The best companies in the business these days will give their employees an opportunity to select a profit sharing plan or a 401(k) plan, though not everyone knows what each plan actually offers. There is a preconceived idea among some individuals that 401(k) is the same thing as a profit sharing set up, but where the two plans do actually differ, it is a fairly stark contrast.
When it comes to profit sharing, one of the first things you should notice is the fact that you will not be asked, nor allowed to, make any contributions of your own into the account; and only your employer will add funds to it. On the other hand, if you want to be a part of a 401(k) plan and have the company investing on your behalf, you are required to contribute the same sum of money that they do. On the one hand you have an income that seems almost automatic and effortless, while on the other you have one that needs you to be highly involved.
Another major difference is the fact that 401(k) plans involve the contribution of a set amount of money, from your employer and you, while the amount you earn through profit-sharing depends heavily on how well the company does that year. One year the company could show to be incredibly profitable, netting you a large sum of money through profit sharing, and the next year you and your company could end up only doing half as well. So with one option you get a constant, predetermined amount of money dropped into your retirement, and with the other you can't always be sure or what you will get.
Both plans follow the same laws that regulate many aspects of how and when the money can be withdrawn, but there are a few differences to note. There are penalties that apply to both plans for any withdrawals made before the account holder reaches the appropriate age, but the employer can allow for early withdrawals if they choose to. What sets the plans apart in this situation is the fact that early 401(k) withdrawals are limited to 'hardships' where the employee is in dire need, while the there are no limitations placed on the circumstances for withdrawing from your profit shares.
It should be easy to see that each plan has its own benefits, but instead of dismissing one or the other, you could actually choose them both and claim all the benefits available. Despite how you choose, the profit sharing plan or a 401(k), you should now know enough about each to make the necessary decisions and start preparing for your retirement.
When it comes to profit sharing, one of the first things you should notice is the fact that you will not be asked, nor allowed to, make any contributions of your own into the account; and only your employer will add funds to it. On the other hand, if you want to be a part of a 401(k) plan and have the company investing on your behalf, you are required to contribute the same sum of money that they do. On the one hand you have an income that seems almost automatic and effortless, while on the other you have one that needs you to be highly involved.
Another major difference is the fact that 401(k) plans involve the contribution of a set amount of money, from your employer and you, while the amount you earn through profit-sharing depends heavily on how well the company does that year. One year the company could show to be incredibly profitable, netting you a large sum of money through profit sharing, and the next year you and your company could end up only doing half as well. So with one option you get a constant, predetermined amount of money dropped into your retirement, and with the other you can't always be sure or what you will get.
Both plans follow the same laws that regulate many aspects of how and when the money can be withdrawn, but there are a few differences to note. There are penalties that apply to both plans for any withdrawals made before the account holder reaches the appropriate age, but the employer can allow for early withdrawals if they choose to. What sets the plans apart in this situation is the fact that early 401(k) withdrawals are limited to 'hardships' where the employee is in dire need, while the there are no limitations placed on the circumstances for withdrawing from your profit shares.
It should be easy to see that each plan has its own benefits, but instead of dismissing one or the other, you could actually choose them both and claim all the benefits available. Despite how you choose, the profit sharing plan or a 401(k), you should now know enough about each to make the necessary decisions and start preparing for your retirement.
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