What is in this article?:
- Should farmers invest in IRAs to save income taxes?
- Benefit of traditional IRA
- An Individual Retirement Account (IRA) is a savings plan that provides the taxpayer (farmer) with tax advantages for setting aside money for retirement and diversifies investments.
- There are two types of IRAs for retirement saving.
USDA estimates average net cash income for farm businesses is projected to be $82,800 in 2011, nearly 17 percent above the 2010 estimate of $71,000.
With prices expected to approach record levels for major crops and some livestock, farmers are anticipating high income tax liabilities when they file their 2011 tax returns.
Farmers have routinely prepaid operating expenses (seed, fertilizer, chemical, feed etc.) and purchased new equipment as a means of reducing their tax liabilities. Historically, farmers have re-invested in their businesses with little thought of diversifying their investments into non-farm assets.
An Individual Retirement Account (IRA) is a savings plan that provides the taxpayer (farmer) with tax advantages for setting aside money for retirement and diversifies investments.
There are two types of IRAs for retirement saving.
Traditional IRAs are funded with before-tax contributions and the Roth IRAs are funded with after-tax contributions. A taxpayer can open and make a contribution to a traditional IRA and/or a Roth IRA if the taxpayer (or if filing a joint return, their spouse), receives taxable compensation (e.g. earned income — wages, salaries, commissions, self-employment income — net earnings from schedule F or C) during the year.
The Internal Revenue Service (IRS) has stated that the following types of income are not considered compensation: earnings and profits from property (e.g. rental income), interest and dividend income, pension or annuity income and Conservation Reserve Program (CRP) payments reported on Form 1040SE, line 1b.
A taxpayer whose age is more than age 70.5 years by Dec. 31, 2011 cannot make a contribution to a traditional IRA.
Regardless of the age of the taxpayer, contributions can be made to a Roth IRA.
Contributions to traditional and Roth IRAs can be made at any time during the year and up to the due date for filing a tax return for that year, not including extensions. For tax year 2011, contributions must be made by April 17, 2012.
The amount contributed to an IRA is based on the amount of taxable income received by the taxpayer during the year. In 2011, the maximum contribution for a traditional IRA and Roth IRA is the lesser of $5,000 or 100 percent earned income ($6,000 age 50 or older).
For example, a farmer with $4,000 in earned income (net schedule F after depreciation) would be limited to a maximum contribution of $4,000 to an IRA.
The maximum contribution to a spousal traditional or Roth IRA (for a spouse with little or no earned income in 2011) is the lesser of $5,000 or 100 percent of combined earned income ($6,000 age 50 or older).
A taxpayer may contribute 100 percent of earned income to either a traditional IRA, a Roth IRA, or split between both types of IRAs up to the annual contribution limit.