A lot of business owners think about the welfare of their employees. They usually give them an option when it comes to preparing for their retirement. There are two kinds of program to choose from – 401k and profit sharing.
A 401k plan or also known as cash or deferred arrangement (CODA) plan is a kind of retirements saving program where in an employee contribute to fund for his or her own retirement. Your employer as well can also contribute to this fund. These contributions are taxable but they are considered tax free until it is withdrawn by the contributor. Companies and other organizations can get this type of plans for their employees. If you want to know the guidelines and policies of this particular plan, you can check out the internal revenue code. The 401k plan is regulated by the government under it labor department.
There is a 401k plan that can include 50% contribution coming from the employer. The employer can make a contribution to this fund but it is independent from the contribution of the employees. This contribution can be related to the company’s profit which is a part of what you call profit sharing plans. There are companies that offer 401k plans giving the employees options where they would want to invest their money. The options include a mutual fund, stock market and others that can let their money grow. The government is prohibited from giving this kind of plan to their workers. On the other hand private employers can establish this kind of plan to a qualified employee.
This 401k plan got a lot of advantages for an employee. One is that they can contribute money that is pre tax. This can also minimize the tax that they pay every time they receive their salary. The contributions coming from an employer is also exempted from tax. Another advantage is the fact that employees can decide where their money goes making them have a control over their investment. In case the employee decides to change jobs, this plan could be transferred. This 401k is very popular because of the fact they can save money and also get tax exempted as well.
Profit sharing is another plan that can be an option for employees wanting to secure their retirement. In profit sharing plan, the employees can have a sense of ownership in the company that they are working for. They are allowed to share profits of the company and while doing this they can help building up their funds. This is not mandatory for a company to take part in profit sharing plans. It is also in their discretion if they want to contribute. It is often a misconception that profit sharing plans are only paid when a company makes a sales or profit. In reality this is not always the case. The company can contribute even if they are on the verge of decreasing profits.
In practice, a company can only allow an employee to join if he or she has been serving them for at least 2 years. There are a lot of ways wherein a company can calculate how much they would want to contribute. There is also a ceiling amount to how much a company can give. The advantage of profit sharing is the both the employer and employee can benefit from the tax liability this plan gives.
