The Difference Between a Profit Sharing Plan and a Thrift Sharing Plan

There are a number of retirement plans available for retirees in the market such as Profit Sharing Plans and Thrift Savings Plans. The difference between the two is that profit sharing plans and are applicable in the private sector while the thrift savings plans apply to those employed in the government service.

Profit sharing plan refers to different incentive plans introduced by businesses that intends to provide direct or indirect payments to employees. This payment generally depend on the company’s profitability in addition to employee’s regular salary, bonuses and other incentives. Profit sharing plans gravitated on a predetermined economic sharing rules that pertain to the division of profits between the company, as a principal, and between the employees, as agents. In the United States, a Profit Sharing Plan may be set up when all or some of the employee’s profit sharing amount are contributed to a retirement plan. Profit sharing plans are also used in conjunction with 401(k) plans.

The retirement plan, referred to in the immediately preceding paragraph, merely means “pension”. It may be referred to as a “Defined Contribution Plan” where in case of sickness, economic hardship, any qualified employee shall have access to said account which would prevent him from quitting his employment.

The requirements for the setting up of a profit sharing plan include the following: (1) an agreement which must use a predetermined formula for allocating and distributing the profits; (2) provision which states the period for which the allocations may begin which may be in years, happening of a particular event or attainment of a particular age; and (3) the agreement must be anchored on the basic compensation of the employee which must be in proportion to the employee’s salary to the total salary of the participants.

Thrift saving plans are retirement plans offered to employees of government agencies. In order to qualify for a thrift saving plan, the applicant must be covered by a government retirement system, working for the federal government and working at least part-time. Thrift saving plans allow employee and employer contributions. The federal agency will automatically contribute 1 percent of the employee’s salary on the start of the plan.

In a thrift saving plan, the contributions may be traditional or Roth. With a traditional contribution, the money is not included in the taxable income once it is contributed, but, the same will be taxed once taken out of the fund. On the other hand, Roth contributions are taxed when put in the fund but is tax free once the same are withdrawn.

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