An important area for review at this time of year, associated with tax savings, is retirement planning. If one is a farm or ranch owner, regardless of the form of ownership, the operation (or owner) may be considered a business and is eligible to establish a retirement plan.
Two options are discussed here: SEPs and IRAs. Contributions to these plans will provide tax savings for the taxpayer every year they’re made and both have flexibility—annual contributions aren’t required. A recent article in The (Great Falls MT) Prairie Star, titled “Review estate, tax and retirement planning issues now,” argues that a farm or ranch operation should include retirement savings for the owner and/or employees as a part of annual budgeting. These retirement funds provide tax savings now and may provide liquidity and income when the decisions for retirement and/or farm transition take place.
Small businesses, including self-employed taxpayers, have two choices after the end of the year to establish and contribute to a retirement plan. These two choices are the Simplified Employee Pension (SEP) plan and the individual retirement arrangement (IRA). A taxpayer has until the due date of the business federal tax return (including extensions) to set up and fund a SEP, but IRAs can’t be funded after the due date of the taxpayer’s personal federal income tax return.
The SEP allows self-employed individuals to contribute and deduct 20% of the net income up to a max of $52,000 for 2014 ($53,000 for 2015). If the owner is contributing for an employee, the percentage is maxed out at 25% of the employee’s gross income—up to $52,000 in 2014 and $53,000 in 2015. IRA contributions are the lesser of $5,500 or 100% of earned income for 2014 (the same in 2015). IRAs also have a “catch up” provision for individuals age 50 or older to contribute an extra $1,000 each year for 2014 and 2015. The article advises that before you contribute to a traditional IRA, you should see if those contributions are deductible. If not, you might look at a Roth IRA.
Although the required minimum distribution (RMD) rules apply to both SEPs and IRAs after taxpayers reach age 70½, the SEP permits contributions to continue as long as the taxpayer has income. As far as the traditional IRA, contributions can’t be made after age 70½, regardless of income. Each of these offers both advantages and disadvantages to a taxpayer, and there are conditions and regulations that apply, so it’s very important to work with an experienced estate planning attorney.
Reference: The (Great Falls MT) Prairie Star (April 1, 2015) “Review estate, tax and retirement planning issues now”