Q&A Time: Profit Sharing Plans, Student Loans and Canadian Investments

Question:

How do profit sharing plans work? I interviewed with an employer who touted it as a good benefit, but I don’t know how they really affect me.

Answer:

Profit sharing plans are defined contribution plans where your employer has discretion to determine when and how much the company pays into the plan. During profitable years, the employer may contribute more. Likewise, during a difficult year, the employer may opt not to contribute to the plan. The employer cannot dip into the plan and take back what they have contributed in the past.

The amount allocated to each employee is usually based on the salary level, so more senior employees may get a larger contribution. The plan may have a vesting schedule, usually between three and six years, during which time an employee becomes fully vested in the plan. If you were to leave the company prior to full vesting and move your account elsewhere, you would forfeit all or a portion of the account’s accumulated value. Contributions are tax deductible for the employer.

Employees can generally access the money after 59 ½ or upon termination of employment. Depending on the plan, employees may be able to take a loan, similar to borrowing from your 401(k) plan.

A profit sharing plan is an incentive by the company to retain quality employees, so it is an added benefit to you. You may want to ask what the average contribution percentage is and if there have been any years contributions were not made. It wouldn’t surprise us if contributions were suspended in 2008-2009.

Question:

I can pay my student loans, but I qualify for a reduction. Do I pay as is or reduce loan payments and build up savings and investments?

Answer:

When you are starting out, cash flow may be very important. If you have the opportunity to refinance your student loans, you generally extend your payment period in exchange for lower monthly payments. While you may pay more in interest over the life of the loan, it can increase your cash flow today and allow you to build up your savings. The extra savings can be invested wisely, as contributions made to an IRA are tax deductible. Additionally, student loan interest, up to $2,500 is also tax deductible, so refinancing your student loan debt may be a good choice.

Question:

I was doing some research on another topic and thought Canada may be a good place to invest. Can I invest in Canada’s market just like here? Would this count toward my international diversification?

Answer:

You can invest directly in stocks on the Toronto Stock Exchange or you can opt for the iShares MSCI Canada Index ETF (NYSEARCA: EWC). Most major companies in Canada have dual listings both on the American exchanges and on the Toronto Stock Exchange.

An investment in Canadian issues can offer diversification, but not as much as other international investments. Canada has an 80% correlation to the American markets. The Canadian markets are also not as diversified as U.S. markets, as the Financial, Materials and Energy sectors make up about 75% of the Canadian markets.

If you choose to invest directly with the Toronto Stock Exchange, you need to be aware of the exchange rate risk involved.

At Henssler Financial we believe you should Live Ready, and that includes consulting experts for financial matters you do not understand. If you have questions regarding your financial situation, contact the Experts at Henssler Financial: