Profit-Sharing Plan

What is a Profit-Sharing Plan?

A Profit-Sharing Plan is a type of retirement account where contributions are determined by the profitability of a company. Employers decide when to make contributions to participating employee accounts dependent upon either quarterly or annual earnings of the company. The Internal Revenue Service (IRS) refers to this as “discretionary employer contributions”. As outlined by the IRS, the most popular way to allocate each employee’s contribution percentage for a Profit-Sharing Plan is via the “comp-to-comp” method”. As per the IRS guidelines, “the employer calculates the sum of all of its employees’ compensation (the total “comp”). To determine each employee’s allocation of the employer’s contribution, you divide the employee’s compensation (employee “comp”) by the total comp. You then multiply each employee’s fraction by the amount of the employer contribution. Using this method will get you each employee’s share of the employer contribution”.

Profit-Sharing Plans are categorized as “qualified plans”, therefore funds within the account are tax-deferred until a distribution is made. A major advantage of a Profit-Sharing Plan is that it can be a valuable addition to retirement savings. Under the guidelines outlined by the (IRS), employers are permitted to establish a Profit-Sharing Plan even if they have additional retirement plans such as a 401(k). A drawback is the higher administrative costs associated with these retirement vehicles.

 

Profit-Sharing Plan Rollover Rules & Limitations

The IRS has stringent rollover rules that must be followed if you don’t want to incur hefty tax penalties. Funds from a Profit-Sharing Plan can be “rolled over” into another type of retirement account or between financial institutions within a period of 60 days. If you are under 59 ½, failing to do so within the 60-day timeframe from initially receiving the funds, will result in a 10% early-withdrawal penalty tax being levied on said funds. 

As per the IRS rules pertaining to rolling over retirement plan, a “distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll it over later. Withholding does not apply if you roll over the amount directly to another retirement plan or to an IRA. A distribution sent to you in the form of a check payable to the receiving plan or IRA is not subject to withholding”.

 

Profit-Sharing Plan vs. Other Retirement Accounts

The table below compares the various types of retirement plans:

Plan TypeSponsorshipRoth Option?Allows Precious Metals Stocks?Allows Precious Metals Bullion?Allows Other Alternative Investments
Precious Metals IRAIndividualYesYesYesYes
Traditional IRAIndividualYesYesNoNo
401(k)EmployerYesMaybeNoNo
SEP IRASelf-employed or Business ownerYesYesMaybeMaybe
Solo 401(k)Self-employedYesYesYesMaybe
Simple IRAEmployerYesYesMaybeMaybe
Money Purchase PlanEmployerNoMaybeNoNo
Profit Sharing PlanEmployerNoMaybeNoNo
457(b)Government or Non-governmental Tax-exempt Employer YesMaybeNoNo
SARSEPEmployerNoYesMaybeMaybe
Keogh PlanSelf-Employed or Unincorporated Employer NoMaybeNoNo
Thrift Savings Plan (TSP)Government or Armed Services EmployerYesNoNoNo
ESOPEmployerYesMaybeNoNo
AnnuityIndividualNoMaybeNoNo

Maybe” denotes where precious metals investment options are dependent upon the retirement vehicle provider.

 

Profit-Sharing Plan Contribution Limits

The Internal Revenue Agency (IRS) has specific contribution limits for a Profit-Sharing Plan. For 2020, as per the IRS regulations, the contribution limits for this type of retirement plan is “the lesser of 25% of compensation or $57,000 to cost-of-living adjustments”.

 

Major Profit-Sharing Plan Providers

Fidelity Profit-Sharing Plan

Fidelity has consistently been one of the highest-rated multinational financial services companies in the industry. It has proven to be an excellent option for retirement investing, thus why many workplaces choose to offer a Fidelity Profit-Sharing Plan

 

Profit-Sharing Plan FAQs

A Profit-Sharing Plan is a retirement vehicle where employers decide when to make contributions to participating employee accounts, determined by the profitability of the company. The Internal Revenue Service (IRS) refers to this as “discretionary employer contributions”.

With a Money Purchase Plan, contributions are made by the employer and are a predetermined percentage of each eligible employee’s salary, as outlined in the details of the specific plan.

A Profit-Sharing Plan is a type of retirement vehicle where employers make “discretionary employer contributions”, based on the profitability of the company.

Conversely, a 401(k) is a retirement plan where the employee funds the account with paycheck deductions prior to taxation. Additionally, with some 401(k) plans, the employer will make proportionally matched contributions to the account based on elective deferrals of the employees.

The Internal Revenue Agency (IRS) has specific contribution limits for a Profit-Sharing Plan. For 2020, as per the IRS regulations, the contribution limits for this type of retirement plan is “the lesser of 25% of compensation or $57,000 to cost-of-living adjustments”.

The IRS has stringent rollover rules that must be followed if you don’t want to incur hefty tax penalties. Funds from a Profit-Sharing Plan can be “rolled over” into another type of retirement account or between financial institutions within a period of 60 days. If you are under 59 ½, failing to do so within the 60-day timeframe from initially receiving the funds, will result in a 10% early-withdrawal penalty tax being levied on said funds.

As per the IRS rules pertaining to rolling over retirement plan, a “distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll it over later. Withholding does not apply if you roll over the amount directly to another retirement plan or to an IRA. A distribution sent to you in the form of a check payable to the receiving plan or IRA is not subject to withholding”.

The main difference is that a traditional IRA is an individual retirement vehicle that you can set up on your own. Conversely, a Profit-Sharing Plan is a qualified defined contribution plan offered through an employer.

If you are 59 ½ or over, you can withdraw funds from a Profit-Sharing Plan without penalties. However, if you are not yet 59 ½ years old, the IRS will also impose a 10% penalty tax on the withdrawal on top of the normal income taxation.

The primary benefit of rolling your Profit-Sharing Plan into a self-directed IRA like a Precious Metals IRA, is that this type of retirement account permits a myriad of diversified assets not allowed in other retirement vehicles. In addition, a self-directed IRA is solely managed by you the investor. Although under federal law, you must have a custodian who acts as an administrator over this type of retirement vehicle.

In essence, the IRS has imposed little restrictions on what you can hold in a self-directed IRA. Unlike many other retirement accounts, a self-directed IRA can be used to invest in everything from precious metals like gold and silver, to real estate, to commodities. Akin to other IRAs, the only investments not allowed in a self-directed IRA are S corporation stock, collectibles, and insurance investments.

The investment options offered through a Profit-Sharing Plan are dependent upon the plan provider. Below are the types of investments available with this retirement account:

• Mutual funds
• Exchange-Traded Funds (ETFs)
• stocks
• bonds
• Options

It is crucial to note that as per IRS rules, a Profit-Sharing Plan cannot be used to invest in physical precious metals bullion. The easiest method to invest in gold, or another precious metal with a Profit-Sharing Plan is to buy mutual funds that include mining company stocks, or invest outright in the stocks of gold mining companies. This investment strategy is known as purchasing “paper gold.” Mining ETFs and gold ETFs are also available, which provide indirect exposure to the precious metal.

Investing in precious metals such as gold is an excellent hedge to protect your investment portfolio against economic uncertainties and inflation. A diversification strategy that includes gold (or other precious metals) not only protects your portfolio against market turmoil, but gold also provides significant growth potential. A simple method for diversification is to open a self-directed IRA.

The Internal Revenue Agency (IRS) has stringent regulations on what types of gold and silver are permitted in an IRA. Essentially, the criteria include the purity levels of the gold or silver, and where it was minted. It is crucial to understand that only specific bullion coins and bars which meet IRA-approved purity levels are permitted in this type of retirement vehicle. Some examples of bullion coins that are approved by the IRS for investing in an IRA include American Eagles, Canadian Maple Leafs, and Austrian Philharmonic.

It is imperative to understand that the IRS does NOT permit things like collectible coins or numismatics as an IRA account. Any reputable IRA company will only recommend IRA-approved gold and silver bullion coins and bars. Be wary of any Gold IRA company that attempts to push collectible coins or numismatics as an investment option for an IRA - their intentions will be dubious.

A Gold IRA company is a firm that acts as a custodian for the entirety of the process for setting up Gold IRAs (in addition to other Precious Metals IRAs). The process entails setting up the account, an IRA rollover or custodian-to-custodian transfer, purchasing IRA-approved precious metals, and storing precious metals in an accredited IRS-approved depository. Usually, Gold IRA companies have established relationships with traditional IRA custodians, IRS-approved accredited depositories, and precious metal dealers, which makes the process seamless for clients.

It is crucial to understand that under federal law if you open a self-directed IRA (including a Precious Metals IRA), you must have a custodian.

This is solely dependent on your personal preferences. What Gold IRA company you choose is contingent on what components are most important to you, whether it is storage options, ratings, or client services, amongst other factors. Once you have decided on your personal preferences, select numerous companies, then contact them to receive more information pertaining to both the respective firm and products offered.

Sometimes any movement of money from one retirement plan to another is often referred to as a “rollover”. However, the IRS has specific definitions for a rollover and a transfer. As per the IRS definition, a rollover occurs when the funds being moved are paid to you directly, and you then deposit the money into the other retirement vehicle.

The IRS has strict regulations and rules pertaining to an IRA Rollover. The guidelines outlined by the IRS for an IRA rollover include having 60 days to deposit the money you have received, in the custodian of your choice. If you are under 59 ½, failing to do so within the 60-day timeframe from initially receiving the funds, will result in a 10% early-withdrawal penalty tax being levied on said funds.

If you receive distributions from a retirement plan and you rollover into another retirement plan, as per the IRS rules there will be no taxation on those funds. In addition, funds can only be rolled over once in a 365-day period from a specific IRA.

In a trustee-to-trustee transfer (as the IRS has deemed it) you request that the original IRA custodian transfers the funds to the new IRA custodian. With a trustee-to-trustee transfer, you never touch the funds and the money transferred is not subject to taxation.