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.
You can learn more about this topic as well as other strategies on our website under the tab entitled: estate planning in Virginia. Be sure you also sign up for our complimentary e-newsletter so that you may be informed of all the latest issues that could affect you, your loved ones and your estate planning.
Reference: The (Great Falls MT) Prairie Star (April 1, 2015) “Review estate, tax and retirement planning issues now”