As companies compete to find and hire the most dependable, highly skilled workers, many have realized that offering additional benefits is a great hiring incentive. For many workers, a profit sharing plan becomes a great reason not only to sign on with a company, but to stay with them over the long haul as well. Not to mention, it’s a great motivator for each cog in the machine to do its best work!
If you’ve been offered a profit sharing plan at work, you may face two choices. You can take a cash payment, or you may have the option to have the amount deposited into your retirement fund.
If you take the cash payment, you’ll first have to pay taxes on the full amount. After you receive the money, you can certainly spend it any way you wish, meaning you could invest it into a savings vehicle on your own. But now you’ve unnecessarily paid taxes on the money when you could have made the other choice.
Your other choice is to have the money placed directly into your retirement fund, with taxes deferred. This is often the better option, because you end up with more money invested in your retirement.
All companies have different rules regarding their profit sharing plans, and whether or not you can participate may depend upon factors like age and length of employment. However, once you are eligible for a profit sharing plan, federal law regarding contribution limits and taxes apply to everyone equally. The contribution limit for 2013* was the lesser of $51,000 or 25 percent of the worker’s annual salary. These amounts are adjusted for inflation when deemed necessary.
As you can see, profit sharing plans quite a potential for tax-deferred retirement savings. Once you’re fully vested in your company’s plan, you can roll the entire amount contributed by the company into an IRA. You can even take the money with you and roll it into a new plan if you change jobs.
As long as you’re living within a reasonable budget, you shouldn’t be in need of your profit-sharing payment. Try to see it as a bonus that is deferred until retirement, at which time you’ll enjoy a noticeably better lifestyle due to years of hard work and saving.
This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
13388 – 2014/5/2