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Retire On Grain

May 27, 2009
By: Sara Schafer, Farm Journal Media Business and Crops Editor
 
 

Jeanne Bernick, Top Producer Crops & Issues Editor
 
Lance Fulton
of Kennedy & Coe
In the March 2009 issue of Top Producer, tax consultant Lance Fulton with Kennedy & Coe offered a unique plan for building a retirement fund with grain while also reducing the burden of paying self-employment tax on that grain in the article Pay Less at Tax Time.
 
What a hot topic! Top Producer has been flooded almost daily with farmer questions and pleas for more information on this tax technique and retirement funding plan.
 
So we decided to share some of the reader questions we received, along with Fulton's answers and suggestions.
 
 
Q. How do you fund IRA accounts up to $250,000 per person?
A. The basic process is this: Your farm operation is converted into an entity that employees you and/or your spouse. The grain is sold by this entity and is used to fund a retirement plan.

Typically we use a defined benefit plan.  This is a plan that determines contributions based on current and past earnings, age and date of retirement.  These are all important factors in determining the amount that goes into the plan.  I have seen amounts from $35,000 to $250,000 per year - again, depending on the factors above.

The entity used is one in which self-employment tax is not paid, thus the grain does
not get charged self-employment tax and the deferral is funded into the retirement
plan, which moves the equity out of the entity and into your name.

The plans are usually funded over a five-year period.  The goal is for the entity to have no equity at the end and it all to have been placed into the retirement plan which is then converted into an IRA and follows all the IRA rules from that point forward.
 
 
Q. Which type of retirement plans allow funding up to $250,000 per person? 
A. At Kennedy & Coe we use a variety of different types of plans.  They vary based on number of employees and willingness to allow the employees to participate, age,
timeframe to retirement and several other considerations.

The usual choices are:
* Defined Benefit Plan
* Defined Contribution Plan
* 412(i)
* Simple 401(k)
* 401(k)

Normally, to make this work out best, it requires putting the farm operation into some form of an entity structure -- again, the type of entity will depend on many of the same factors as noted above, but would also include the amount of grain carry-over, pre-paid expenses and operating debt.
 
 
Q. Do these retirement plans allows for funding of up to $250,000 per person, per year?  The biggest one I know of maxes out at $46,000 per year.
A. The amount of the contribution is dependent upon your earnings from the employer, number of years you will be contributing to the plan, anticipated retirement dollar amount, your age and when you plan to retire.

These factors determine the potential amount of the contribution to the plan, and, yes, I have seen it calculate out to $250,000 in a given year. These plans are really meant to fund retirement plans right at the end of a career.

They are most effective when there is an entity that is the employer and you are the employee.  Therefore, they are normally handled through a corporate or partnership environment (structured correctly!).  The type of entity doing the farming is where the additional self-employment tax reduction comes from!


Q. What kind of paper work is needed to pay wages in grain to my spouse?
A. Paying grain wages to your spouse requires the following documents:
An employment agreement specifying the services provided, which might
include bookkeeping, gathering supplies, moving equipment, etc.

What your spouse is paid in grain should be equivalent to approximately the
value of the services provided to the farm operation as an employee. We normally suggest paying a mix of grain and cash wages.

There is a transfer document to show the grain going from the operation
to the name of your spouse - from that point forward he or she is responsible
for the marketing and storage and transportation costs of the grain.

We recommend a minimum of two weeks that the grain is held in your spouse's name
before selling.
 
 
Q. I would like to use grain to fund a retirement fund. I presently have a profit-sharing fund in which I include my employees, but I understand I can only put in about $50,000 for myself.  I am 69 years old and didn't get started with the profit-sharing plan until too late. I still farm full-time. What should I do?
A. First, convert your farm into an entity that employees you and/or your spouse.
The grain is sold by this entity and is used to fund a retirement plan (see defined benefit plans, explained above). These plans determine contributions based on current and past earnings, age and date of retirement.  These are all important factors in determining the
amount that goes into the plan.  I have seen amounts from $35,000 to $250,000 per year - again, depending on the above-mentioned factors.

The entity used is one in which self-employment tax is not paid, thus the grain does
not get charged self-employment tax and the deferral is funded into the retirement
plan, which moves the equity out of the entity and into your name.

The plans are usually funded over a five-year period.  The goal is for the entity to have no equity at the end and it all to have been placed into the retirement plan which is then converted into an IRA and follows all the IRA rules from that point forward.
 

Listen to more advice from Fulton:



For More Information
Pay Less at Tax Time
 

 
You can email Jeanne Bernick at jbernick@farmjournal.com.

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FEATURED IN: Top Producer - SPRING 2009

 
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