The Notable Differences Of A 401(k) Plan And A Profit Sharing Plan

By Author: Andrew Bui
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When you start out with a new company you will likely be faced with a choice of retirement plans, between the profit sharing plan and the 401(k), and may not know how they differ. There is a preconceived notion among some individuals that 401(k) is the same thing as a profit sharing arrangement, but where the two plans do actually differ, it is a fairly stark contrast.

Of all the differences, the most prominent is likely the fact that profit sharing involves no contributions on part of the employee, and all the money that is deposited into that fund will come straight from the company itself. When it comes to the 401(k), if the employer is contributing a certain amount, you must pay in that same amount or you will not be eligible to participate. The one situation asks that you pay in your own money on a constant basis, and the other situation asks you to do nothing more than to go to work and fulfill your role within the company.

Another substantial 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. Profit sharing can be amazing if your employer is enjoying an extra profitable year, but if your company's earnings are down by a whole lot, you won't be seeing anywhere near that same amount. Basically, with 401(k) you always know the amout you are receiving, but with profit sharing you never really can tell what you can get, even though it could prove to be a great deal more than your 401(k) contributions.

Both plans fall under the same laws that regulate many factors of how and when the money can be withdrawn, but there are a few differences to note. According to government regulations, any early withdrawals will result in a penalty; though, the company can allow you to make one regardless. What sets the two 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.

Clearly, both plans come with their own pros and cons, but in many cases you should be able to ask for both options and enjoy many additional benefits. Regardless of how you choose, the profit sharing plan or a 401(k), you should now know enough about both of them to make the necessary decisions and start preparing for your retirement.
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