What is a profit-sharing plan?
A profit-sharing plan is a type of defined-contribution plan that lets employers help their employees save for retirement. It is similar to the 401(k) plan and allows employers to make pre-tax contributions based on the company’s profits. Those contributions and earning are not taxed until distributed.
Contributions from the employers are discretionary. This means, each year, an employer can decide whether and how much to contribute. For 2020, the maximum contribution to a profit-sharing is 25% of an employee’s salary or $57,000, whichever is less.
Profit-sharing plan withdrawals
Like any other retirement plan, a profit-sharing plan has strict rules on when an employee can start withdrawing money. For example, an employer may outline a schedule that determines how long an employee may work in a company to claim part of the contribution.
Early withdrawals and penalties
Early withdrawals, before age 59 ½ may be subject to a 10% penalty plus payment of taxes on the amount withdrawn. In case your company has withdrawal exceptions, you may be able to avoid penalties. Some of these exceptions include when you become disabled, your medical expenses exceed 7.5% of your adjusted gross income, and in case of death. If you die, your estate or beneficiaries receive the account contributions.
Other exceptions include those resulting from excess contributions, divorce settlements, and when you leave your job. If you leave your job before turning 55, you can still withdrawal your money without paying the penalty if you take a series of substantially equal periodic payments.
Again, if you roll over your distributions to another eligible retirement saving plan, you will be off the hook for paying the 10% penalty.
Your account is subject to additional penalties if you make prohibited transactions. You will also be penalized if other disqualified persons, for example, your relatives, make prohibited transactions.
How to withdraw from profit sharing
- Step one
Talk with your employer about the withdrawal policy to find out whether it is possible to withdraw your money early. Some plan allows employees to withdrawal a portion of the money early, and others don’t.
- Step two
Calculate your tax. Even when allowed to make early withdrawals, you are not off the hook to paying tax and penalty on any amount you withdraw before reaching 59 ½.
- Step three
Search for exemptions to the penalty tax. If you roll over your money to another qualified retirement plan, leave the job after 55, or make distributions during a divorce, the penalty for withdrawal will not apply.
- Step four
Fill out the right papers and submit them to your employer.
- Step one
Talk to your employer and find out how soon you can access your money. For example, Iron Workers’ plan participants must be 65 before they begin making regular withdrawals unless they qualify for an exception.
- Step two
While you will not pay penalty taxes after age 59 1/2, you can’t avoid federal income tax on the money you withdraw. When you turn 70 1/2, you have the option to withdrawal all your money at once or make minimum withdrawals. Make sure to decide which option works best for you.
- Step three
Start making withdrawals as soon as your employer allows it, and at that point you realize the most benefits.
It pays to work with a financial planning firm that knows it very well. At BeamaLife, we manage many defined contribution plans such profit sharing plan and defined benefit pension plans and have the best plan designs in the country.
Whether you are a successful business owner, doctor, independent pharmacist or any other self-employed professional, please call (877) 972-3262 to speak with pension plan expert.