Ag Conversations


How Farmers and Ranchers Can Begin Retirement and Business Transition Planning

Nov 14, 2018

Retirement plans are a crucial component of any business transition plan. Saving today in a retirement plan allows for flexibility in when and how you transition your farm or ranch. What type of retirement plan you choose to invest in now can have a substantial impact as well.

Each situation is unique, and each farm or ranch owner has a unique goal. Often, the best laid plans can be impacted by a shortfall of retirement funds and whether plan contributions were tax deferred (taxes need to be paid upon withdrawal) or Roth (tax free at withdrawal). Business transition can look very different in farming than it does with other types of businesses — it’s not often that there’s a “hand over the keys” moment, with one owner transitioning complete ownership to another. And don’t forget about the impact of a large amount of assets like land and equipment compared to cash in the operating account.  

Creating a Retirement Plan

Business owners have several options for creating retirement plans. The simplest plan is an IRA, or individual retirement account. As the name implies, this type of plan is created at the individual level and not at the business level. There are two basic types of IRA accounts. A traditional IRA’s contributions are tax deferred, where taxes are paid on the withdrawal during retirement. The second type is a Roth IRA, which is not deducted today, meaning no immediate tax savings, but is tax-free upon withdrawal. The best option will depend on your timeline for retirement as well as your current income tax rate and expected tax rate during retirement.

Retirement plans can also be set up at the business level, with the business contributing dollars on behalf of eligible employees. These plans include Simple IRAs, SEP IRAs or 401(k)s. Each of these plans have different eligibility rules about which employees are eligible to participate. Examples include number of hours worked in a year, minimum age requirements or being employed for more than one year.

After an employee is eligible, the business contributes to the employee’s account. The type of plan also dictates how much the employer contributes for each employee. Most plans cap at $5,000 or a matching contribution of up to 4% of employee compensation. And depending on the plan type, employees may be eligible to make individual contributions through payroll deduction.

Some plans are simple to administer. A 401(k) is more complex, but with higher contribution limits and a Roth component, it does have its advantages. A potential downside is that seasonal employees would not be eligible. However, owners and family members would benefit.

The benefits of offering a retirement plan for employees include the obvious of tax savings by deferring the tax to the future. In today’s competitive market, it can be difficult to retain employees, and offering retirement benefits may give you an advantage in hiring and retaining good employees.

Getting Started on Your Business Transition Planning

With so many variables in play, you will want to craft a thorough, personalized plan designed to help you gain a clear vision of your long-term goals and a blueprint of retirement. A dedicated team will help you develop and put your plan into action, as well as review your plan periodically to ensure that as circumstances change, it can be adjusted to help you meet your goals. To develop a solid retirement and business transition plan, contact Wipfli — we’d be happy to help.


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