Profit-sharing plans are retirement plans with companies that give employees a percentage of the company’s earnings. A profit-sharing plan is similar to a 401(k) because it is considered a defined-contribution plan. The sole difference is that the only entity contributing to the plan is the employer – based on its corporate profits at the end of each fiscal year.
Whether you can use your profit-sharing funds for a down payment on a house depends on constraints that may prevent you from withdrawing the money from the company. With profit-sharing plans, the employer may impose a vesting schedule that determines how long an employee must work at a company to claim this or her portion of the profit-sharing money. When you meet the requirements of your company’s vesting schedule, you have to meet an age requirement, as well. Like a 401(k), a profit-sharing plan imposes a penalty on you if funds are withdrawn before the age of 59½. So, if you want to withdraw money from the plan and you have not reached the qualifying age, be ready to be assessed a 10% penalty.
You may be able to avoid the penalty, however, if there are withdrawal exception(s) for your company’s plan. Compared to 401(k)s, profit-sharing plans are often more flexible about early-withdrawal exceptions: The rules are set by each company, as opposed to federal regulations imposed by the IRS.
For more, check out our 401(k) And Qualified Plans Tutorial.
This question was answered by Chizoba Morah.