# What Is a Money Purchase Plan? Definition and Contribution Limits

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*— skynesher / Getty Images*

A money purchase plan is an employer-sponsored retirement plan. The employer must deposit a percentage of a participating employee’s salary in the account every year. The employee is permitted to contribute to the fund as well, and they can choose how to invest the money based on options offered by the employer.

With a money purchase plan, the employee’s account balance is tax deferred until the money is withdrawn, while the employer’s contribution is tax deductible.

### Key Takeaways

*   A money purchase plan is different from a profit-sharing program: An employer must contribute to the plan, no matter how well the company is doing.
*   For 2024, the contribution limit is $69,000 or 25% of an employee’s compensation, whichever is less.
*   For 2025, the contribution limit is $70,000 or 25% of an employee’s compensation, whichever is less.
*   Employees don’t pay taxes on the money until it is withdrawn.

## Understanding Money Purchase Plans

A money purchase plan is a [tax-advantaged](https://www.investopedia.com/terms/t/tax-advantaged.asp), [qualified retirement plan](https://www.investopedia.com/terms/q/qrp.asp) that is subject to tax regulations. The rules are similar to those for other qualified retirement accounts:

*   If you leave your employer, you can roll the money over into a [401(k)](https://www.investopedia.com/terms/1/401kplan.asp) or an [individual retirement account (IRA)](https://www.investopedia.com/terms/i/ira.asp)
*   You can’t withdraw the funds before age 59½ without incurring a 10% early withdrawal penalty
*   Your employer may authorize loans from the account

The money purchase plan is designed to provide retirement income. During [retirement](https://www.investopedia.com/terms/r/retirement.asp), you can withdraw funds gradually or in a lump sum.

Employers typically establish a [vesting period](https://www.investopedia.com/terms/v/vesting.asp) after which an employee is eligible for the program. After being fully vested, an employee may start taking out funds at age 59½ without a tax penalty.  

> **Important**
>
> A worker can have several retirement accounts throughout their career in addition to a money purchase plan, such as a 401(k), IRA, 457(b), and 403(b).

## Contributions to a Money Purchase Plan

The [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) sets the contribution limit each year to keep pace with [inflation](https://www.investopedia.com/terms/i/inflation.asp). For [tax year](https://www.investopedia.com/terms/t/taxyear.asp) 2024, the limit is $69,000 or 25% of the employee’s compensation, whichever is less. (For tax year 2025, it is $70,000 or 25% of the employee’s compensation, whichever is less.)  

It is different from a profit-sharing plan, because the company cannot adjust its contribution level as profits go up or down. Company contributions must be made whether or not the business makes a profit, or how much profit it makes.

The participant’s benefit at retirement is based on total contributions and the gains or losses on investments. As long as the contribution amounts remain within the annual limits, the money is tax deferred.  

### Required Minimum Distribution

Like all [defined contribution plans](https://www.investopedia.com/terms/d/definedcontributionplan.asp), RMDs are required for a money purchase plan. For 2024, the [required minimum distribution](https://www.investopedia.com/terms/r/requiredminimumdistribution.asp) age is 73. It will increase to 75 in 2033.

## What Are the Pros and Cons of a Money Purchase Plan?

The money purchase plan can substantially boost retirement savings if used with other savings plans like a 401(k). Having such a program gives companies an edge in competing for talent, as the tax benefit levels the expenditure. On the downside, the money purchase plan may have higher administrative costs than other retirement plans.

## Is a Money Purchase Plan a Defined Contribution Plan?

A money purchase plan is a defined contribution plan, where employer contributions are based on a fixed percentage of an employee’s annual compensation or salary. Employees are allowed to contribute, too.

## Can You Withdraw Money from a Money Purchase Plan?

Like other retirement plans, withdrawals before age 59½ will incur a 10% early withdrawal penalty.

## What Is the Contribution Limit for a Money Purchase Plan?

The most that can be contributed to a money purchase plan for tax year 2024 is $69,000 or 25% of the employee’s compensation, whichever is less, according to the IRS. The most that can be contributed for tax year 2025 is $70,000 or 25% of the employee’s compensation, whichever is less.

## The Bottom Line

A money purchase plan is an employer-sponsored retirement plan that requires companies to contribute a specific percentage of an employee’s salary each year, regardless of the company’s profitability. In this way, it’s different from a corporate profit-sharing program. And like most retirement plans, it disincentivizes early withdrawals with a 10% penalty for distributions before age 59½. The plan also has a provision for required minimum distributions.  

> **Article Sources**
>
> 1.  Internal Revenue Service. “[Choosing a Retirement Plan: Money Purchase Plan](https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-money-purchase-plan).”
>     
> 2.  U.S. Department of Labor, Employee Benefits Security Administration. “[What You Should Know About Your Retirement Plan](https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/what-you-should-know-about-your-retirement-plan.pdf),” Pages 18 and 21 (Pages 22 and 25 of PDF).
>     
> 3.  Internal Revenue Service. “[Retirement Topics—Exceptions to Tax on Early Distributions](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions).”
>     
> 4.  Internal Revenue Service. “[2025 Adjustments Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living](https://www.irs.gov/pub/irs-drop/n-24-80.pdf).”
>     
> 5.  U.S. Senate Committee on Finance. “[SECURE 2.0 Act of 2022 Summary](https://www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf),” Page 2.