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This question is about employer.
Profit Sharing Plan vs. 401(k)
The difference between a profit-sharing plan and a 401k is important when planning out retirement options and when looking into and understanding compensation and benefits offered. Both deal with different retirement plans.
A 401k is a retirement plan in which individuals contribute money to their retirement accounts and then receive a tax deduction. Employers may choose to also make contributions and they also receive tax deductions by doing so. Under a profit-sharing plan, only the employer contributes to the retirement account.
Key Takeaways:
| 401k | Profit Sharing Plan |
|---|---|
| Under a 401k, individuals can contribute what they choose, and generally employers match up to a certain number or percentage. | Profit Sharing Plans have a set number that employers contribute, so the retirement number is the same for all employees. |
| The amount of money received in a 401k account is dependent on an individual's choice. There is an emphasis on the individual making smart financial plans, but not a huge emphasis on how the success of a business affects retirement because it doesn't. | The amount of money received in a profit-sharing plan is dependent on the success of a company, so there is an emphasis on seeing success for the company that you are working for, which may motivate workers to work harder. |
| A direct 401k rollover means that you can transfer your funds should you move to a different company, which means a 401k is flexible. | If you quit your position, it is possible that the profit-sharing money does not go with you. You may be able to transfer it to a different account, but that may not always be the case. |
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