Consider retirement accounts when looking at financial numbers

Hello, Northeast Ohio!

Typically, as we enter the final quarter of the year, farm managers begin to review their financial records to estimate potential net farm income for the year and make plans on how to avoid the proverbial “fisc”. All indications point to positive revenues for the dairy sector in 2022.

The October WASDE (World Agricultural Supply and Demand Estimates), released on October 12, forecast the price of milk for 2022 at $25.60 per quintal and estimates the price of milk for 2023 at $22.90. dollars per quintal. The rest of the year looks favorable due to the shrinking US dairy herd and growing demand for dairy products.

Additionally, operations may have seen increased revenue due to cash grain sales despite rising input costs. So if 2022 looks profitable, what can I do to reduce my tax liability?

For many farm managers, this usually means prepaying expenses for the coming year or investing in buildings, machinery and equipment.

While these strategies are all useful as tax mitigation strategies, I remind you that having a profitable year and paying taxes is not a bad thing. As a bonus, earning income and paying self-employment taxes as a farm manager impacts future Social Security retirement benefits.

Social Security

For many farmers, Social Security will be an important part of their eventual retirement income. To qualify for future Social Security benefits, an individual must earn 40 quarters or 10 years of net earnings or earnings.

For 2022, the minimum wage per quarter is $1,510. Individuals can earn up to four credits per year, bringing the total minimum income to $6,040 for 2022. In 2023, the coverage quarter will increase from $1,510 to $1,640.

Earning 40 credits qualifies you for benefits, but the amount you will receive for retirement benefits is based on your best 35 years of earnings. If you contribute at the minimum level, your Social Security retirement will be minimal.

In high-profit years, managers should maximize salaries or profits subject to Social Security tax to help raise their 35-year average.

According to the Social Security Administration, the average (2023) Social Security income per month for a retired worker is $1,827 or $2,972 for a couple. If a retired couple has a family living on $70,000, Social Security only provides 51% or $35,664 of the needed retirement income.

Investments

So that brings us to the question, how are you going to build up the amount left over for retirement and account for inflation? So if this has been a good year for you, I challenge you to consider ways to invest in retirement for you and your employees.

In fact, many would say the best investment you can make for a junior farm partner is to put money in their retirement account, early and often. Individuals can invest after-tax dollars in certificates of deposit, bonds, stocks, and mutual funds that could serve as sources of retirement income.

Other planes

Individuals can also make contributions to traditional or Roth Individual Retirement Accounts (IRAs) to help fund their retirement years. The 2022 contribution limits for IRAs are $6,000, unless the person is over age 50. If over 50, the person can contribute up to $7,000. Individuals need more than $6,000 of earned income to be able to contribute to a traditional IRA.

Several vehicles exist for small businesses to use to help prepare owners and employees for retirement. These include the IRA Employee Savings Incentive Plan, 401(k) plans, Solo-401(k) plans, and the Simplified Employee Retirement Plan. These plans allow companies to make pension contributions for employees as a business expense. At a time when labor wage inflation is on the rise, having a pension plan as part of your compensation package can be a great benefit for employees.

Resources

So, as you calculate your year-end financial numbers, I encourage you to consider bolstering your retirement accounts. When doing so, be sure to seek advice from financial professionals.

I also encourage you to access this month’s Buckeye Dairy newsletter, which includes an article on retirement planning, at dairy.osu.edu/newsletter/buckeye-dairy-news. You can also find more information on retirement options for small businesses at irs.gov/pub/irs-pdf/p3998.pdf. Be careful this fall and happy retirement planning!