The most significant tax breaks offered by all qualified retirement plans are:

• Contributions by an employer to a qualified retirement plan are immediately tax deductible as a business expense, up to specified maximum amounts.
• Employer contributions are not taxed to the employee until actually distributed.
• Investment earnings and gains on qualified retirement plan contributions grow on a tax-deferred basis, meaning that they are not taxed until distributed from the plan.

Depending on the type of qualified retirement plan used, other tax incentives may also be available:

• Certain types of qualified retirement plans allow employees to defer a portion of their compensation, which the employer then contributes to the qualified retirement plan. Unless the Roth 401(k) option is selected, these elective employee deferrals are not included in the employee’s taxable income, meaning that they are made with before-tax dollars.
• Qualified retirement plan distributions may qualify for special tax treatment.
• Depending on the type of qualified retirement plan, employees age 50 and over may be able to make additional “catch-up” contributions.
• Low- and moderate-income employees who make contributions to certain qualified retirement plans may be eligible for a tax credit.
• Small employers may be able to claim a tax credit for part of the costs in establishing certain types of qualified retirement plans.