For Mark Roberts’ Use: A common trend among competitive companies these days is to offer employees a profit sharing plan. It’s one of the best ways to recruit and keep valuable employees, because profit sharing offers bonus pay and an incentive to stay with the company. For workers, profit sharing options can be utilized to boost retirement funds and offer a better outlook for the future.
When workers are offered profit-sharing payments, they face a choice. Many are tempted to accept the payment as regular, taxable income. Even if they decide to save or invest the money after making this choice, they’ve already had to pay taxes on the payment and therefore have overlooked an opportunity to put the money to better use. The second choice is often the better one. If the employer offers an elective deferral plan, the payment can be directed straight into the worker’s retirement fund while deferring taxes at the same time. It’s a win-win situation for the employee.
All workers may not be able to take part in the profit-sharing plan, depending upon age and length of employment, because the rules for doing so vary widely among different companies. However, federal law provides rules for taxes and contribution limits that are consistent no matter where a person works. These limits are assessed and altered based upon inflation when necessary. In 2013, the limit for profit-sharing contributions was the lesser of $51,000 or 25 percent of the employee’s yearly salary*.
After a worker is fully vested in his company’s profit-sharing plan, he has the option of rolling the full amount contributed by the company into an IRA. If the worker changes companies, he can take his old account with him and roll it into a new plan.
Workers whose companies offer a profit-sharing sharing plan should seriously consider utilizing the plan as a vehicle for retirement savings. If employees create a budget to live on their regular salaries, the profit-sharing option can be seen as a nice bonus that will someday make a great retirement gift to themselves.