For Mark Roberts’ Use: Many companies offer profit-sharing plans to employees in order to generate a feeling of partnership and attract high-caliber workers. These plans give employees a portion of the company’s profits each year, and can help fund their retirement plans.
When money is contributed to a profit-sharing plan, it accumulates tax-deferred, just as other employer-sponsored retirement plans. However, employer contributions are only tax deductible on elective deferral plans, which means that employees elect to defer the assets into the retirement fund rather than accept cash payments. Accepting cash payments is, of course, taxable income. Employees might choose to invest those payments in some manner, but that will be a completely separate matter from elective deferral plans.
Typically, companies will automatically enroll employees into profit sharing plans when they become eligible. Each company’s regulations for entering the plan may concern length of employment or age. As of 2013, a company is allowed to contribute the lesser of $51,000 or 25 percent of an employee’s salary, and the amount is indexed for inflation. Once employees are fully vested in the plan, they are allowed to access the full amount contributed to the plan and roll it over to an IRA. If they change employers at this point, they can roll that amount into the new employer’s qualified retirement plan.
Once the employee reaches age 59 ½, they can begin withdrawing funds without risking the 10 percent early withdrawal tax penalty. At this point withdrawals are taxed as regular income. In some cases, plans may allow early withdrawals due to greater flexibility in the terms of these plans. However, the general trend is not to allow early withdrawals.
After reaching age 70 ½, most plans require participants to begin taking the required minimum distributions. These assets can be withdrawn as a lump sum (and taxed on the entire value of the fund) or a distribution schedule can be arranged based on the individual’s life expectancy.