Can a Profit Sharing Plan Be Transferred to an IRA?

It can, and here's how.

Dec 23, 2015 at 11:32PM

A profit-sharing plan is a defined contribution plan for which an employer determines when and how much it will pay. The amount a company contributes is often based on an individual employee's salary. Some employers offer 401(k) plans, which are considered profit-sharing plans, but there are other types of plans that fall under the category of profit-sharing as well.

If you have a profit-sharing plan through your employer, you can transfer money from it to an IRA, or individual retirement account. If your company's plan follows a vesting schedule, it means you don't take full ownership of your funds until you've put in a certain amount of time as an employee. If that's the case, you may have to wait a certain amount of time to be vested in your plan before you can transfer that money.

Transferring money to an IRA
When transferring money out of a profit-sharing plan into an IRA, you have the option to move a portion of the balance if you don't wish to transfer it all at once. You can also make multiple transfers, as the IRS doesn't impose a waiting period between transfers.

If you choose to transfer money from a profit-sharing plan to an IRA, you must deposit whatever amount you take out within 60 days to avoid being taxed on your withdrawal. If you fail to do so, the IRS will tax your distribution as income. In addition, you may incur a 10% early withdrawal penalty if you take out funds before you reach the age of 59.5.

When you transfer the money, your employer is required to withhold 20% of the total amount. You can reclaim that withheld amount when you file your tax return, but if you fail to replenish that 20% with your own money in the interim, you'll be subject to taxes. You can avoid the 60-day time limit and 20% withholding requirement by moving money from your profit-sharing plan to your IRA via a trustee-to-trustee transfer.

Restrictions on transferring money to an IRA
The IRS imposes certain restrictions when transferring money from a profit-sharing plan to an IRA. You cannot transfer money resulting from:

  • A hardship distribution
  • A required minimum distribution
  • Excess contributions
  • A loan taken from your plan

Additionally, you cannot roll over a life insurance policy from a profit-sharing plan to an IRA. You also can't transfer a Roth profit-sharing plan to a traditional IRA.

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