One of the most common tax questions is, "How do the owners and employees of a closely held company benefit from a qualified retirement plan?" To see how a profit-sharing or pension plan really benefits you, let's look at the results.

We'll assume you're running a successful business. Both you and the company are in the 50% tax bracket (for argument's sake only; the maximum corporate tax on income is 46%). You want to take an additional $10,000 out of the company. Now let's follow that $10,000 through the tax gristmill.

First, assume you take $10,000 as additional compensation. Here's what happens:

Gross expense by company $10,000

Less tax savings for company (5,000)

Net out-of-pocket by company 5,000

Gross income to you $10,000

Less taxes payable (5,000)

Net in-pocket to you 5,000

Now, assume you take the $10,000 as a dividend. Remember that in order to pay the $10,000 out the company must first earn it, after taxes. So here's what happens:

Company earns $20,000 pretax $20,000

Company pays $10,000 tax (10,000)

Company pays you $10,000

dividend (10,000)

Net out-of-pocket by company 20,000

Gross income to you $10,000

Less taxes payable (5,000)

Net in-pocket to you 5,000

While you wind up with the same amount as in the first example, the company has to spend four times as much to achieve the result. That's a simple example of "double taxation" of dividends.

Now let's assume that the corporation contributes $10,000 to a qualified profit-sharing or pension plan for your benefit. The money is actually paid to a trust created by the plan. The result:

Gross expense by company $10,000

Less tax savings for company (5,000)

Net out-of-pocket by company 5,000

Gross amount paid into trust $10,000

Less taxes payable (0)

Net amount in trust for your

benefit 10,000

In short, the company winds up in the identical position whether it pays you $10,000 in additional compensation or contributes $10,000 to a qualified plan on your behalf. You, however, have twice as much working for you through the plan. Furthermore, the money accumulates tax free while it remains in the trust. And that's where the biggest difference of all shows up. Take the $5,000 you net from $10,000 paid as either additional compensation or a dividend and invest it. Assume a 10% return on your money. After five years, your $5,000 will have grown to $6,381.42; the Internal Revenue Service will have taken its 50% of your profits each year along the way.

Then take the $10,000 paid into your qualified plan. Assume that it, too, is invested for a 10% return. After five years you will have $16,105 credited to your account. The trust pays no taxes on profits earned from its investments. Neither do you, until you begin to withdraw the funds. Quite likely, that won't happen until after you retire, when most people can expect to be in a lower tax bracket.Setting up a qualified plan is relatively simple, as your own professional can tell you. Do it now. In effect, qualified plans are the best tax shelter around.