Written by,
Brandie Schmitt-Maschman
Senior Accountant| HBE LLP
In agriculture, it’s crucial to consider long-term retirement planning alongside day-to-day operations. Fortunately, farmers have several retirement options available to prepare for the future, such as individual retirement accounts (IRAs), simplified employee pension (SEP) plans, solo 401(k)s, defined benefit pension plans, and cash renting farmland.
Individual Retirement Account (IRA)
An IRA is a popular retirement plan known for being relatively easy to set up and contribute to. The maximum IRA contributions for 2023 is $6,500 for those under 50 and $7,500 for those over 50. There are two main types of IRAs: Traditional and Roth. Traditional IRAs can be fully or partially tax deductible depending on income and are taxed once withdrawn, whereas Roth IRAs are not tax-deductible but are tax-free if proper distribution requirements are met.
Simplified Employee Pension (SEP) Plan
The SEP plan allows farmers to contribute 25% their compensation or net earnings up to $66,000 for 2023. If a farmer has eligible employees, they must contribute the same percentage to the employees SEP account as they did for their own. A farmer may choose to use a SEP plan over a Traditional or Roth IRA as it can help to lower taxes in higher income years.
Solo 401(k)
A solo 401(K) can be set up as a Traditional or Roth with contributions not to exceed $66,000 if 50 or older in 2023, and up to $22,500 for those under 50.
Defined Benefit Pension Plan
Defined Benefit Pension plans aid in reducing taxable income, moving farmers into a lower tax bracket.
Cash Renting Farmland
Farmers can also use their farmland to help them retire by generating income through cash rent. By renting out their farm ground, a farmer can use this as a steady source of income throughout their retirement.
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