Profit Sharing vs. 401K?

[saint]

A question for all of you financial buffs.

If you had the choice between profit sharing and a 401K, which would you choose? If you could partake in both, would you?

My gf got a promotion and is now allowed to take part in the profit sharing and/or a 401K in which they match either .5/1 or 1/1 i'm not sure. I know all about 401ks etc but am not too familiar with profit-sharing. From what i've read it is a contribution from the business into the workers retirement based on the success of the company. I also read that regardless of how the company is doing, they can contribute anything from 0 to 25% of total salary. I guess one question i have is do companies ever not contribue anything or is that uncommon. Should she do both if she can, or if given only one what choice what do you recommend? She was told by her manager that their profit sharing program is very good and she should jump at the chance. This is thru Gallo the winery.

 

[BobbyBlueChip]

Without knowing the terms of the PSP, I would say that the 401(k) would be best especially with that matching rate. In a PSP, there's too many ways that a Company can manipulate their income too minimize their income to avoid PSP liability

 

[saint]

With my limited knowledge that was my hesitation w/ the PSP. Of course my gf is 100 miles away w/ the paperwork and asking her to describe the terms is a lot like pulling teeth. What would a "typical" PSP plan outline. If what the company contributes can vary at the companies whim, what is there really to be put in writing?

 

[Chopsticks]

I don't know about your company, but my company pays out profit sharing every quarter, granted that we do make a profit. As far as 401K goes, my company matches dollar for dollar up to 9% of your contribution, of which, you are allowed to go as high as 30% of your pay. Who would be rich enough to do that? As a very conservative person, I would always participate in a 401K savings plan verses profit sharing. I never heard of a company that requires one to sign up for profit sharing. I always thought it was automatic. In my honest opinion, there are so many options in 401K these days, where you can make a killing in the stock market if you play your cards right. Also, profits come and go and always fluctuate with the economy, but your company matching your 401K will never change whether it makes a profit or not. You can basically count on not cashing in on your social security when you get older. As corrupt as that system is, unless your company is one of the few that offers a pension once you retire, my recommendation is you start planning now for your retirement, since you'll be the only one paying for it. Besides, you can always borrow against your 401K and you'll be paying yourself back. Profit sharing is for the present; 401K is for the rest of your life. Best of luck on whatever is decided.

 

[TAZ]

In general it is a no lose situation. I don't know alot about profit sharing plans, but like other employer sponsored retirement plans a contribution is made to an account on behalf of the employee based upon some formula. This written formula should spell out how contributions are made, which can potentially be done even if the company does not have net income for the year, ie. contributions are treated as an operating expense.

I will not explain 401k plans since they seem to be common knowledge today. Couple of things to consider, I don't believe there is a limit on what the employer can contribute in a PSP. In a 401k the maximum an employee can contribute is $13,000 for 2004, $14,000 for 2005. The employer match, if any, does not count against this limit. Also 401k contributions are made pre tax which lowers your taxable income.

Without knowing the specifics of the PSP it is hard to recommend one over the other. If forced I would go 401k just due to familiarity with the product. If both can not be done, you could go the PSP route and open up a retirement account personally like a Roth IRA.

 

[BobbyBlueChip]

With my limited knowledge that was my hesitation w/ the PSP. Of course my gf is 100 miles away w/ the paperwork and asking her to describe the terms is a lot like pulling teeth. What would a "typical" PSP plan outline. If what the company contributes can vary at the companies whim, what is there really to be put in writing?

It's all over the map and can be set up as tax-deferred and paid out upon retirement or annually as compensation. Contributions into your account can also be based on income, income before executive bonuses and can also be discretionary.

If she doesn't need to declare what she's doing for a couple of months, then I would ask someone that she gets to know at the Company, but 401(k) plans are so beneficial that they usually trump everything else.

 

[djv]

I believe if the profit sharing does not go towards a 401k you pay taxes. If it goes into the 401k you can defer taxes till money is drawn out. And that is best way to go.

 

[SixFive]

nice bennies some of u have. My company matches my 401K 1/4 of the first 3% I put in. Now, that sucks! In addition to this, they provide absolutely no retirement.

 

[djv]

Six Five your still better off then 50% of Americans that get nothing towards retierment. By the way many of those companies don't always get the best workers. Unless they pay better so folks can save on there own.

 

[NickiD]

Choice - 401k

But both is Best !!!!

 

[taoist]

Heather, he didn't ask your sexual preference....


:thefinger

 

[saint]

Thanks for the advice, she gets both of them, so the company doesn't match the 401k because they give profit sharing for the employees too. Sounds like a sweet deal.

 

[Chopsticks]

saint

saint

Sorry man, but in my opinion, not getting matched on your 401K is a big loss, especially if her company does not offer a pension. That puts the burdern on her to increase her contribution out of her own pocket, though she does benefit with the "taxable" income.

 

[FatBoy]

If the company makes a profit (ie contributes a % of your salary each year), then profit sharing is/can be a good deal. I've been with my present company for 16 years. We have had a profit sharing trust for that time. They've contributed up to 15% at least 10/16 years. Only 2 years did we get nothing. Right now i have a substantial amount of money in the account. Of course, the base salary needs to be decent, for the money to start to accrue. At this point, I/m more concerned with how our Investment group is managing the money then the amount they put in each year.

This year they are adding a 401K. No matching though. That would be real nice.

 

[djv]

FatBoy do they tax your P S. Or can you saved it tax defered? If taxed find away to take it taxed defered if possiable.

 

[FatBoy]

djv,

It's not taxed, unless you take a portion of it out. There are only a few reasons that you can take the money out (first home, college tuition for kids, medical expenses etc.)

 

[saint]

If the company makes a profit (ie contributes a % of your salary each year), then profit sharing is/can be a good deal. I've been with my present company for 16 years. We have had a profit sharing trust for that time. They've contributed up to 15% at least 10/16 years. Only 2 years did we get nothing. Right now i have a substantial amount of money in the account. Of course, the base salary needs to be decent, for the money to start to accrue. At this point, I/m more concerned with how our Investment group is managing the money then the amount they put in each year.

This year they are adding a 401K. No matching though. That would be real nice.

From what she's gathered the company always contributes something and usually a very nice % of the salary.

 

[djv]

FatBoy sounds good tuck away as much as you can. GL