Selling Your Farm Is Not A Retirement Plan

December 28, 2017 10:32 AM
Matt Lange of Compeer Financial urges young farmers to take a higher draw and then use a portion of that draw to fund a retirement account just like any other company would do.

Often one of the biggest hurdles in developing a succession plan is figuring out retirement income for the older generation. What if there was a way you could remove the guesswork from that situation? You can! Start investing in a retirement account.

“We’ve got to get past the notion that I’m going to sell this dairy and that is my retirement,” says Matt Lange, a dairy consultant with Compeer Financial. “That model does not work, because at the end of the day you can’t sell your business to the next generation and collect an amount that works for them and funds your retirement.”

How much will you need for retirement? Financial experts estimate that you may need up to 85% of your pre-retirement income to live on in retirement, according to Fidelity Investments. A 2017 study from Penn State University shows the average owner draw in Pennsylvania for farms with more than 290 cows is $88 per cow per year. If you are milking 1,500 cows (the average MILK magazine reader’s herd size) that’s an annual owner draw of $132,000, and 85% of that means you’ll need $112,200 per year for retirement expenses.

Lange’s advice? Start funding an IRA. Lange urges young farmers to take a higher draw and then use a portion of that draw to fund a retirement account just like any other company would do.

According to the IRS, total contributions to any IRA account(s) in your name cannot exceed $5,500 if you’re under age 50. The limit is $6,500 if you’re over 50. On a monthly basis, investing the maximum amount would increase your owner draw $458 per month per person investing. Lange says most farms can absorb that increase without issue.

“Start paying your future self,” he recommends. “Your business’ sustainability relies on it.”

Types of IRA Accounts

There are three different types of IRA accounts to choose from. Discuss these three with your accountant before deciding what’s best for your situation.

Traditional IRA– Contributions to this account are made with money you can deduct on your tax return, and any earnings can potentially grow tax-deferred until you withdraw them in retirement.

Roth IRA- You put money in this account that you’ve already paid taxes on and that way your money potentially grows tax-free, with tax-free withdrawals in retirement, provided that certain conditions are met.

Rollover IRA - A Traditional IRA intended for money "rolled over" from a qualified retirement plan. Rollovers involve moving eligible assets from an employer-sponsored plan, such as a 401(k) or 403(b), into an IRA.

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Spell Check

James wirz
Cold spring, MN
12/29/2017 09:46 PM

  Another possibility is a SEP IRA which is for someone who is self employed. It potentially has higher limits than the traditional or Roth IRA and sometimes you can do both a SEP IRA and a traditional or Roth IRA. See a tax professional for advice

Sam Kirkendohl
Aiken , SC
1/23/2018 12:12 AM

  Great article! Retirement savings is very crucial at an early age. Discipline to start and continue is tremendous! Don’t delay for the best day to start is today, putting off tomorrow what should have been done yesterday, will cost you dearly. Find a plan that works for you and talk with your advisor often to make changes as your life changes. Something to consider is working with an advisor that specializes in farmers. I have a program that tailors to your land, Farm, income and the next generation farmer! It encompasses your entire operation leaving you with a peace of mind. The work that goes into the planning leaves no stone unturned and you get a really nice binder with all your documents in it for easy keeping. I really like it!

Gene Rasmussen
Ame, IA
1/2/2018 07:50 AM

  There are other options that allow more to be contributed: A Simple IRA, or a 401k. Both can be simply done and the maximum much higher than for an old traditional IRA. The SEP mentioned below can be also but is a little more complex. Local brokers could help, or mail-order mutual fund companies work. Put it in, keep it in, and compound interest and returns. Keep the costs low with low cost funds probably. Also realize, once the money is in those retirement accounts, the money is locked down for two reasons: 1) The taxes are only deferred and will be paid when withdrawn, and 2). Until you reach 59 1/2 getting to YOUR money incurs a penalty over and above the taxes, say 10%, to be paid. So you can't replace the culls from your retirement account. It's for RETIREMENT.


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