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Profit Sharing Plan

Profit Sharing Plans

Some companies offer a profit-sharing plan to their workers as an incentive for them to be productive so that they can both help boost and share in the company’s profits.

This is another hands-off benefit, in the sense that you can’t contribute to it; only the employer can. But here’s the catch: your employer has discretion as to whether to contribute from year to year. However, the government does insist that contributions be “recurring and substantial.”

Pros: “It doesn’t cost you anything,” says Littell. “In some profit-sharing plans you can choose the investments you want and in others, the trustees handle the investment decisions.”

Cons: Profit-sharing plans are not a fail-safe way to ensure your financial security. “It’s difficult to predict how much benefit you’re going to get in retirement,” says Littell. “You don’t know how much the company will contribute from year to year, and you don’t know what the investment experience will be.”

What it means to you: When you’re planning for retirement, it’s a good idea to look at the history of company contributions to get a sense of what to expect. You don’t have to make a lot of decisions unless the plan allows you to determine how to invest the money. One important caveat: “At the time of distribution, as with any account, you want to make sure it’s rolled into an IRA so you defer income tax,” says Littell.

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