Table of Contents

Money Purchase Plan Explained: Definition, Tax Benefits, & Contribution Limits

By

Julia Kagan

Updated November 15, 2025

Reviewed by

Marguerita Cheng

Fact checked by

Suzanne Kvilhaug

Worker in office with clients — skynesher / Getty Images

Key Takeaways

A money purchase plan requires employers to contribute annually, regardless of the company's financial performance.
Money purchase plans offer tax-deferred growth, meaning funds are taxed upon withdrawal.
Withdrawals before age 59½ incur a 10% penalty, reinforcing their role as long-term savings plans.
Participants can roll over funds into other retirement accounts upon leaving an employer.

What Is a Money Purchase Plan?

A money purchase plan is an employer-sponsored retirement plan where the employer must deposit a percentage of a participating employee’s salary in the account every year, regardless of company profits.

Employees can add their own contributions and choose from the plan's investment options, with the account growing tax deferred. Unlike profit-sharing plans, employer contributions are mandatory, giving the plan a more consistent and predictable funding structure.

Exploring the Features of Money Purchase Plans

A money purchase plan is a tax-advantaged, qualified retirement plan 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) or an individual retirement account (IRA)
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, you can withdraw funds gradually or in a lump sum.

Employers typically establish a vesting period 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).

How Contributions Work in a Money Purchase Plan

The Internal Revenue Service (IRS) sets the contribution limit each year to keep pace with inflation.

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, RMDs are required for a money purchase plan. The required minimum distribution 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.

The Bottom Line

A money purchase plan is a defined contribution retirement plan where employers must contribute a set percentage of each employee's salary every year, unlike profit-sharing plans that vary with the company's performance.

The fund grows tax deferred, early withdrawals usually face penalties, and required minimum distributions apply later in life. It can also complement other workplace retirement accounts to strengthen long-term savings.

Article Sources

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Internal Revenue Service. “Choosing a Retirement Plan: Money Purchase Plan.”
U.S. Department of Labor, Employee Benefits Security Administration. “What You Should Know About Your Retirement Plan,” Pages 18 and 21 (Pages 22 and 25 of PDF).
Internal Revenue Service. “Retirement Topics—Exceptions to Tax on Early Distributions.”
Internal Revenue Service. “2025 Adjustments Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living.”
U.S. Senate Committee on Finance. “SECURE 2.0 Act of 2022 Summary,” Page 2.

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