Any future retirement pension benefit is not fixed as in a defined benefit plan.
The future retirement benefit will depend upon the amount of contributions, years of service, and investment performance.
The future monthly retirement check is therefore definitely not guaranteed.
A Money Purchase Plan requires that the yearly contribution be a fixed percentage of either the self-employed or employee's earnings. The contribution percentage can be as much as 25% but the dollar amount cannot exceed $55,000 ($61,000 if age 50) in 2018.
The 2019 limits have been increased to $56,000 and if age 50 or older $62,000.
The big drawback of a Money Purchase Plan is that the selected contribution percentage is fixed and does not depend upon the current year's business profit or loss.
The Money Purchase Plan can also include a 401k salary deferral feature.
The big advantage of a Profit Sharing Plan is that the contribution amount is not fixed and can vary from year to year. This contrasts with the Money Purchase Plan where you are required by the Plan to make a fixed yearly contribution amount.
The Profit Sharing plan can also have a 401k salary deferral feature. If you are self-employed, you must use a special calculation to compute your own retirement contribution to the above plans.
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Defined Contribution Retirement Plan
Profit Sharing Plan Contribution Limits
A defined contribution plan is a qualified retirement plan that must meet certain IRS tax laws. The "defined contribution" refers to a certain percentage of your earnings. The percentage of a self-employed or an employee's earnings are then contributed to the defined contribution plan.
The two types of defined contribution plans are a Money Purchase Plan and a Profit Sharing Plan. Your small business can be either a sole proprietorship, corporation or a partnership.
These plans were all once called Keogh Plans, named for U.S. Congressman Eugene Keogh who sponsored the legislation, Law HR-10.
The IRS rules also allow you to do a tax-free profit sharing rollover or a money purchase rollover to your IRA or to another retirement plan.
The name "Profit Sharing Plan" does not imply that your small business corporation must have profits in order to make a yearly contribution to the plan. However, if you are self-employed, you must have profits to be eligible for a contribution for yourself.
You can contribute up to 25% of your salary or your self-employed earnings; and the same for each of your employees. The maximum dollar amount cannot exceed $55,000 ($61,000 if age 50) in 2018.
The 2019 profit sharing limit has been increased to $56,000, and if age 50 or older $62,000.
Defined Contribution Pension Plan
Profit Sharing Plan
Money Purchase Plan
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