Difference Between A Profit Sharing Plan & A Thrift Saving Plan

Profit Sharing Plan

Generally,profit sharing plan, also called as  stock bonus, means the contribution plan. It differs from the 401k and thrift savings systems in that employers, not employees, contribute to the plan. There is a lot of flexibility in a profit sharing plan, and contribution amounts may vary from year to year. Any business can establish a profit sharing plan. An employer is not required to have profits just to make a contribution, amounts placed in the plan are discretionary, and a plan may provide participants to take loans from the plan.

401k Function

What is 401 Function? The 401k plan gives employees in the private sector contribute pretax dollars to a tax-deferred savings plan. Employers can match or partially match the amount employees wants to contribute, same with a tax-deferred basis. Optional loans and hardship withdrawals are also allowed with guidelines. An employees contributions are always 100 percent vested, meaning the employee is entitled to keep contributed amounts. The flexibility of private sector plans allows employer contributions to vest when contributed or on a set schedule. That’s why  employees can invest their own money in a 401k, there is generally greater flexibility in where 401k contributions can be invested, compared with a profit sharing plan.

Thrift Savings

What is A thrift savings plan (TSP)? it is defines as, federal government civilian employee and uniformed services equivalent to the private employer 401k. Contributions are made in pretax dollars, and earnings are tax deferred until it is withdrawn. The TSP covers millions of workers across different governmental agencies, from astronauts in space to mine inspectors miles below the earth. There is a presence of uniformity in the thrift savings plan compared to 401k plans handled by thousands of private companies. Employee contributions are matched to the first 5 percent, and matches are fully vested with the employee after three years of federal service.

Uniformed Services

For uniformed members of the U.S. Army, Navy, Air Force, Marines, Coast Guard, National Guard, Ready Reserve, Public Health Service and National Oceanic and Atmospheric Administration serving on active duty, the thrift savings plan gives additional savings incentives. While generally members do not receive matching contributions, pay covered by the combat zone exclusion is tax-exempt. This contribution of money to the thrift savings plan is not taxable, compared to the  contributions that are tax-deferred. A member of the uniformed services can contribute 1 percent to 100 percent of incentive pay, bonus pay or special pay, up to a designated total yearly amount.

Transfer Considerations

Eligible private sector and federal employer plans provide transfer procedures to move contributions and earnings between 401k and thrift savings plans. In its June 2007 booklet, states that, Withdrawing your TSP Account After Leaving Federal Service, the Federal Retirement Thrift Investment Board advises checking with a tax adviser or plan administrator before withdrawing money from a retirement plan or  transfer it to another plan. This advice for federal employees applies to private sector plans as well. To keep the tax-deferred status of a profit sharing, 401k or thrift savings plan account, get  information about how to make the transfer from a plan administrator or financial adviser.

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