When it comes to farming there are a number of hurdles faced when deciding to retire. Two of the most common hurdles that we deal with at Taatjes Financial Group are the mental/emotional side of ending your farm career, and the tax burden faced when unwinding the farm operation.
When it comes to unwinding farm operations farmers often have significant grain inventories, machinery, and years of depreciation to deal with. This can often cause a tax nightmare. One solution we have found to this problem is using a defined benefit plan in conjunction with a 401(k). A defined benefit plan allows up to $230,000 per year of tax deferred contributions into it. In the past we have funded defined benefit plans for the three years leading up to retirement in order to defer taxes when unwinding the farm operation.
After the third year the defined benefit plan can be shut down since there is no more income coming in. The amount in the Defined benefit plan is then rolled into an IRA which allows for flexibility. This technique gives you more control over when you take your income.
This is a very simplified explanation and it is recommended you work with your CPA and your financial advisor before you make any decisions.
If you are thinking about unwinding a farm operation or small business and you are worried about the hurdles discussed above give us a call at 320.222.4236. We would love to find a way to add value to your situation.