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 IRS requires you to begin withdrawing money (RMD) by April 1 of the following year after you reach age 70½ (if you were born before July 1, 1949) or after you reach age 72 (if you were born after June 30, 1949).
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.