Profit Sharing – Qualified and Unqualified, Part 4
THE END RESULT: How does qualified profit sharing work out in actual dollars?
Here is Ms. Young Executive, age 35. If she had received a salary increase of ,500 she would have about ,625 left after taxes (25 percent bracket). Assuming that she invested this amount each year at 6 percent compound interest after income taxes, she would have 9,979 available to her at age 65. On the other hand, if instead of taking the increased salary, she had the ,500 credited to her in qualified profit-sharing and pension plans and invested at 7.5 percent percent pretax she would receive a distribution of 9,040 at retirement-an increase of 9,061. However, the 9,040 is subject to taxation when received.
Retirement Fund
A drawback, but sometimes also an advantage, to profit sharing as an estate builder is that the ultimate distribution is subject to two variables. Obviously, if the company does not earn sufficient profits it will not make its annual contribution to the profit-sharing fund. Also, if the investments in the fund lose their original invested values, the overall value of the fund will be decreased. This will, of course, depend upon the type and success of the fund’s investments. If they are fixed-return or insured, there is a reduced problem of capital loss. On the other hand, if the fund invests in equities, the amount to be distributed to the participants will be in direct proportion to the increase or decrease of their values. Some profit-sharing funds have had phenomenal success. We can think of several which had doubled and tripled as a result of the increase in the market value of the securities they held.
As we know, a participant will receive at his retirement his share of the value of the fund on that date. What happens then if at this time there is a temporary drop in the value of the fund?
Consider the case of two persons who worked for the same company at the same salary. We’ll call them Mr. X and Ms. Y. Both were due for retirement at the same time. Mr. X retired on the due date, February 28, 2000, and took out 0,000 from the profit-sharing fund; Ms. Y was asked if she would stay on for another year, and did. This action proved to be disastrous for her, because the market proceeded to drop. The value of the fund’s securities shrank and the value of her share on her retirement date was correspondingly reduced from 0,000 to less than 5,000. Or in other words, profit sharing can seem to promise, but it” cannot guarantee you, a fixed sum on retirement. Ms. Y then needed to consider at least another two years of work and waiting before daring to draw income from her retirement funds. Things could have been worse if her health required her to discontinue work sooner.
A flexible feature of profit-sharing plans is their portability. Should you leave the company prior to retirement, your vested portion of the funds contributed can generally be transferred to the retirement plan of a new employer, or to a Rollover IRA that you control. Still, between uneven employer contributions and the ups and downs of investment performance, there is no guarantee of a profit-sharing plan’s future ability to produce income when you are ready to retire.
Profit Sharing – Qualified and Unqualified, Part 4
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Tags: Profit, Qualified, Qualified Unqualified, Sharing, Unqualified, Unqualified Profit
