You likely know the value of all applicable tax deductions for your business. Unfortunately, federal law only allows deductions for contributions to certain tax-qualified plans. Qualified plans involve pre-tax money and tax-deductible contributions; you pay taxes later on the withdrawals that you make. Non-qualified plans, on the other hand, involve the deferral of current compensation and gains on such compensation until paid out. Qualified plans have required minimum distribution (RMD) requirements, but non-qualified plans do not. If you have a qualified plan like a traditional 401(k) or individual retirement account (IRA), the age at which you generally must start taking required minimum distributions is 72. The new SECURE Act 2.0 increased that age to 73 starting January 1, 2023 (if you turn age 72 on or after January 1, 2023) and pushes the age to 75 starting in 2033.
Qualified tax-favored retirement plans include defined benefit pension plans, money-purchased pension plans and 401(k) plans. All of these plans allow for tax-deductible contributions and tax-deferred growth, but their benefits come at a price. Federal law mandates which of your employees must be covered by the plans, limits the amount of money you can set aside for yourself, and restricts the investment choices within the plans. Also, if you are a highly compensated individual, you are limited by the amounts you can contribute to qualified plans, restricting your ability to accumulate money on a tax-favored basis.