Because the Internal Revenue Service views a profit-sharing plan as a qualified retirement plan, it allows a person to transfer funds from his profit-sharing account to an individual retirement account, or IRA, established outside of his workplace. The IRS determines if funds transferred from a profit-sharing plan to an IRA are taxable based on the type of IRA established to receive the funds and how a person moves his savings from one account to another.
Even though an employer makes all of the contributions to the profit-sharing accounts of its employees, the money deposited into each person’s retirement account becomes the property of the individual employees over time as dictated by the plan’s vesting schedule. As of publication, the IRS allows an employer to contribute up to the lesser of $49,000 or 25 percent of an employee’s compensation to a single employee’s profit-sharing account. The IRS permits an employer to deduct its contributions to its retirement plan on the company’s federal tax return in an amount equaling up to 25 percent of the employer’s eligible payroll.
The IRS allows a person to transfer money invested in his profit-sharing account to an IRA by completing either a rollover or a direct rollover. If an individual chooses to move his money via a rollover, his retirement plan’s administrator will send him a written explanation of how he must handle his retirement savings to avoid taxes on the funds between 30 and 90 days before releasing his money.
In general, the IRS requires an employer to withhold 20 percent of a person’s profit-sharing account balance from the amount sent to the individual to ensure funds are available to pay taxes the person may owe if he fails to deposit his savings in an IRA in a timely manner, typically within 60 days. If a person completes the rollover of his retirement funds and avoids taxes on his savings, the IRS applies the 20 percent withheld by his employer as a credit against any federal tax liability that may exist when the person files his annual tax return. If a person fails to deposit his profit-sharing funds within the allotted time period, the IRS requires him to report the amount not deposited as income. In addition to income taxes, the IRS may assess a 10 percent tax against any funds not deposited in an IRA if a taxpayer is under 59 ½.
If a person initiates a direct rollover of his profit-sharing account to an IRA, his plan’s administrator will send the entire balance of his account to the institution at which the person established his IRA without withholding money for taxes. The IRS will not tax retirement savings transferred via a direct rollover.
The IRS requires a person who wants to transfer his profit-sharing funds to a Roth IRA to first deposit his money in a traditional rollover IRA. The IRS taxes as income any money moved from a traditional IRA into a Roth IRA.
- IRS.gov; Publication 575 Pension and Annuity Income; February 2011
- IRS.gov; Publication 590 Individual Retirement Arrangements (IRAs); February 2011
- IRS.gov; Retirement Plans FAQs Regarding IRAs; July 2011
- Firstrade: Rollover Your Retirement Asset
- IRS.gov; Choosing a Retirement Plan: Profit Sharing Plan; January 2011
- IRS.gov; Retirement Topics...; April 2011
- Internal Revenue Service. "Choosing a Retirement Plan: Profit-Sharing Plan." Accessed June 16, 2020.
- Department of Labor. "Profit Sharing Plans for Small Businesses," Page 2. Accessed June 16, 2020.
- Internal Revenue Service. "Topic No. 557 Additional Tax on Early Distributions from Traditional and Roth IRAs." Accessed June 16, 2020.
- Department of Labor. "Profit Sharing Plans for Small Businesses," Page 1. Accessed June 16, 2020.
- Internal Revenue Service. "Retirement Topics - Plan Loans." Accessed June 16, 2020.
- Internal Revenue Service. "Retirement Topics - Exceptions to Tax on Early Distributions." Accessed June 16, 2020.
Deborah Barlowe began writing professionally in 2010. With experience in earning securities and insurance licenses and having owned a successful business, her articles have focused predominantly on finance and entrepreneurship. Barlowe holds a bachelor’s degree in hotel administration from Cornell University.