Table of Contents
- What Is a Money Purchase Plan?
- Key Takeaways
- Understanding Money Purchase Plans
- Contributions to a Money Purchase Plan
- Required Minimum Distribution
- Pros and Cons of a Money Purchase Plan
- Is a Money Purchase Plan a Defined Contribution Plan?
- Can You Withdraw Money from a Money Purchase Plan?
- What Is the Contribution Limit for a Money Purchase Plan?
- The Bottom Line
What Is a Money Purchase Plan?
Let me explain: a money purchase plan is an employer-sponsored retirement plan where your employer has to deposit a percentage of your salary into the account every year. You can contribute to it as well, and you get to choose how to invest the money from the options your employer provides.
In this setup, your account balance grows tax-deferred until you withdraw the money, and your employer's contributions are tax-deductible for them.
Key Takeaways
Understand this clearly: a money purchase plan differs from a profit-sharing program because your employer must contribute no matter how the company performs. For 2024, the contribution limit is $69,000 or 25% of your compensation, whichever is less. For 2025, it's $70,000 or 25% of your compensation, whichever is less. You don't pay taxes on the money until you withdraw it.
Understanding Money Purchase Plans
A money purchase plan is a tax-advantaged, qualified retirement plan under tax regulations, with rules similar to other qualified accounts. If you leave your employer, you can roll the money over into a 401(k) or an IRA. You can't withdraw funds before age 59½ without a 10% early withdrawal penalty. Your employer might allow loans from the account.
This plan is meant to provide retirement income, so during retirement, you can withdraw funds gradually or in a lump sum. Employers usually set a vesting period before you're fully eligible, and once vested, you can start taking funds at age 59½ without penalty.
Keep in mind, you can have multiple retirement accounts alongside this, like a 401(k), IRA, 457(b), or 403(b).
Contributions to a Money Purchase Plan
The IRS sets the contribution limit each year to adjust for inflation. For tax year 2024, it's $69,000 or 25% of your compensation, whichever is less. For 2025, it's $70,000 or 25% of your compensation, whichever is less.
It's not like a profit-sharing plan; the company can't change contributions based on profits. They must contribute whether the business is profitable or not. Your retirement benefit depends on total contributions plus investment gains or losses, and as long as it's within limits, the money is tax-deferred.
Required Minimum Distribution
Like other defined contribution plans, money purchase plans require minimum distributions. For 2024, the age is 73, and it will go up to 75 in 2033.
Pros and Cons of a Money Purchase Plan
This plan can significantly increase your retirement savings when combined with others like a 401(k). It helps companies attract talent due to the tax benefits. However, it might come with higher administrative costs than other plans.
Is a Money Purchase Plan a Defined Contribution Plan?
Yes, it is a defined contribution plan, with employer contributions fixed as a percentage of your annual compensation. You can contribute too.
Can You Withdraw Money from a Money Purchase Plan?
As with other retirement plans, withdrawing before age 59½ triggers a 10% penalty.
What Is the Contribution Limit for a Money Purchase Plan?
For 2024, the IRS sets it at $69,000 or 25% of your compensation, whichever is less. For 2025, it's $70,000 or 25% of your compensation, whichever is less.
The Bottom Line
In summary, a money purchase plan requires your employer to contribute a specific percentage of your salary each year, no matter the company's profits, setting it apart from profit-sharing. It penalizes early withdrawals with a 10% fee before age 59½ and includes required minimum distributions.
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