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with profit sharing companies can make a decision each year whether or not they're even going to make contributions to your retirement plan what's up guys sean here and today we're answering the question what is it profit sharing plan how does it work and what the contributions even look like you're probably here because your company is offering you a profit sharing plan but you're a little bit confused on why profit sharing plan actually is a profit sharing plan it's just a defined contribution plan that allows companies to help employees save for retirement but with this type of retirement plan contributions from your employer is discretionary this means your employer can decide each year how much we're going to be contributing and whether or not they're even going to be contributing to your retirement plan and if the company doesn't make a profit they'll have to contribute to your plan this flexibility makes a great retirement plan option for small businesses or businesses of any size plus a lousy financial well-being of the employees to the company's success so the first thing we're going to talk about is how this profit sharing even work unlike a 401k plan employees with profit sharing plans do not make their own contributions but employers can offer other retirement plans such as the 401k along with the profit sharing plan employees can get their profit shares in the form of cash or company stocks typically these contributions are made to tax deferred retirement plans which allow penalty-free distributions after the age of 59 and a half some plans offer a combination of retirement contributions and cash payouts if you take a cash payout this will be taxed at your normal income rate and if you leave the company you can move your money from a profit sharing plan into a rollover IRA but distribution is taken before the age of fifty nine and a half are subject to a 10% penalty and the second thing we're going to talk about is what is the maximum contribution that can be made to a profit sharing plan so while there's a set amount that has to be contributed to profit sharing plan there is a maximum contribution amount for each employee and that amount fluctuates with inflation the maximum contribution amount is 25 percent of your income up to fifty seven thousand dollars a year and the salary cap for this is two hundred and eighty-five thousand dollars and the thing we're gonna talk about is who makes contributions to a profit-sharing plan with a profit sharing plan employees don't really have to do anything but the company does have to do some calculations planning in paperwork if an employer does decide to do profit sharing for a given year they will simply take a percentage of your annual salary and contribute that to your plan an employer who does profit sharing has to set up a system that tracks contributions investments distributions and files annual returns with the government but that's all I have for today guys smash that like button and subscribe to my channel cheerio