accounts.
Yes, generally all withdrawals from a 401(k) Plan are subject to regular income tax. In addition, if you withdraw funds before age 59½ you may also be subject to an additional 10% early withdrawal penalty.
Yes, the IRS allows for catch-up contributions from employees who are age 50 or older. Employees can contribute an additional $6,500 each year up to a total of $26,000 in 2020. Employers may also offer additional employer contributions upon reaching certain milestones such as years of service or age. However, this will depend on the specific plan offered by the employer.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
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