How do farmers ensure they have enough income to live on when they retire and also make sure the next generation has enough to enjoy a fair standard of living? The proper use of a retirement plan can help achieve both goals.
It’s not smart to just rely on income from farmland owned. Think about contributing to a tax-advantaged retirement plan. By taking advantage of the tax savings during a 30- or 40-year period, you can provide enough retirement income while allowing your successors to more easily take over the farm. Farmers have many options available. (See the table below.) Due to space, we will only cover a few.
First, consider annually funding an Individual Retirement Account (IRA). If you don’t have another retirement plan, the amount contributed is deductible (assuming enough income is earned). A regular IRA is deductible when the investment is made. The earnings accrue tax free and the tax is only owed when distributions are made. (Distributions are required at age 70+.)
Farmers might also want to contribute to a Roth IRA, which works in reverse. There is no deduction when the Roth is funded, and the earnings and all distributions are tax free. Also, a Roth does not have to be distributed during your lifetime.
"During a 30-year period, Assuming a normal rate of return, a total IRa savings of $1 million or more is very achievable."
If you participate in a retirement plan and your income level is too high, the regular IRA deduction might be limited; however, it can still be funded. Once income exceeds a certain amount, the Roth IRA is not permitted. For a married couple, about $11,000 to $13,000 can be funded each year.
During a 30- to 40-year period, assuming a reasonable rate of return, a total IRA savings of $1 million or more is very achievable.
Retirement Cushion. If you want to provide additional retirement benefits, consider a Savings Incentive Match Plan for Employees (SIMPLE) IRA. This plan allows you to set aside up to $15,000 plus a similar amount for your spouse (if employed by the farm). In return, you might be required to allocate 2% to 3% of your employee’s wages as a contribution to their benefit.
One non-tax benefit to consider is the effect of providing a retirement plan for your employees. It can be a great tool to recruit and retain qualified employees, which creates a win/win situation.
In my November column, I will highlight retirement plan options available to farmers who want to deduct more than what we discussed above. For farmers nearing retirement with substantial untaxed grain inventories, I’ll also feature the advantages of using a defined benefit plan. Many farmers could easily report $1 million in grain sales with little or no expenses to offset income generated from these sales.
Paul Neiffer is a tax accountant with CliftonLarsonAllen and author of the blog, The Farm CPA. He grew up on a wheat farm in Washington and owns a corn and soybean farm in Missouri. Contact him at paul.neiffer@CLAconnect.com.
- October 2013