When investing in a Non-Qualified Retirement Plan, an investor forfeits the right to receive upfront tax deductions on their contribution in exchange for tax-free gains and tax-free income during the retirement years. Examples might include a Roth IRA, Roth 401(K) and Investment Grade Life Insurance.

One way of viewing the difference between this option and a Qualified Retirement Plan is to consider a farmer with a handful of seeds. As he is about to plant the seeds for his family’s future, the tax collector comes knocking. The farmer is given two options: 1. Do not pay taxes now. Plant every seed available and grow the crops as big and plush as possible. However, when it comes time to harvest, the tax collector will get roughly one-third of the harvest. This will occur every harvest season thereafter, for generations to come. 2. Pay taxes today, by giving the tax collector one-third of the seeds prior to being planted. The tax collector agrees to never come back. Over the years, as the crop grows and the harvest is taken, the tax collector is never to be seen again. Your harvest is completely tax-free.

Those who elect to defer taxes by investing in Qualified Plans will end up paying on the harvest, likely in much greater proportions than had they paid on the seed money instead. Those who elect to invest in Non-Qualified Retirement plans have paid the tax on the seed money in order to enjoy a tax-free harvest for generations to come.