It’s not common for farmers and ranchers to be interested in retirement. Most producers view their investment in their operation as their retirement plan. They could be right. However, depending on your circumstances you might find a retirement plan to be just what the doctor
ordered for your financial future.
Advantage points. Let’s take a look at the benefits of a retirement plan. First, it allows you to put away money for your future and get a current year tax deduction. Then, when you retire, you are hopefully taxed at a lower rate. While you will pay federal income tax on the proceeds, many states do not tax the proceeds from a retirement account. The problem is that some farmers and ranchers might find that, due to their success, their tax bracket might be even higher than during their working years.
Liquidity is another major advantage of a retirement plan.
Using your farm or ranch as a retirement plan might well be a great idea, but what happens if you need cash? You might be forced to liquidate your business, or at least take a loan against your agricultural assets if you have a serious illness or end up in a nursing home.
Another use of a retirement plan might come at your death. Most families have farming and ranching heirs and non-farming and ranching heirs. A retirement plan can provide trading cards at your demise. Farming and ranching heirs get business assets. The non-farm heirs get cash, and everyone lives happily ever after.
It’s your choice. What type of retirement plan should you have? There are numerous choices ranging from a simple IRA to a Roth 401K plan. Contributions run from $5,500 to more than $57,500 for 2014, depending on the type of plan, your age and your earned income. The larger contributions require more complex plans and might require you to make contributions on behalf of certain employees.
We often use a 401K plan in the final years of an active farming operation. Typically a farm or ranch operator will not have employees during the last few years of their active business. Yet the farm or ranch operator might have large amounts of income with only a few expenses. Using a qualified retirement plan might allow an operator to put away a lot of money at once in a retirement account and receive a tax deduction.
Although 401K plans used to be hard to administer and costly to maintain, that is not so in 2014. If properly designed, you can even make minimal contributions for employees and still make a large contribution to your own plan.
One example is a safe harbor 401K plan. The employer can voluntarily contribute up to $17,500 to their own account in 2014. If they are older than 50, they can make an additional $5,500 "catch-up" contribution. The employer is required to contribute 3% of their qualified employee’s compensation and can also contribute another 3% of their compensation as long as they are subject to certain limitations.
Many taxpayers cannot contribute to a Roth IRA because of income limitations. Contributions and earnings to a Roth IRA might be distributed tax free to their owners, but they are not deductible like contributions to a regular retirement plan. Roth IRAs do not require minimum distributions at age 70½. But if you have a properly created 401K plan you can also make Roth contributions.
Retirement plans are effective yet complex tools, and you should seek the services of a qualified tax or retirement adviser who is familiar with the ins and outs of production agriculture. Take the time this year to see if a comprehensive retirement plan has a place in your financial stability and future.
This column is not a substitute for seeking individual accounting advice.
- September 2014