As our farm businesses use tax planning tactics to reduce current tax liability impacts, we do not completely reduce the tax but move the tax to a future year. This webinar will provide details on the importance of identifying and calculating your operation’s deferred tax liability and how that can affect your current and future strategic farm management decisions.
Presenter: Dick Wittman, Wittman Consulting, Farm Manager/Family Business... Read More →
ILSOYADVISOR POST
Retirement Plans for Farm Operators
March 08, 2021
While 2020 was a challenging year in many ways, farm incomes were relatively strong in parts of the Midwest. These income levels often give rise to a search for a tax deferred retirement plan. There are several options available, however, the retirement plan space can be very complex. The following is a synopsis of some of the more common retirement plan options followed by a table that outlines the characteristics of each type of plan.
Individual Retirement Account - IRA
IRAs are the least complex and most versatile. The deduction is limited to the lesser of wages plus net self-employment income or $6,000 per taxpayer ($7,000 if 50 or older). A couple filing a joint return can each make a $6,000 ($7,000 for 50+) contribution as long as their combined earned income exceeds the amount of their combined contribution. If either spouse participates in an employer sponsored retirement plan, deductibility is phased out at higher income levels. The contribution must be made by the due date of the return not including extensions. Due to the basic nature of IRAs, further discussion is not included in the table below.
Simplified Employee Pension - SEP IRA
SEP IRAs allow a greater contribution amount - as much as 20 percent of net self-employment income up to $57,000. There are no annual filing requirements, however, contributions must be made on behalf of part-time employees that meet minimum requirements.
Profit Sharing - Money Purchase Plan
These plans also allow contributions as high as 20 percent of net self-employment income up to $57,000. Annual reports (form 5500) are required for multiple participant plans or if the total assets of the plan exceed $250,000. Part-time employees (<1,000 hours) can be excluded from the plan.
Savings Incentive Match Plans for Employees - Simple IRA
These plans are relatively “simple” like an IRA, however, they allow greater contributions than an IRA ($13,500 plus $3,000 for 50+). These plans must be established by October 1 of the plan year and are required to distribute form 5305-SIMPLE to each participating employee annually.
Solo 401k and Simple 401k
401ks offer greater employee deferral amounts as well as employer contributions of up to 25 percent of employee wages up to $57,000. A self-employed individual is considered an employee and employer for the purposes of contribution limits. Annual reports (form 5500 or 5500-SF) are required for multiple participant plans or if the total assets of the plan exceed $250,000. Part-time employees (<1,000 hours) can be excluded from the plan.
Defined Benefit Plans
These plans allow the largest contribution amounts. These contributions may be $250,000+ depending on the age and earnings of the employee/employer. Contributions are based on what is needed to provide definitely determinable benefits to plan participants. These plans are the most complex and involve substantial annual administrative expenses. A comprehensive discussion of Defined Benefit Plans is beyond the scope of this blog.
|
|
SEP IRA |
Profit Sharing |
Simple IRA |
Solo 401K |
Simple 401K |
Defined Benefit |
|
Employer deductible annual combined contribution maximum |
25% of employees pay or $57,000, whichever is less (20% net SE income - ½ of SE Tax) |
25% of employees pay or $57,000, whichever is less (20% net SE income - ½ of SE Tax) |
$27,000 ($13,500 deferral plus $13,500 maximum match) |
25% of employees pay or $57,000, whichever is less ($6,500 catch-up contribution 50+) |
25% of employees pay or $57,000, whichever is less ($6,500 catch-up contribution 50+) |
Limited to amount needed to fund future benefits (maximum pay per employee is $230,000) |
|
Employer contribution requirement |
None, unless plan is top-heavy |
Flexible contributions allowed each year; employer must make substantial and recurring contributions |
Dollar for dollar match up to 3% pay for all eligible employees who earn $5,000 during the year |
None |
None |
Contributions based on predicted payouts |
|
Employee maximum annual deferral |
No pretax contributions allowed |
No pretax contributions allowed |
$13,500; 50+ catch-up contributions of $3,000 allowed |
$19,500, 50+ catch-up contributions of $6,500 allowed |
$19,500, 50+ catch-up contributions of $6,500 allowed |
No pretax contributions allowed |
|
Vesting |
100% immediate vesting |
According to schedule |
100% immediate vesting |
NA |
100% immediate vesting |
According to schedule |
|
Employee Loans |
No |
Yes |
No |
Yes |
Yes |
Yes |
|
Who MUST be covered |
Any employee who worked 3 of past 5 years; age 21 or older; may exclude employees with less than $600 in wages |
Any employee with 1,000 hours of service for 1 year; age 21 or older; can exclude certain employees, except if immediate vesting, 2 years of service may be required |
Any employee earning $5,000 during past 2 years and who is expecting to earn $5,000 in current year; can exclude certain employees |
Any employee with 1,000 hours of service for 1 year; age 21 or older; can exclude certain employees |
Any employee with 1,000 hours of service for 1 year; age 21 or older; can exclude certain employees |
Any employee with 1,000 hours of service for 1 year; age 21 or older; can exclude certain employees, except if immediate vesting, 2 years of service may be required |
|
Plan establishment deadline |
Tax filing deadline plus extensions |
Last day of fiscal year |
Between January 1 and October 1 |
Last day of fiscal year, not later than beginning of employee contributions |
Last day of fiscal year, not later than beginning of employee contributions |
Last day of fiscal year |
|
Annual Filing Requirement |
None |
Form 5500 if it has $250,000 or more in assets at the end of the year; may file 5500-EZ if single participant |
Form 5305SIMPLE distributed to each employee annually |
Form 5500-SF if it has $250,000 or more in assets at the end of the year |
Form 5500-SF if it has $250,000 or more in assets at the end of the year |
Form 5500 |
|
Plan advantages |
• Minimal paperwork and expense • Minimal Tax Filing • Ongoing contributions not required • More flexibility |
• Flexible contributions • May exclude part-time employees |
• Owner-employee can contribute even if no other employee chooses to participate • Minimal paperwork and expense • Minimal tax filing |
• May exclude part-time employees • Ongoing contributions not required • More flexibility • Greater deferrals allowed for owner employees |
• May exclude part-time employees • Ongoing contributions not required • More flexibility • Greater deferrals allowed for owner employees |
• Greatest Annual Contribution Limits • Guaranteed annuity payments for life |
|
Plan disadvantages |
• Part-time employees must be included when eligible |
• More paperwork and filing requirements • 5500 form is rather complex if employees are included |
• Annual form distribution to employees • Employer contribution limited to 3% |
• Annual filing requirement if plan assets exceed $250,000 at the end of the year |
• Annual filing requirement if plan assets exceed $250,000 at the end of the year |
• High administrative expense • Annual contribution requirements may be substantial |
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