What Happens to My Profit Sharing Plan if I Leave the Company?
There are many benefits of profit sharing but how can leaving a company affect your profit sharing plan? Whether you resign, get fired, or retire, your plan's fate varies. Let's take a look at each scenario to see how your hard-earned benefits can be affected.
Voluntary resignation or quitting
If you decide to quit, the fate of your profit sharing plan hinges on your vesting status. Being fully vested means you retain the employer contributions. But, if you're not vested, you could lose all or a portion of these contributions.
It's important to review your plan's details or consult HR to understand your vesting status. You should also consider options like rolling over your funds into an IRA or another retirement plan.
Involuntary termination
In cases of involuntary termination, the terms of your profit sharing plan become very important. Some plans may allow you to keep the employer's contributions, while others may have different rules. Your vested benefits are protected by law, so you'll retain these regardless of the nature of your termination.
Make sure you understand your plan's specific rules and how your vesting status affects your benefits in such situations.
Retirement
When you retire, the handling of your profit sharing plan generally allows you to keep the accumulated funds. The amount you can keep usually depends on the plan's rules, your age, and the length of your service.
As a retiree, you might consider rolling over your profit sharing funds into an IRA. This can be quite a financially savvy move for continued growth and securing your retirement savings.
Your Options After Departure
When you leave your job, deciding what to do with your profit sharing contributions can be a big financial decision. Let's break down your options...
Leaving the funds in the existing plan
Opting to leave your funds in the existing profit sharing plan can be an easy choice for many. The advantage here is the simplicity: your money stays put and you continue to benefit from the plan's investment strategy.
But, there are downsides. Some plans may have restrictions on access or investment choices, limiting your control over the funds. Also, if the plan is terminated by your former employer, you may be forced to move the funds anyway.
Rolling over the funds to an IRA or another retirement plans
An employee's retirement savings are precious, so know that rolling over your profit sharing contributions to an IRA or another retirement plan gives you more control and likely more investment options. With this process, you'll be transferring your funds directly to the new plan, which can help you avoid tax penalties.
This is a pretty good option if you want a retirement plan with more flexibility and ways to invest. When comparing options, think about factors like investment choices, fees, and the comp-to-comp method of contribution matching, which could influence your retirement income.
Cashing out the plan
Cashing out means withdrawing your funds as a lump sum. This option gives you immediate access to your money, which could be necessary under certain circ*mstances. But, it's important to consider the immediate financial implications.
Cashing out can lead to hefty tax penalties, especially if you're under the age of 59.5. Also, you'll lose the compounding benefits of a retirement savings plan which can possibly reduce your long-term retirement savings. Always do your best to weigh these consequences against your current financial needs.
Special Considerations that May Impact Your Decision
As we said earlier, deciding what to do with your profit sharing plan after leaving a company isn't an easy decision. To add to this, there are several special considerations that indicate how important it is to properly weigh up your decision. Here are some additional factors that could motivate employees to assess their profit sharing plans:
Company-specific rules
- Some companies have special routes on how you can handle your profit sharing contributions. This could include specific timelines for decision-making or limitations on rollover options.
- For highly compensated employees, additional restrictions or opportunities might apply, based on the company's profit sharing plan formulas.
Market conditions and timing
- The state of the market can greatly influence the "best time" to move your funds. If the market is volatile around the time that you're considering moving the funds, then you might want to consider waiting or choosing more stable investment options.
- Consider the timing in relation to your tax benefits. For example, rolling over to a 401(k) or IRA might have different tax implications depending on the fiscal year.
Consulting with a financial advisor
- It's always wise to consult with a financial advisor, as they can provide personalized advice based on your unique financial situation, including an employee's annual compensation and long-term goals.
- They can help you understand how different actions might affect your tax situation and whether putting the same percentage of investment in a new plan is advisable.
Consider your future salary and compensation
Think about your future earning potential and how it might affect your retirement planning. If you're expecting a significant change in your salary, then this could influence your decision on how to manage your profit sharing funds.
Each of these factors plays an important role in determining the best course of action for your profit sharing contribution. Also, whatever decision you make, avoid rushing into it, as doing so can blind judgment and leave you at a loss.
FAQ: Can an employer keep your profit sharing after you quit?
Generally, no. If profit sharing is an integral part of an employee's compensation, the profit sharing partner is entitled to it, even after resignation.
This applies unless the employer clearly states that continuing employment is a requirement for receiving profit sharing funds. Always check your plan's terms and consult with HR, if need be, to fully understand your rights.
